[Anonymous]

I have a question about calculating the basic EPS. In this question, the numerator for basic EPS is (Net Income – 250,000×4%), which is the correct answer B. How do I know I should subtract 250,000×4% instead of the 16,000 that is given in the question (in that case, the answer will be A, which is incorrect)?

Thanks!

Ute Co. had the following capital structure during Year 1 and Year 2:

Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding $250,000

Common stock, $5 par, 200,000 shares issued and outstanding 1,000,000

Ute reported net income of $500,000 for the year ended December 31, Year 2. Ute paid no preferred

dividends during Year 1 and paid $16,000 in preferred dividends during Year 2. In its December 31, Year 2,

income statement, what amount should Ute report as basic earnings per share?

a. $2.42

b. $2.45

c. $2.48

d. $2.50

[ITauditor010]

because it is a cumulative preferred dividend as opposed to a noncumulative preferred dividend, they are entitled to the dividend even though it has not been declared yet. as a result, you take the amount they would get out of earnings even though management hasn't declared it yet. for the noncumulative preferred dividend, you only take it out when management has declared a dividend and has funds available to allocate to their portion.

in this problem, the cumulative folks are owed 2 years worth of dividends because they were not paid last year. this means that they are owed ($10 par * 4% dividend [based upon par value of stock] * 25000 shares) for 2 years. in other words, they are owed $10,000 a year for 2 years — $20,000 total.

when management declared the $16,000 preferred dividend, it was not enough to pay off the cumulative preferred stockholders. because the dividend declaration was too low and couldn't cover the total amount of cumulative dividends owed ($16,000 vs $20,000), the noncumulative preferred people didn't get anything from the declaration. as a result, the EPS calculation numerator would only be the (Net Income – amount of cumulative preferred dividends this year).

now IF management had declared more than the amount owed to the cumulative preferred stockholders, then the amount above what the cumulative preferred dividend liability is would be the amount you additionally take out of net income. say for example, they declared a $25,000 dividend. Then the EPS numerator becomes (Net Income – Amount of cumulative preferred dividends for this year – $5000 excess above what's owed to the cumulative people). In figures, that would be $500,000 NI – $10,000 Cumulative Dividends – $5000 excess available for the noncumulative people.

Please also note that, for the cumulative preferred dividends, the amount you take out of net income is the amount of dividends in arrears FROM THIS YEAR. We only take out $10,000 ($10 par * 4% dividend * 25000 shares) because that portion arose from operations this year. The other $10,000 that we owe the cumulative preferred stockholders was incurred last year and was already figured into last year's EPS calculation.

BEC - 85 (Took May 2011)
FAR - 94 (Took Jul 28 2011)
REG - 87 (Took Aug 17 2011)
AUD - 98 (Took Aug 31 2011)

[Anonymous]

@ITauditor0

Thanks a lot for your explanation!! I especially like how you gave me the example in the end with the $25,000 dividends. So basically there are two parts of of the dividends we need to deduct from Net Income:

1) Dividends DECLARED this year from non-cumulative

2) TOTAL dividends accumulated this year (# of shares x par x %), whether declared or not

Quick question about your exams schedue… I see you are taking 2 exams next month right after your FAR today. Are you planning on studying full time for REG and AUD? I was thinking about doing that too but I am not sure if that's enough time for both. What's your study plan like?

[ITauditor010]

So basically there are two parts of of the dividends we need to deduct from Net Income:

1) Dividends DECLARED this year from non-cumulative

2) TOTAL dividends accumulated this year (# of shares x par x %), whether declared or not

yup, that's correct. remember that you only include “total dividends accumulated this year” for the cumulative preferred stock and not the noncumulative preferred stock. also, remember that you only subtract the dividends declared for non-cumulative preferred shareholders only if there is money left over to pay them.

like in your original question — the dividend declaration couldn't even cover everyone owed in the cumulative preferred stock, so that $16,000 dividend declaration wasn't factored into the EPS (we only went with the cumulative stock). if the declaration was higher and every cumulative person got paid and there was a net amount left over to start distributing to the non-cumulative people (such as in my $25,000 example), then that leftover amount would be used to reduce Net Income (the $5000 above the $20,000 owed to the cumulative people).

as for my study plan, it looks like I entered in the wrong date for my FAR in the signature. I actually have it on thursday (7/28, not 7/26), so I've been doing a lot of touch ups on various topics in the book. I'm starting with a Big 4 firm in September so I know I won't have any time to study once I start and I'm trying to do everything before this testing window closes. I actually had a part time job before this month, but I had to quit it so I can catch up with my schedule. Originally, I had planned to do FAR and REG in July, then AUD the 2nd week of august, leaving me with 3 weeks of summer before I started work. Now, I'm going all the way til 8/31.

this is different for everyone, but for me, what works is studying hard and fast. When I tried to juggle both work and study, I “completed” Becker lectures F1-F6 over 2 months, but I forgot everything because I moved so slow. After I quit my job about 2.5 weeks ago, I've been full time studying, learning F7 to F9, and re-learning F1 to F6. My study breakdown is about 7 hours of FAR per day and then 1 REG or AUD video lecture at night (which is usually 3-4 hours). On weekends, I usually go a little slow and do maybe 4-5 hours of study vs 7. I actually just finished re-studying FAR this past Saturday….and this time, I retained the info!

I plan on doing the same 7 to 11 hours of daily studying for REG and AUD. With FAR, it took me about 10-14 hours of reading and homework per chapter, so I'm hoping REG and AUD will be slightly less because I just took these courses before I graduated from college. If everything goes according to plan, I should be done with the REG coursework around 8/6 and the AUD coursework around 8/11. This would give me about 1 week to prep for the REG exam and allow me to salvage SOME summer (maybe 8/17-8/24?) before I go review for my AUD exam on 8/31.

so to answer your question, should you try to do 2 exams in 1 month? if you were me, i would say so. there's too much crap to memorize and if you go too slow, you forget half of it because it disappeared from your short term memory. that said, studying 10-11 hours a day is a LOT of time that most people don't have. if you don't have that much time or mental stamina, it might be better for you to pace yourself and not sprint.

BEC - 85 (Took May 2011)
FAR - 94 (Took Jul 28 2011)
REG - 87 (Took Aug 17 2011)
AUD - 98 (Took Aug 31 2011)

[Author]

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