CPA Financial Accounting and Reporting Far Quiz: Calculate Basic And Diluted Eps

What this quiz covers

This quiz focuses on Calculate Basic And Diluted Eps, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. $2.10 (correct answer)
2. $2.50
3. $2.60
4. $2.00

Explanation: FASB ASC 260 requires basic EPS to be calculated using income available to common stockholders divided by weighted-average common shares outstanding. The key data includes net income of $5,000,000, declared noncumulative preferred dividends of$800,000, and 2,000,000 weighted-average common shares. The correct answer of $2.10 properly calculates income available to common as$5,000,000 - $800,000 =$4,200,000, then divides by 2,000,000 shares to get $2.10. Answer B ($2.50) incorrectly ignores the preferred dividends, Answer C ($2.60) uses an incorrect calculation, and Answer D ($2.00) appears to overstate the preferred dividend deduction. For noncumulative preferred stock, only declared dividends are deducted from net income, unlike cumulative preferred where dividends accrue regardless of declaration. This framework ensures that EPS reflects only the earnings attributable to common stockholders after satisfying preferred dividend obligations.

Question 2

1. $1.88
2. $2.00 (correct answer)
3. $2.28
4. $2.45

Explanation: Basic EPS = Net Income / Weighted-Average Common Shares Outstanding (WACSO). The 200,000 shares were outstanding for the full 12 months, and the 60,000 shares were outstanding for 9 months (April 1 to December 31). WACSO = (200,000 × 12/12) + (60,000 × 9/12) = 200,000 + 45,000 = 245,000 shares. Basic EPS = $490,000 / 245,000 =$2.00. Distractor A incorrectly uses year-end shares (490,000/260,000). Distractor C incorrectly weights new shares for 3 months instead of 9. Distractor D incorrectly uses beginning shares only.

Question 3

1. $2.76
2. $2.82
3. $3.00 (correct answer)
4. $3.14

Explanation: To calculate weighted-average common shares outstanding (WACSO), stock dividends are treated as if they occurred at the beginning of the period. The beginning shares and any shares issued before the dividend are multiplied by (1 + dividend percentage).

1. Restate beginning shares for the dividend: 100,000 shares × 1.10 = 110,000 shares. These are outstanding for the full year.
2. Calculate weighted shares for the new issuance (which occurred after the dividend and is not affected by it): 30,000 shares × 2/12 = 5,000 shares.
3. Total WACSO = 110,000 + 5,000 = 115,000 shares.
4. Basic EPS = Net Income / WACSO = $345,000 / 115,000 =$3.00.

Question 4

1. $1.90
2. $1.93
3. $2.00 (correct answer)
4. $3.80

Explanation: Stock splits are applied retroactively to all shares outstanding before the split. Beginning shares adjusted for split: 300,000 × 2 = 600,000 shares (treated as outstanding from January 1). Treasury stock purchase: 40,000 shares held for 3 months (October 1 to December 31). Weighted reduction = 40,000 × 3/12 = 10,000 shares. WACSO = 600,000 - 10,000 = 590,000 shares. Basic EPS = $1,180,000 / 590,000 =$2.00. Distractor B would result from using $1,140,000 net income. Distractor D ignores the stock split's effect on the denominator.

Question 5

1. $2.20 (correct answer)
2. $2.33
3. $3.00
4. $3.80

Explanation: Basic EPS is calculated as (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding. Because the preferred stock is cumulative, the preferred dividends must be subtracted from net income regardless of whether they were declared. Preferred Dividend Amount = 100,000 shares × $50 par × 8$400,000. Income available to common shareholders = $1,500,000 -$400,000 = $1,100,000. Weighted-average common shares = 500,000 (since it was constant). Basic EPS =$1,100,000 / 500,000 = $2.20. Distractor B ($2.33) is incorrect. Distractor C ($3.00) incorrectly ignores the preferred stock dividends ($1,500,000 / 500,000). Distractor D ($3.80) is incorrect and may result from a calculation error.

Question 6

1. $2.50
2. $3.50
3. $4.00 (correct answer)
4. $5.50

Explanation: Basic EPS is calculated as (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding. For non-cumulative preferred stock, dividends are subtracted from net income only if they are declared in the period. Since Apex's board did not declare any dividends, there is no deduction for preferred dividends in the EPS calculation for Year 1. Income available to common shareholders = $800,000 -$0 = $800,000. Weighted-average common shares = 200,000. Basic EPS =$800,000 / 200,000 = $4.00. Distractor A ($2.50) incorrectly subtracts the potential preferred dividend ($800,000 - (50,000 * $100 * 0.06)) / 200,000 =$500,000 / 200,000 = $2.50. This would be the correct treatment for cumulative preferred stock. Distractors B and D are incorrect calculations.

Question 7

1. $1.87
2. $1.89 (correct answer)
3. $1.90
4. $1.94

Explanation: Use the treasury stock method for stock options. Proceeds from exercise = 10,000 options × $20 =$200,000. Shares assumed repurchased = $200,000 ÷$25 average market price = 8,000 shares. Incremental shares = 10,000 options exercised - 8,000 repurchased = 2,000 shares. Diluted WACSO = 500,000 + 2,000 = 502,000 shares. Diluted EPS = $950,000 ÷ 502,000 =$1.89. Distractor A is a calculation error. Distractor C ($1.90) is basic EPS. Distractor D is a calculation error.

Question 8

1. $2.38
2. $2.43 (correct answer)
3. $2.50
4. $2.57

Explanation: Use the if-converted method for convertible bonds. First check for dilution: Basic EPS = $2,000,000 ÷ 800,000 =$2.50. After-tax interest = $1,000,000 × 6$45,000. Conversion shares = ($1,000,000 ÷$1,000) × 40 = 40,000 shares. Individual EPS effect = $45,000 ÷ 40,000 =$1.125. Since $1.125 <$2.50, the bonds are dilutive. Adjusted numerator = $2,000,000 +$45,000 = $2,045,000. Diluted WACSO = 800,000 + 40,000 = 840,000. Diluted EPS =$2,045,000 ÷ 840,000 = $2.43. Distractor C is basic EPS.

Question 9

1. They are dilutive and will decrease EPS.
2. They are antidilutive and are excluded from the calculation. (correct answer)
3. They have no effect on EPS because they were not exercised.
4. They are dilutive, and the impact is calculated using the year-end stock price.

Explanation: Stock options are considered antidilutive and are excluded from the diluted EPS calculation if their exercise price is greater than the average market price of the stock. In this case, the exercise price ($40) is greater than the average market price ($35). If exercised, the options would be 'out of the money,' and the treasury stock method would result in repurchasing more shares than were issued, which would decrease the share count and improperly increase EPS. Therefore, they are antidilutive and ignored. Distractor A is incorrect because the options are antidilutive. Distractor C is incorrect because potential dilution is calculated whether or not the options are exercised. Distractor D is incorrect because the treasury stock method uses the average market price, not the year-end price.

Question 10

1. They are dilutive and should be included.
2. They are antidilutive and should be excluded. (correct answer)
3. They are included, adding $80,000 to the numerator.
4. They are excluded because the interest rate is higher than the EPS.

Explanation: To determine if a convertible security is dilutive, its individual EPS effect must be calculated and compared to basic EPS. Individual EPS effect = (After-tax interest saved) / (New shares from conversion). Interest expense = $1,000,000 × 8$80,000. After-tax interest = $80,000 × (1 - 0.20) =$64,000. New shares = 30,000. Individual EPS effect = $64,000 / 30,000 =$2.13. Since the individual effect ($2.13) is greater than the basic EPS ($2.00), the security is antidilutive and must be excluded from the diluted EPS calculation. Distractor A is incorrect because the security is antidilutive. Distractor C is incorrect because it uses the pre-tax interest amount. Distractor D provides an illogical reason for exclusion.

Question 11

1. The options first, then the preferred stock. (correct answer)
2. The preferred stock first, then the options.
3. Either order, as the final result will be the same.
4. Only the security with the largest impact on the denominator is included.

Explanation: When a company has multiple potentially dilutive securities, they must be ranked and included in the diluted EPS calculation from most dilutive to least dilutive. The dilutiveness is measured by the individual EPS effect of each security.

1. Stock Options: The numerator effect is always $0. The denominator effect is positive (incremental shares). Therefore, options (if dilutive) are always the most dilutive security and are considered first.
2. Convertible Preferred Stock: Individual EPS effect = (Dividends saved) / (Shares from conversion) = (10,000 * $100 * 5$50,000 / 40,000 = $1.25. Since options have an EPS effect of$0, they are more dilutive than the preferred stock with an effect of $1.25. Therefore, the options are included first.

Question 12

1. Net income per share: $2.00
2. EPS from continuing operations: $2.50; Net loss per share:$(0.50)
3. EPS from continuing operations: $2.50; Loss from discontinued operations:$(0.50); Net income per share: $2.00 (correct answer)
4. EPS from continuing operations: $2.00

Explanation: Companies must report per-share amounts for both income from continuing operations and net income on the face of the income statement. The per-share amount for any discontinued operations can be shown on the face of the income statement or in the notes. Calculation:

• EPS from continuing operations = $5,000,000 / 2,000,000 shares =$2.50
• Loss per share from discontinued operations = $(1,000,000) / 2,000,000 shares =$(0.50)
• Net income per share = $4,000,000 / 2,000,000 shares =$2.00 The sum of the components must equal the net income per share ($2.50 -$0.50 = $2.00). Option C correctly presents all required components.

Question 13

1. $2.50
2. $2.63
3. $2.71 (correct answer)
4. $2.78

Explanation: Basic EPS includes the actual weighted-average shares outstanding during the period. When convertible bonds are converted during the year, the newly issued shares must be included in the WACSO calculation.

1. WACSO before conversion = 180,000 shares
2. Shares issued upon conversion: ($1,000,000 ÷$1,000) × 20 shares/bond = 20,000 shares
3. These 20,000 shares were outstanding for 3 months (October 1 to December 31)
4. Weighted contribution = 20,000 × (3/12) = 5,000 shares
5. Total WACSO for basic EPS = 180,000 + 5,000 = 185,000 shares
6. Basic EPS = $501,350 ÷ 185,000 =$2.71

Question 14

1. $680,000
2. $840,000 (correct answer)
3. $1,000,000
4. $1,160,000

Explanation: For cumulative preferred stock, the dividend for the current period is deducted from net income to calculate income available to common shareholders, regardless of whether it was declared. Dividends in arrears from prior periods that are paid in the current period do not affect the current period's EPS calculation because they would have already been included in the prior period's EPS calculation (as a reduction to income available to common shareholders). Preferred dividend for Year 2 = 20,000 shares × $100 par × 8$160,000. Income available to common shareholders for Year 2 EPS = $1,000,000 (Net Income) -$160,000 (Current year's dividend) = $840,000. Distractor A ($680,000) incorrectly subtracts two years of dividends ($1,000,000 - $320,000). Distractor C ($1,000,000) incorrectly ignores the preferred dividend requirement. Distractor D results from adding the dividend instead of subtracting.

Question 15

1. $(1.00)
2. $(2.00)
3. $(3.00) (correct answer)
4. $(4.00)

Explanation: When calculating EPS with a net loss, the preferred dividend requirement is still added to the loss to determine the net loss attributable to common shareholders. Preferred Dividend Amount = 20,000 shares × $100 par × 5$100,000. Since the preferred stock is cumulative, this dividend is required for the period. Net loss available to common shareholders = Net Loss - Preferred Dividends = $(200,000) -$100,000 = $(300,000). Weighted-average common shares = 100,000. Basic Loss per Share =$(300,000) / 100,000 = $(3.00). Distractor A ($1.00) incorrectly subtracts the preferred dividend amount from the loss. Distractor B ($2.00) ignores the effect of the preferred dividends. Distractor D ($4.00) is a calculation error.

Question 16

1. $2.40 (correct answer)
2. $2.50
3. $3.00
4. $2.25

Explanation: Use the if-converted method for convertible preferred stock. First calculate basic EPS: Preferred dividends = 50,000 × $100 × 4$200,000. Income available to common = $1,200,000 -$200,000 = $1,000,000. Basic EPS =$1,000,000 ÷ 400,000 = $2.50. Check for dilution: Individual EPS effect =$200,000 ÷ (50,000 × 2) = $200,000 ÷ 100,000 =$2.00. Since $2.00 <$2.50, the preferred is dilutive. Diluted numerator = $1,200,000 (add back preferred dividends). Diluted WACSO = 400,000 + 100,000 = 500,000. Diluted EPS =$1,200,000 ÷ 500,000 = $2.40. Distractor B is basic EPS.

Question 17

1. 4,167 (correct answer)
2. 16,667
3. 25,000
4. 62,500

Explanation: When options are exercised during the year, the treasury stock method is applied to the period they were outstanding (Jan 1 to Mar 31) and the actual shares issued are weighted for the period they were outstanding after exercise (Apr 1 to Dec 31). The diluted EPS calculation only includes the incremental shares for the portion of the year the options were outstanding.

1. Incremental shares for Jan 1 - Mar 31 (3 months): Proceeds = 100,000 × $30 =$3,000,000. Shares repurchased = $3,000,000 /$36 (avg price for the period) = 83,333. Incremental shares = 100,000 - 83,333 = 16,667. Weighted incremental shares = 16,667 × (3/12) = 4,167. After exercise, the shares are no longer potential common shares but are included in the basic WACSO calculation. The diluted EPS calculation only considers the dilutive effect when they were options.

Question 18

1. To report the amount of earnings that would have been available if all potential common shares had been exercised at the beginning of the year.
2. To measure the performance of an entity over the reporting period by showing the potential dilution of earnings per share from all potential common shares that were outstanding during the period. (correct answer)
3. To provide a conservative measure of performance by assuming the worst-case scenario for share issuance.
4. To predict the future impact on earnings per share when potential common shares are converted or exercised.

Explanation: The objective of diluted EPS is to measure an entity's performance for the reporting period while giving effect to all dilutive potential common shares that were outstanding during that period. It shows the 'worst-case' scenario of dilution based on the capital structure that existed during the year. Distractor A is too narrow; it focuses only on exercise and not conversion. Distractor C uses the term 'worst-case scenario' but this is a means to an end; the primary objective is performance measurement, not just being conservative. Distractor D is incorrect; EPS is a measure of past performance, not a prediction of future performance.

Question 19

1. $1.50
2. $1.63
3. $1.70 (correct answer)
4. $1.88

Explanation: To calculate basic EPS, determine the weighted-average common shares outstanding (WACSO). The 500,000 shares were outstanding for the full year before the treasury purchase. The 60,000 treasury shares were not outstanding for 8 months (May 1 to December 31). Weighted reduction = 60,000 × 8/12 = 40,000 shares. WACSO = 500,000 - 40,000 = 460,000 shares. Basic EPS = $782,000 / 460,000 =$1.70. Distractor A incorrectly uses beginning share count. Distractor B would result from using $750,000 net income. Distractor D incorrectly weights treasury shares for 4 months.

Question 20

1. Diluted EPS will be a larger loss per share than basic EPS.
2. Diluted EPS will be a smaller loss per share than basic EPS.
3. Diluted EPS will be equal to basic EPS. (correct answer)
4. Diluted EPS cannot be calculated when there is a net loss.

Explanation: When a company has a net loss from continuing operations, any potential common shares (from options, convertible securities, etc.) are considered antidilutive. Including them in the calculation would increase the number of shares in the denominator, which would spread the loss over more shares, resulting in a smaller loss per share. A smaller loss is an improvement, which is antidilutive. Therefore, for any company with a net loss, diluted EPS is reported as the same amount as basic EPS. Distractor A would be the result of a dilutive effect, which doesn't occur with a loss. Distractor B describes the antidilutive effect that is prohibited. Distractor D is incorrect; both basic and diluted EPS must be reported, but they will be the same number.