# Review question ratios—Liquidity/Solvency and Operational 1.Calculate and interpret liquidity and solvency ratios. 2. Calculate and interpret operational ratios. Ratios—Profitability and Equ

Review question

ratios—Liquidity/Solvency and Operational

1.Calculate and interpret liquidity and solvency ratios.

2. Calculate and interpret operational ratios.

Ratios—Profitability and Equity

1.Calculate and interpret profitability ratios.

2.Calculate and interpret equity ratios.

Consolidation at Acquisition

1.Describe the characteristics of consolidated financial statements immediately following a business combination.

Prepare consolidated financial statements immediately following a business combination, including:

calculate consolidated balances on the consolidated balance sheet,

understand consolidating investment eliminating entries, and

understand intercompany receivable/payable eliminating entries.

2. Describe the effects that the method a parent uses to carry an investment (on its books) in a subsidiary has on the investment balance that must be eliminated in the consolidating process.

Consolidation Subsequent to Acquisition

1. Describe the characteristics of the cost method of accounting for an investment.

2. Describe the necessary treatment of the consolidating worksheet when a parent uses the cost method to account for an investment in a subsidiary

Consolidation Less than 100% Ownership

1. Allocate the purchase price for a less than 100% acquisition.

2.Calculate the components of the balance sheet and income statement that would be represented on the consolidated statements with a less than 100% acquisition.

Introduction to Earnings per Share

1.Complete a calculation of basic EPS.

2.Complete a calculation of diluted EPS.

Basic Earnings per Share

1.Complete a calculation of weighted average shares outstanding with stock issuance, repurchase, dividends, and splits.

Diluted Earnings per Share

1. Calculate the potentially dilutive effect of convertible preferred stock on basic EPS.

2.Calculate the potentially dilutive effect of stock options and warrants using the “treasury stock method” on basic EPS.

Solve BOTH EPS (Earnings Per Share) questions below using the “EPS Excel Spreadsheet” format provided to you within the module:

QUESTION #1)

Stanley Department Stores reported net income of \$720,000 for the year ended December 31, 2021.

Common shares outstanding at Jan. 1, 2021

80,000

Incentive stock options (vested in 2020) outstanding throughout 2021

24,000

(Each option is exercisable for one common share at an exercise price of \$37.50)

During the year, the market price of Stanley’s common stock averaged \$45 per share.

On Aug. 30 Stanley sold 15,000 common shares.

Stanley’s only debt consisted of \$50,000 of 10% short term bank notes.

The company’s income tax rate is 40%.

Required:

Compute Stanley’s basic and diluted earnings per share for the year ended December 31, 2021

QUESTION #2)

Information from the financial statements of Ames Fabricators, Inc., included the following:

December 31

2021

2020

Common shares

100,000

100,000

Convertible preferred shares      (convertible into 32,000 shares of common)

12,000

12,000

10% convertible bonds      (convertible into 30,000 shares of common)

\$

1,000,000

\$

1,000,000

Ames’s net income for the year ended December 31, 2021, is \$500,000. The income tax rate is 40%. Ames paid dividends of \$5 per share on its preferred stock during 2021.

Required:

Compute basic and diluted earnings per share for the year ended December 31, 2021.