(a) On the basis of the information above, do you agree with the controller's computation of earnings per share? If you disagree, show a revised computation of the earnings per share for 2020. (b) Calculate the diluted earnings per share for 2020. (c) Explain and justify the accounting treatment for share dividends and share splits.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
As auditor for Chrisley and Dale Associates, you have been assigned to check McKesson Corporation's computation of earnings per share for the current year. The financial controller has supplied you with the following computations.
Net Income $6,800,000
Ordinary shares issued and outstanding:
Beginning of year 650,000
End of year 4,000,000
Average 2,325,000
Earnings per share calculation:
$6,800,000 /2,325,000
= $2.92
You have gathered the following information:
On January 1, 2020, McKesson Corp. issued 650,000 shares. Additional issues of shares
for the year were as follows:
April 1 150,000 shares.
May 1 A 20% share dividend
August 1 700,000 shares.
September 1 340,000 shares.
November 1 A 2 for 1 share split
All 4,000,000 shares were outstanding at December 31, 2020.
On January 1, 10% convertible debentures, $60,000,000 face value, were issued at par. Each $1,000 debenture is convertible into 40 ordinary shares. The interest expense for the current year related to the liability component of the convertible debentures is $6,500,000.
200,000
Options were granted to purchase 400,000 ordinary shares at $18 each. The company's average market price of ordinary shares was $24.
10 year $3,000,000 face
McKesson's net income in 2020 was $6,800,000 and its tax rate was 30%.
Instructions:
(a) On the basis of the information above, do you agree with the controller's computation of earnings per share? If you disagree, show a revised computation of the earnings per share for 2020.
(b) Calculate the diluted earnings per share for 2020.
(c) Explain and justify the accounting treatment for share dividends and share splits.
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