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Chapter 4: Question 25Q (page 180)

Neumann Company computed earnings per share as follows.

Net income

_____________________________________

Common shares outstanding at year-end

Neumann has a simple capital structure. What possible errors might the company have made in the computation? Explain.

Short Answer

Expert verified

According to the given situation, the earnings per share would reflect an inaccurate amount.

Step by step solution

01

Meaning of Earnings Per Share

Earnings per share represent the per share earnings generated by a business entity on its outstanding common stock. It is computed by dividing the profits with outstanding common stock.

02

Possible errors made by the company

  • In the case of a simple capital structure, the ideal way to compute EPS is to deduct the preferred stock dividend from the net income. Here the company is considering net income without deducting such dividends.
  • Also, the denominator should contain the outstanding number of shares, not the outstanding amount. Hence, the total amount outstanding for common stock should be divided by the number of shareholders to determine the number of common stock outstanding.

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Most popular questions from this chapter

(Multiple-Step Statement, Retained Earnings Statement) The following information is related to Dickinson Company for 2017.

Retained earnings balance, January 1, 2017 \(980,000

Sales revenue 25,000,000

Cost of goods sold 16,000,000

Interest revenue 70,000

Selling and administrative expenses 4,700,000

Write-off of goodwill 820,000

Income taxes for 2017 1,244,000

Gain on the sale of investments 110,000

Loss due to flood damage 390,000

Loss on the disposition of the wholesale division (net of tax) 440,000

Loss on operations of the wholesale division (net of tax) 90,000XXX

Dividends declared on common stock \)250,000

Dividends declared on preferred stock 80,000

Dickinson Company decided to discontinue its entire wholesale operations (considered a discontinued operation) and to retain its manufacturing operations. On September 15, Dickinson sold the wholesale operations to Rogers Company. During 2017, there were 500,000 shares of common stock outstanding all year.

Instructions

Prepare a multiple-step income statement and a retained earnings statement.

What is the basis for distinguishing between operating and non operating items?

What effect does intraperiod tax allocation have on reported net income?

Cooper Investments reported an unusual gain from the sale of certain assets in its 2017 income statement. How does intra period tax allocation affect the reporting of this unusual gain?

Using the information provided in BE4-2, prepare a condensed multiple-step income statement for Brisky Corporation

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