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19–94 Intermediate Accounting, 8/e
Case 19–12 (concluded)
2015
net preferred Basic
income dividends EPS
$134 – $12‡ $122
——————————————————— = —— = $2.44
60 – 12 (10/12) 50
shares retired
at Jan. 1 shares
2016
net Basic
income EPS
$95 $95
——————————————————— = —— = $2.50
48± – 12 (10/12) 38
shares retired
at Jan. 1 shares
Communication Case 19–13
Suggested Grading Concepts and Grading Scheme:
Content (80% )
60 Convertible securities are included in the computation.
Of diluted earnings per share.
By assuming they were converted, the “if-
converted” method, as it’s called.
Writing (20%)
5 Terminology and tone appropriate to the audience of
division managers.
19–96 Intermediate Accounting, 8/e
Analysis Case 19–14
Requirement 1
PetSmart’s basic earnings per share was $4.06. Its diluted earnings per share was
Requirement 2
Securities, like stock options or restricted stock awards, while not being common
Real World Case 19–15
Requirement 1
Other potential common shares might include restricted stock, RSUs, convertible
securities and contingently issuable shares.
The proceeds for the calculation should include the amount received from the
hypothetical exercise of the options, but should also include two additional amounts.
The first additional component of the proceeds is the total compensation from the
award that's not yet been expensed. When options or restricted stock are fully vested,
all the compensation already has been expensed and this second component of the
19–98 Intermediate Accounting, 8/e
Case 19–15 (continued)
Similarly, we would assume convertible securities had been converted into shares.
This means adding the new shares to the denominator and increasing the numerator by
the after-tax effect of the convertible security not being outstanding.
Case 19–15 (concluded)
Requirement 2
Sometimes, the effect of potential common shares would be to increase, rather than
decrease, EPS. These we refer to as “antidilutive” securities. Such securities are
ignored when calculating both basic and diluted EPS. For example, when we adjust
19–100 Intermediate Accounting, 8/e
Case 19–15 (concluded)
Requirement 3
Here is the presentation of basic and diluted earnings per share for 2013, 2012, and
2011 that Kaman reports in its 2013 annual report.
2013 2012 2011
Earnings per share
Basic
Earnings per share from continuing operations $ 2.12 $ 2.04 $ 1.90
Diluted:
Earnings per share from continuing operations $ 2.09 $ 2.03 $ 1.88
Earnings per share from discontinued operations (0.01) (0.01) 0.05
Earnings per share from disposal of discontinued operations 0.02 0.05 —
Analysis Case 19–16
Requirement 1
In its simplest form, earnings per share is merely a firm’s net income divided by
the number of shares outstanding throughout the year.
Requirement 2
Price-earnings ratio = Market price per share
Earnings per share
= $47.00
$2.69
= 17.5 times
The ratio is a measure of the market's perception of the “quality” of a company’s
earnings. It indicates the price multiple the capital market is willing to pay for the
company’s earnings. In a way, this ratio reflects the market’s perceptions of the
19–102 Intermediate Accounting, 8/e
Case 19–16 (concluded)
Requirement 3
The dividend payout ratio expresses the percentage of earnings that is distributed
to shareholders as dividends. To calculate the ratio for IGF with the information
provided, we must estimate dividends from analysis of the retained earnings account:
Dividend payout ratio = Cash dividends per share
Earnings per share
= $1.02
$2.69
= 37.9%
IGF paid cash dividends of $1.02 cents per share during the most recent year,
almost 38% of earnings. The ratio provides an indication of the firm’s reinvestment
Research Case 19–17
The results students report will vary somewhat depending on the dates and times
quotes were accessed. It is unlikely, though, that their relative comparisons or
conclusions will differ.
19–104 Intermediate Accounting, 8/e
Analysis Case 19–18
Requirement 1
The price-earnings ratio is simply the market price per share divided by the earnings
per share. For Kellogg, the ratio is:
$61.07 ÷ $4.94 = 12.4
It purports to measure the market's perception of the “quality” of a company’s
earnings by indicating the price multiple the securities market is willing to pay for the
Requirement 2
The dividend payout ratio expresses the percentage of earnings that is distributed to
shareholders as dividends. The ratio is calculated by dividing dividends per common
share by the earnings per share. For Kellogg’s most recent 12 months, the ratio is:
Research Case 19–19
Requirement 1
The appropriate accounting treatment for the situation is specified in FASB ASC 718–
10–35: “Compensation–Stock Compensation–Overall.” Section 718–10–35–15 states:
Change in Classification Due to Change in Probable Settlement Outcome
35-15 An option or similar instrument that is classified as equity, but subsequently
becomes a liability because the contingent cash settlement event is probable of
occurring, shall be accounted for similar to a modification from an equity to
liability award. That is, on the date the contingent event becomes probable of
occurring (and therefore the award must be recognized as a liability), the entity
Requirement 2
National Paper should record a liability for the portion of the award attributed to
past service (2/5) multiplied by the award's fair value ($8 million) on the date cash
payment becomes probable:
19–106 Intermediate Accounting, 8/e
Air France–KLM Case
Requirement 1
Note 30.3 indicates that AF reported €1 million in its income statement for its
stock options in 2013. AF’s share options are cliff-vesting, such that one-third of the
options vest at grant date with a further one-third after one and two years,
respectively. When options have graded-vesting, U.S. GAAP permits companies to
account for each vesting amount separately, as if they were separate awards, but also
Requirement 2
AF reported basic earnings and diluted earnings per share of €6.17 in its income
statement for 2013. If AF used U.S. GAAP, it would have reported EPS using the
