Question

Please select the correct Answer

When calculating basic EPS, which of the following should be subtracted from net income in the numerator?

		Dividends paid to preferred shareholders
		Dividend paid to common shareholders
		Interest expense
		Noncontrolling interest

Please use the following information extracted from the financial statements of Fun, Inc., for 2010, 2009, and 2008.

	2010	2009
Net sales	$233,000	$204,000
Cost of sales	(124,000)	(110,000)
Selling and administrative expenses	(95,000)	(81,500)
Other income:
Interest	(3,700)	(3,050)
Other	100	1,175
Earnings before tax and extraordinary items	$ 10,400	$ 10,625
Provision for income tax	(4,800)	(4,740)
Earnings before extraordinary items	5,600	5,885
Extraordinary items	—	1,510
	$  5,600	$  7,395
Total assets	$202,000	$173,000

What is the trend in gross profit margin from 2009 to 2010?

		a slight increase (less than 1%)
		a slight decrease (less than 1%)
		no change
		increased by more than 5%
		decreased by more than 5%

Jake and Jason, Inc., had the following balance sheet results for 2010:

	(in millions)
Current liabilities	$12.6
Bonds payable	18.6
Lease obligations	2.7
Common stock	8.6
Retained earnings	22.9
	$65.4

Compute the debt-equity ratio.

		107.6%
		87.6%.
		67.6%.
		46.7%.
		none of the answers are correct.

Answer 1

1. Option (a) is correct. While calculating basic EPS, we have to subtract dividend paid to preferred sharehoders, from net income. Because, only after when the dividend on preferred shareholders is paid, then the earnings that are left, will be available for common shareholders.

2. Option (a) is correct. Gross profit margin is slightly increase (by less than 1%)

Gross profit margin = Gross profit / sales * 100 = (Sales - cost of sales) / sales *100

For 2009, Gross profit margin = ($204000 - $110000) / $204000 *100 = 46.07%

For 2010, Gross profit margin = ($233000 - $124000) / $233000 *100 = 46.78%

3. Option (c) is correct.

Debt equity ratio = Total liabilities / equity

where, Total liabilities (long term) = Bonds payable + lease obligations = $18.6 +$2.7 = $21.3

Total equity = common stock + retained earnings = $8.6 + $22.9 = $31.5

Debt equity ratio = $21.3 / $31.5 = 67.6%