Question

In computing the weighted-average number of shares outstanding during the year, which of the following events, occurring after the Fox Co.. balance sheet date for the year, but before Fox's financial statement issue date, must be treated as if it had occurred at the beginning of the year? I. Issuance of 1 share of Owl Co. common stock for every 2 shares of Fox common stock II. Issuance of a 200% common stock split III. Issuance of a 5% preferred stock dividend

Answer 1

Answer: II. Issuance of a 200% common stock split

Explanation:

Earnings per share (EPS) is Net income - Preferred dividend / Average number of shares outstanding

We are concerned only with the denominator which is the average number of shares outstanding. Therefore the third option which is issuance of preferred stock dividend will not have any affect. However, in the case of Diluted EPS this information would have helped.

Also, since the first option is related to property dividend it is again not relevant to EPS. So that option is also negated.

The second option talks about a common stock split. During the year if there is a stock split then it affects the number of common shares which will affect the denominator of EPS and that is why it is the only relevant option for us.