Professional Documents
Culture Documents
Chapter 12
Chapter 12
1. The purpose of presenting subtotals such as Income from Continuing Operations and Income
before Extraordinary Items is to assist users of the income statement in making forecasts of future
earnings. By excluding the operating results of discontinued operations and the effects of unusual
and nonrecurring transactions, these subtotals indicate the amount of income derived from the
company’s ongoing, normal operations.
2. The discontinued operations classification is used in the income statement only when a business
discontinues an entire segment of its activities. Frank’s has two business segments—pizza parlors
and the baseball team. Only if one of these segments is discontinued in its entirety will the
company report discontinued operations. The sale or closure of a few parlors does not represent
the disposal of the pizza parlor segment of the company’s business activities.
3. Extraordinary items are gains and losses that are unusual in nature and not expected to recur in
the foreseeable future.
Separate line-item presentation should be made for items that are unusual in nature or infrequent
in occurrence, but not both. While these items are disclosed separately via their separate
presentation, a subtotal for income before and after them is not presented as is done for
extraordinary items.
4. The restructuring charges should be combined and presented as a line item in the company’s
income statement in determining operating income.
In predicting future earnings for the company, the charges generally should not be considered to
be costs that will be incurred in the future. In fact, if the program of downsizing is successful,
operating results in the future could be expected to improve as a result of having incurred the
restructuring charges.
5. A prior period adjustment represents a correction of an error in the amount of income reported in a
prior period. Prior period adjustments are shown in the statement of retained earnings (or
statement of stockholders’ equity) as an adjustment to the balance of retained earnings at the
beginning of the period in which the error is identified.
6. Irregular income items, such as extraordinary items, discontinued operations, and prior period
adjustments, are legitimate parts of the earnings history of a company. On the other hand, they are
non-recurring and should not carry the same weight in evaluating future profitability as normal,
recurring operating revenues and expenses.
7. a. The current-year preferred dividend is deducted from net income to determine the earnings
allocable to the common stockholders. (If the preferred stock is noncumulative, the preferred
dividend is deducted only if declared; the preferred dividend on cumulative preferred stock is
always deducted.)
9. a. The price-earnings ratio is computed by dividing the market price of a share of common
stock by the annual earnings per share.
b. The amount of basic earnings per share is computed by dividing the net income available
for common stock by the weighted-average number of common shares outstanding during
the year.
c. The amount of diluted earnings per share is computed by dividing net income by the
maximum potential number of shares outstanding after convertible securities are assumed to
have been converted.
10. a. Shares used in computing basic earnings per share:
Common shares outstanding throughout the year ………………………………. 3,000,000
b. Shares used in computing diluted earnings per share:
Common shares outstanding throughout the year ………………………………… 3,000,000
Additional common shares that would exist if preferred stock had
been converted at the beginning of the year (150,000 x 2) ………………………… 300,000
Total shares used in diluted earnings computation …………………………………3,300,000
11. The analyst should recognize the risk that the outstanding convertible securities may be
converted into additional shares of common stock, thereby diluting (reducing) basic earnings per
share in future years. If any of the convertible securities are converted, basic earnings per share
probably will increase at a slower rate than net income. In fact, if enough dilution occurs, basic
earnings per share could actually decline while net income continues to increase.
12. Date of declaration is the day the obligation to pay a dividend comes into existence by action
of the board of directors. Date of record is the day on which the particular stockholders who
are entitled to receive a dividend is determined. Persons listed in the corporate records as
owning stock on this day will receive the dividend. Date of payment is the day the dividend is
distributed by the corporation. Ex-dividend date (usually three business days prior to the date
of record) is the day on which the right to receive a recently declared dividend no longer
attaches to shares of stock. As a result, the market price of the shares usually falls by the
amount of the dividend.
13. The purpose of a stock dividend is to make a distribution of perceived value to stockholders as a
representation of the profitability of the company while, at the same time, conserving cash.
16. Three items that may be shown in a statement of retained earnings as causing changes in the balance
of retained earnings are:
(1) Net income or net loss for the period
(2) Dividends declared (both cash dividends and stock dividends)
(3) Prior period adjustments
17. If the price of the stock declines in proportion to the distribution of shares in a stock dividend, at the
time of that distribution the stockholder does not benefit. He/she holds exactly the same percentage of
the outstanding shares, and the value per share has declined in proportion to the increased number of
shares. Often, however, the value does not drop in proportion to the increased number of shares,
meaning that the recipient of the shares has an immediate benefit. For example, if an investor who
held 2,000 shares of stock that had a market value of $10 each received a 10% stock dividend, and
the market price only declined 5%, the following would result:
20. The statement of retained earnings shows for the Retained Earnings account the beginning balance,
changes in the account balance during the period, and the ending balance. A statement of stockholders’
equity provides the same information, but includes every category of stockholders’ equity account
(including retained earnings). Therefore, a statement of stockholders’ equity may appropriately be
described as an expanded statement of retained earnings.
Revenues $1,500,000
Expenses 1,200,000
Income before extraordinary item $300,000
Extraordinary gain from passage of new legislation, net of $80,500
income taxes 149,500
Net income $449,500
b. Since Smiley is a small and growing corporation, the board of directors probably
decided that cash from operations was needed to finance the company’s expanding
operations.
c. You are probably better off because of the board’s decision not to declare cash
dividends. Smiley was obviously able to invest the funds to earn a high rate of
return, as evidenced by the value of your investment, which has grown from
$1,000 to $17,280.
Ex. 12.5 a. 1. Net income (all applicable to common stock) ……………… $1,920,000
Shares of common stock outstanding throughout the year .. 400,000
Earnings per share ($1,920,000 400,000 shares) ……….. $4.80
2. Net income ………………………………………………………… $1,920,000
Less: Preferred stock dividend (100,000 x 8% x $100) ………… 800,000
Earnings available for common stock …………………………… $1,120,000
Shares of common stock outstanding throughout the year …… 300,000
Earnings per share ($1,120,000 300,000 shares) ……………… $3.73
b. The earnings per share figure computed in part a (2) is a basic EPS figure.
Although the company has outstanding both common and preferred stock, the
preferred stock must be convertible into common stock in order to result in a
diluted computation of earnings per share. The potential conversion of preferred
stock into common stock is what necessitates disclosure of diluted EPS. Because the
preferred stock in this exercise is not convertible, the EPS computation is basic.
Ex. 12.7 a. Apr. 30 Memorandum: Issued an additional 1,000,000 shares of capital stock in a 2-for-
1 stock split. Par value reduced from $1 per share to $0.50 per share.
b. 2,100,000 shares
1,000,000 + 1,000,000 + 100,000
c. $0.50 par value per share ($1 par reduced to $0.50 par due to 2-for-1 stock split on April
30.)
d. Stock split—No effect
Declaration/payment of cash dividend—Decrease retained earnings
Declaration/distribution of stock dividend—No effect
Ex. 12.10 a. After a stock split, earnings per share are expressed in terms of the new shares.
Therefore, a 3-for-1 stock split will cause earnings per share figures to be
restated at one-third of their former amounts.
b. Realization of a gain from most sources, including discontinued operations,
increases net earnings per share. (As this gain relates to discontinued operations,
however, it would not increase the per-share earnings from continuing
operations. )
c. Dividends declared or paid do not enter into the determination of net income.
Therefore, the declaration and/or payment of a cash dividend on common stock
has no effect upon earnings per share.
d. Earnings per share are restated to reflect the increased number of shares
resulting from a stock dividend. Therefore, a stock dividend causes a
proportionate reduction in the earnings per share reported in past periods, as
well as in the current period. (This effect parallels that of a stock split, only
smaller.)
*$290,000 x 35%
Ex. 12.13 a. 10% stock dividend: 500,000 shares x 1.10 = 550,000 shares
2:1 stock split: 550,000 x 2 = 1,100,000 shares
Note: The cash dividends do not affect the number of outstanding shares.
Your portfolio after the four transactions is $8,800 compared to $6,500 before
the four transactions. In addition, you would have received cash dividends, as
follows:
(100 shares x 1.10 x $1) + (110 shares x 2 x $.60) = $110 + $132 = $242
Ex. 12.14 a. Home Depot is a very aggressive company. It is constantly opening new
stores, requiring large amounts of capital. The company retains the majority
of its earnings in order to have the capital available to take advantage of its
growth opportunities and to constantly open new markets for its growing
business.
b. Home Depot, Inc. has one class of common stock in its capital structure.
10,000 billion shares are authorized, and at February 3, 2008, 1,698 million
shares had been issued. Treasury stock on that date consisted of 8 million
shares. This means that 1,690 million shares were outstanding (1,698 - 8).
c. During the three years presented, treasury stock was purchased in the first year.
In the year ending January 29, 2006, the company purchased 77 million shares
for over $3 billion. Similarly, in the second year (year ended January 28, 2007),
174 million shares were purchased at $6,671 million.
In the third year (year ended February 3, 2008), Home Depot purchased 292
million shares for $10,815 million. The company also retired almost all of its
treasury shares (735 million shares) for $26,884 million, having only 8 million
shares in treasury at the end of that year.
c.
Total cash dividends declared during 2009 (data given) $ 950,000
Less: Preferred stock dividend (80,000 shares x $6.25 per share) 500,000
Cash dividends to common stockholders $ 450,000
Number of common shares outstanding through 2009 200,000
Cash dividend per common share ($450,000 ÷ 200,000 shares) $ 2.25
d. The single 2010 $8.00 figure for EPS is unfavorable in comparison with 2009 performance.
Since 2010 has only one EPS figure, it should be compared to the earnings per share from
continuing operations in 2009, which amounted to $12.25 per share. Slick Software, Inc.’s
earnings per share from continuing operations fell $4.25 per share (approximately 35%)
from 2009 to 2010.
c. The “gain on sale of treasury stock” represents the excess of reissue price received over the
cost Phoenix paid to acquire some of its own shares of stock. Although a corporation may
reissue treasury stock at prices above or below its cost of acquiring its own stock, the
difference between amounts received and the cost of treasury shares does not result in gains
or losses recognized in the income statement. Rather, the amount described as “gain on sale
of treasury stock” is included as part of additional paid-in capital in the stockholders’ equity
section of the balance sheet.
Note to instructor: Net income actually increases book value throughout the year, not merely on
the date upon which net income is closed into retained earnings.
2009
Jan 3 Dividends 382,000
Dividends Payable 382,000
To record declaration of $1 per share cash
dividend payable on Feb. 15 to stockholders of
record on Jan. 31
b. 1. Declaration of a cash dividend has no immediate effect upon net income or cash
flows. It increases current liabilities (dividends payable), but has no effect on
current assets. Also, retained earnings is decreased, resulting in a decrease in
stockholders’ equity.
2. Payment of a cash dividend has no effect on revenue or expenses, but it reduces cash. Since it
reduces cash, it also reduces current assets. The transaction has no effect on stockholders’
equity, which has already been decreased when the dividend was declared.
3. The purchase of treasury stock has no effect on either revenue or expenses and,
therefore, does not affect net income. But cash is used to purchase the treasury
stock, and this decreases cash and current assets. Because treasury stock is
deducted from stockholders’ equity in the balance sheet, its purchase decreases
stockholders’ equity.
4. Reissuance of treasury stock at a price less than its original cost results in a loss, but these
losses are not recorded in the income statement. Instead additional paid-in capital is
decreased for the amount of the loss. Therefore, this transaction does not affect net income.
Since the treasury stock account is deducted from stockholders’ equity, reissuance of the
stock increases the total amount of stockholders’ equity. Also, both cash and current assets
are increased as a result of the cash received from sale of the stock.
b.
MANDELLA CORPORATION
Partial Balance Sheet
December 31, 2009
Stockholders’ equity:
Capital stock:
Common stock, $5 par, 1,000,000 shares authorized,
328,000 shares issued and outstanding (1) $ 1,640,000
Additional paid-in capital:
From issuance of common stock $ 3,000,000
From stock dividend 350,000
From treasury stock (2) 50,000 3,400,000
Total paid-in capital $ 5,040,000
Retained earnings (3) 874,000
Total stockholders’ equity $ 5,914,000
b.
Net loss $ (18,301)
Less: Preferred dividend requirements (2,778)
Net loss applicable to common stockholders (21,079)
Weighted-average number of shares of common stock 39,739
Loss per share ($21,079 ÷ 39,739) $ (0.53)
c.
Total cash dividends declared during 2009 (data given) $ 2,000,000
Less: Preferred stock dividend (100,000 shares x $6 per share) 600,000
Cash dividends to common stockholders $ 1,400,000
Number of common shares outstanding through 2009 200,000
Cash dividend per common share ($1,400,000 ÷ 200,000 shares) $ 7.00
d. The single 2010 $75.00 figure for EPS is unfavorable in comparison with 2009 performance.
Since 2010 has only one EPS figure, it should be compared to the earnings per share from
continuing operations in 2009, which amounted to $76.50 per share. Beach, Inc.’s earnings
per share from continuing operations fell $1.50 per share (2%) from 2009 to 2010.
c. The “gain on sale of treasury stock” represents the excess of reissue price received over the
cost Dexter paid to acquire some of its own shares of stock. Although a corporation may
reissue treasury stock at prices above or below its cost of acquiring its own stock, the
difference between amounts received and the cost of treasury shares does not result in gains
or losses recognized in the income statement. Rather, the amount described as “gain on sale
of treasury stock” is included as part of additional paid-in capital in the stockholders’ equity
section of the balance sheet.
Note to instructor: Net income actually increases book value throughout the year, not merely on
the date upon which net income is closed into retained earnings.
2009
Jan 5 Dividends 560,000
Dividends Payable 560,000
To record declaration of $1 per share cash
dividend payable on Feb. 18 to stockholders of
record on Jan. 31.
b. 1. Declaration of a cash dividend has no immediate effect upon net income or cash
flows. It increases current liabilities (dividends payable), but has no effect on
current assets. Also, retained earnings is decreased, resulting in a decrease in
stockholders’ equity.
2. Payment of a cash dividend has no effect on revenue or expenses, but it reduces cash. Since it
reduces cash, it also reduces current assets. The transaction has no effect on stockholders’
equity, which has already been decreased when the dividend was declared.
3. The purchase of treasury stock has no effect on either revenue or expenses and,
therefore, does not affect net income. But cash is used to purchase the treasury
stock, and this decreases cash and current assets. Because treasury stock is
deducted from stockholders’ equity in the balance sheet, its purchase decreases
stockholders’ equity.
4. Reissuance of treasury stock at a price less than its original cost results in a loss, but these
losses are not recorded in the income statement. Instead additional paid-in capital is
decreased for the amount of the loss. Therefore, this transaction does not affect net income.
Since the treasury stock account is deducted from stockholders’ equity, reissuance of the
stock increases the total amount of stockholders’ equity. Also, both cash and current assets
are increased as a result of the cash received from sale of the stock.
b.
ADAMS CORPORATION
Partial Balance Sheet
December 31, 2009
Stockholders’ equity:
Capital stock:
Common stock, $.50 par, 200,000 shares authorized,
43,200 shares issued and outstanding (1) $ 21,600
Additional paid-in capital:
From issuance of common stock $ 480,000
From stock dividend 48,000
From treasury stock (2) 20,000 548,000
Total paid-in capital $ 569,600
Retained earnings (3) 1,567,200
Total stockholders’ equity $ 2,136,800
b.
Net loss $ (16,220)
Less: Preferred dividend requirements (3,100)
Net loss applicable to common stockholders $ (19,320)
Weighted-average number of shares of common stock 10,000
Loss per share ($19,320 ÷ 10,000) $ 1.932
a. Both the operating loss from the noncoal minerals activities and the loss on disposal should be
classified in ARCO’s income statement as discontinued operations and should be shown
separately from the results of ARCO’s ongoing business operations. These losses qualify for
this separate treatment because the discontinued activities represented an entire identifiable
segment of ARCO’s business operations.
b. A change in the estimated useful life of depreciable assets is a change in accounting estimate.
Changes in estimate affect only the current year and future years, and are included in
revenues and expenses from normal operations.
c. The explosion of a chemical plant of a company like Union Carbide appears to meet the
criteria for classification as an extraordinary loss. These criteria are (1) material in amount,
(2) unusual in nature, and (3) not expected to recur in the foreseeable future.
d. The criteria for classification as an extraordinary item are (1) material in amount, (2) unusual
in nature and (3) not expected to recur in the foreseeable future. Condemnations of assets by
governmental authorities generally are viewed as meeting these criteria. Therefore, the $10
million gain would be classified as an extraordinary item in Georgia Pacific’s income
statement.
a. If JPI had not sold the baseball team at the end of 2009, it still would have incurred the team’s
$1,300,000 operating loss for the year. However, the company would not have realized the $4,700,000
gain on the sale. Other items in the income statement would not have been affected. Thus, JPI’s income
for 2009 would have been $4,700,000 less than was actually reported, or $2,600,000 ($7,300,000
$4,700,000 = $2,600,000).
b. In 2009, JPI’s newspaper business earned $4,500,000, as shown by the subtotal, Income from
Continuing Operations. If the profitability of these operations increased by 7% in 2010, they would
earn approximately $4,815,000 ($4,500,000 x 1.07 = $4,815,000). If the baseball team were still owned
and lost $2,000,000 in 2010, JPI could be expected to earn a net income of about $2,815,000 in that year.
c. Given that the baseball team was sold in 2009, JPI should earn a net income of approximately
$4,815,000 in 2010, assuming that the profitability of the continuing newspaper operations increases by
7% ($4,500,000 x 1.07 = $4,815,000).
d. The operating loss incurred by the baseball team in 2009 indicates that the team’s expenses (net of tax
effects) exceeded its net revenue by $1,300,000. If the expenses were $32,200,000, the net revenue must
have amounted to $1,300,000 less, or $30,900,000.
d. $29.79 average cost per share of treasury stock at the beginning of the year
($135,900,000 total cost 4,562,500 treasury shares)
e. The aggregate reissue price for the treasury shares must have been lower than the cost to
acquire those treasury shares, because the Additional Paid-in Capital account was reduced
by the reissuance of the treasury stock. The cost of the treasury shares reissued was
$16,700,000; the reissue price for the treasury shares must have been $15,300,000 to cause a
$1,400,000 reduction in Additional Paid-in Capital.
f. $63.61 average cost per share for treasury stock acquired during the current year
($78,600,000 aggregate cost 1,235,700 shares repurchased)
g. Earnings per share: Divide by the weighted-average number of shares outstanding
throughout the year
Book value per share: Divide by the actual number of shares outstanding as of the specific
date (usually a balance sheet date)
Note to instructor: We do not consider this answer cut and dried. If these assets had been
expropriated, the losses would be classified as extraordinary. These assets have not been
expropriated—nor is there any indication that they will be. Nonetheless, there are some
parallels between this situation and an expropriation of assets by a foreign government.
These similarities may be set forth as an argument for classifying the losses as
extraordinary.
c. 1. Net income will be reduced by the same amount regardless of whether these losses are classified as
ordinary or extraordinary. In either case, they are deducted in the computation of net income.
2. Income before extraordinary items will be reduced only if the losses are classified as ordinary. If
they are classified as extraordinary, they will be deducted after the computation of the subtotal,
Income before Extraordinary Items.
3. Extraordinary items are deducted after the determination of Income from Continuing Operations.
Therefore, this subtotal will be reduced only if the losses are classified as ordinary.
4. Given that these losses do not affect income taxes, they have no cash effects. Therefore, net cash
flow from operating activities will be unaffected.
d. The p/e ratio is based upon income before extraordinary items (stated on a per-share basis). As stated in
c (2), above, income before extraordinary items will be unaffected if the losses are classified as
extraordinary. Therefore, the p/e ratio will be unaffected. But if the losses are classified as ordinary,
income before extraordinary items will be reduced, and the p/e ratio, therefore, will be higher.
e. Yes. Members of management have a self-interest in seeing stock prices increase, which would favorably
affect the value of their stock options as well as stock they already own. In addition, a rising stock price
makes it easier for the company to raise capital, benefits stockholders, and makes management look
good.
On the other hand, if the losses are considered extraordinary, this subtotal will be unaffected and,
presumably, continue to reflect the company’s 15% annual growth rate.
Similarly, classifying the losses as ordinary will reduce income before extraordinary
items, which is the income figure used in computing p/e ratios. Thus, the p/e ratio
reported in the financial press will rise significantly above its normal level. This, too,
may have a depressing effect upon stock price. But if the losses are classified as
extraordinary, the per-share earnings used in the computation of the company’s p/e ratio
will not be affected.
In summary, the adverse effects of these losses on the company’s stock price are likely
to be greater if the losses are classified as ordinary, rather than extraordinary.
Therefore, management has a self-interest in seeing these losses classified as an
extraordinary item.
f. These write-offs are likely to increase the earnings reported in future periods, especially if the company
continues to do business in any of the related countries. With the assets having no book value, future
earnings from these operations will not be reduced by charges for depreciation (or, in some cases, for a
cost of goods sold).
g. The ethical dilemma is the classification of these losses. Because of the probable effects
upon stock price, classifying them as extraordinary may be to management’s advantage.
The case is arguable—though we think it’s a bit of a reach. Bear in mind that a higher
stock price also benefits the company’s current stockholders. So who, if anybody, stands
to lose?
In management’s shoes, how would you classify these losses? (We find this question easier to ask than to
answer.)
Note to instructor: This case is adapted from an incident involving an international pharmaceutical
company. The details of the situation have been altered for the purpose of creating an introductory level
textbook assignment, and the so-called quotations from corporate officers are entirely fictitious.
Nonetheless, we believe that the outcome of the actual event provides insight into the financial reporting
process and also to the importance that investors attach to the various computations of earnings per share.
Who were the losers? Anyone who bought the stock between the release of the original earnings figures and
the announcement that substantial losses would be reclassified.
We do not attempt in this solution to write the report that is required in the instructions in
the case, but rather to provide some ideas of how students might respond to each of the
bulleted items.
Relationship of sales revenue and net income
The fact that sales are sluggish but net income is steadily increasing at least raises an issue
that should be explored. All other things being equal, which they rarely are, one would not
expect this occur. One might expect sluggish sales to result in similarly sluggish net
income in the absence of some mitigating circumstances. Relationships of this type are
things auditors should be conscious of and, when encountered, auditors should seek
explanations to insure that no errors have been made and that nothing improper has taken
place.
The case statement indicates that it is particularly important for Flexcom, Inc. to control its inventory
because of the highly competitive market in which they operate and the sensitivity of inventory to changes in
consumer demand and technology changes. This sounds as if competition and technological obsolescence
are particularly important risks that Flexcom must control in order in order to be successful. Rapidly rising
inventory levels could be explained several different ways. There may be perfectly logical and appropriate
reasons for management to be increasing inventory at an above-normal rate, particularly if sales are
sluggish. On the other hand, in light of sluggish sales, a logical question is whether the company has an
inventory obsolescence problem and simply can't sell its inventory which is building up. If inventory
obsolescence is an issue, the fact that the allowance for inventory obsolescence has significantly declined
raises an interesting question that is worthy of further exploration.
A possible explanation that is at least worth exploring is whether management has taken conscious steps to
overstate inventory. The motivation would be to increase reported net income to enhance the position of
management. The relationship of inventory to net income is as follows: an overstatement of inventory is
offset by an understatement of cost of goods sold which, in turn, overstates net income. By overstating
inventory, either intentionally or in error, net income is improved and the company appears to be more
profitable that it actually is.
Several reasons may be cited for why there is an increase in “special items” in U.S. corporations’
income statements. Perhaps the most persuasive is that companies are constantly looking for
ways to make their performance look better to investors and creditors. If a special item is a loss,
separating that item out from normal, recurring operations, and presenting an income subtotal
before and after that loss may encourage investors and creditors to discount that item in terms of
it recurring in the future.
For all companies to report by the same rules is critical to being able to compare the performance
of one company against others. For that reason, the FASB has spent a great deal of time, effort,
and money to try to develop financial reporting standards to increasingly move companies
toward more comparable financial reporting. Special items, however, have been a particularly
difficult area, and achieving a balance between prescriptive standards that border on absolute
rules and allowing judgment in the application of standards is a difficult task.
a. On June 24, 2008, Martin Marietta's stock sold for a high of $107.18 and a low of
$103.06. These amounts will vary for other dates.
b. The number of shares of common stock outstanding on Dec. 31, 2007 was
41,318,000. These shares were originally sold by the company for the total of the par
value of the shares plus the additional paid-in capital:
c. There is no direct relationship between the amount the stock originally sold for
($1.24) and the current market price of the stock. The original price at which the
stock was sold is a historical amount that represents the investment of owners in
the company while the current market price reflects a number of factors, including
the long-term performance of the company and many other factors directly and
indirectly related to the company's performance.
d. The three-year trend in basic earnings per share (EPS), including discontinued
operations, is $4.14 (2005), $5.40 (2006), and $6.16 (2007). Discontinued operations
had virtually no effect on EPS in 2007, did not occur in 2006, and had the most
significant impact on EPS in 2005 when it accounts for a loss of $.12 per share of a
net amount of $4.12 of earnings per share.
e. The average number of shares used to compute basic EPS in 2007 was
42,653,0000. This is different from the 41,318,000 because the number of shares
outstanding decreased during the year. The year-end figure is in the balance sheet
while a weighted average number is used in computing EPS.