"Financial Report":Treasury stock method
A retailer provides credit cards only to its most valued customers who pass a rigorous credit check. A credit card customer ordered an item from the retailer in May. The item was shipped and delivered in July. The item appeared on the customer’s July credit card statement and was paid in full by the due date in August. The most appropriate month in which the retailer should recognize the revenue is:
The following relates to a company’s common equity over the course of the year:
If the company’s net income for the year is $5,000,000, its diluted EPS is closest to:
B is correct. The appropriate time to recognize revenue would be in the month of July because the risks and rewards have been transferred to the buyer (shipped and delivered), the revenue can be reliably measured, and it is probable that the economic benefits will flow to the seller (the rigorous credit check was completed). Neither the actual payment date nor the credit card statement date is relevant here.
A is incorrect. The order date is not relevant here because all of the critical elements in the revenue recognition process are not satisfied until July.
C is incorrect. The payment date is not relevant here because all of the critical elements in the revenue recognition process are not satisfied until July.
B is correct. First, determine the incremental shares issued from stock option exercise (treasury stock method):
A is incorrect. It includes the options at full value not using the Treasury stock method and forgets to prorate the others issued and repurchased $5,000,000/(2,000,000 +100,000 + 300,000 – 100,000) = 2.17
C is incorrect. It does not prorate the new shares issued or repurchased for the length of time outstanding: (2,000 + 75 + 300 – 100) = 2,275; 5,000/2,275 = 2.20. Or it ignores the buyback: (2,000 + 100 + 225 – 50) = 2,275; 5,000/2,275 = 2.198 = 2.20.