[victoriaperezs]

Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During Year 1, 100,000 shares of common stock were outstanding. In Year 2, two distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in Year 2 and $350,000 in Year 1. What amounts should Strauch report as earnings per share in its Year 2 and Year 1 comparative income statements?

Year 2 Year 1

a. $2.34 $1.75

b. $1.78 $1.75

c. $2.34 $3.50

d. $1.78 $3.50

The correct answer is b, however I thought it was d because I didn’t apply the stock split for year 1, only for year 2. According to them, the stock split can be applied if after year end but before the financial statements are issued. It does not mention that in the question so I pretended they did issued it because they are different years. Can someone explain, am I missing something?

[Bagels]

I believe it's because it says in the question they present comparative income statements. If this is the case the stock splits should be retroactive for both years displayed.

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[cpaMD86]

Stock splits and stock dividends are applied retroactively.

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[Pete E. Rino]

If there is a stock split or a stock dividend in Year 2, it has to be applied retroactively in any comparative I/S the company produces, or else it would look odd. Like let's say originally in year 1, the company had $200,000 in Net Income, and had 50,000 shares. The EPS would be $4.00. Now let's say in on April 1, Year 2, the company did a 3:1 stock split, i.e. now has 150,000 shares. And once again, in year 2, the company happened to have Net Income of $240,000. But this time the EPS is only $1.60 because there are 150,000 shares. If you do not retroactively apply the stock split to any comparative I/S issued, an investor or common interested reader might see this and say “Hey, they had an EPS of $4 last year, but this year it is dropped significantly to $1.60. This company doesn't look like it is doing too well.” But that would in fact be wrong because the company in fact did better because their N.I. increased by 20% as compared to Year 1, but because the stock split isn't applied to Y1, it would skew the comparisons. Now if you applied the stock split retroactively, the EPS of Year 1 would be $1.33, not $4.00. Now as an investor or common reader, they see the opposite of what they would have seen. The company actually did better as the EPS rose from $1.33 to $1.60. So it gives the true picture if comparative I/s are presented.

[vodrldnr]

PAY ATTENTION ! It is comparative F/S therefore, you have to apply all the changes to YR1 !!!!

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