CAF-6 · Chapter 11

IAS 33 Earnings per share MCQs with Answers

15 multiple-choice questions on IAS 33 Earnings per share for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   Under IAS 33, how is basic earnings per share (EPS) calculated?

   • A) Profit divided by the closing number of shares at year-end.
   • B) Profit attributable to ordinary equity holders of the parent divided by the weighted average number of ordinary shares outstanding.
   • C) Gross profit divided by the weighted average number of shares.
   • D) Profit after tax divided by total authorized share capital.
   Show answer & explanation

   Answer: B) Profit attributable to ordinary equity holders of the parent divided by the weighted average number of ordinary shares outstanding.

   Basic EPS requires dividing the profit or loss attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period.

2. Question 2

   How is the 'incremental earnings' calculated for a convertible bond when determining diluted EPS?

   • A) The face value of the bond multiplied by the interest rate.
   • B) The interest expense saved, net of tax.
   • C) The interest expense saved, before tax.
   • D) The total principal amount of the bond.
   Show answer & explanation

   Answer: B) The interest expense saved, net of tax.

   For convertible bonds, the assumption of conversion means the company would save the interest expense. This saved interest, strictly net of tax, is added back to earnings.

3. Question 3

   If an entity has multiple potential ordinary shares, in what order should they be considered when calculating diluted EPS?

   • A) From the largest issue size to the smallest.
   • B) From the most dilutive to the least dilutive.
   • C) From the least dilutive to the most dilutive.
   • D) In chronological order of their issue date.
   Show answer & explanation

   Answer: B) From the most dilutive to the least dilutive.

   To maximize the dilution effect, potential ordinary shares must be ranked and included in the calculation in order from the most dilutive to the least dilutive.

4. Question 4

   A company issues a 1-for-4 bonus issue during the year. How should this be treated in the calculation of the weighted average number of shares for basic EPS?

   • A) Ignored completely.
   • B) Weighted from the exact date of the bonus issue.
   • C) Treated as if it had occurred at the beginning of the earliest period presented.
   • D) Included only in diluted EPS.
   Show answer & explanation

   Answer: C) Treated as if it had occurred at the beginning of the earliest period presented.

   A bonus issue does not bring in new resources. It is treated retrospectively, as if the shares had always been in issue from the beginning of the earliest period presented.

5. Question 5

   Which of the following is considered a 'potential ordinary share'?

   • A) Non-redeemable preference shares.
   • B) Fully paid ordinary shares.
   • C) Convertible bonds.
   • D) Treasury shares.
   Show answer & explanation

   Answer: C) Convertible bonds.

   A potential ordinary share is a financial instrument that may entitle its holder to ordinary shares. Convertible bonds and share options are classic examples.

6. Question 6

   When calculating the weighted average number of shares, when are shares issued for cash generally included?

   • A) From the beginning of the financial year.
   • B) From the date consideration is receivable.
   • C) From the end of the financial year.
   • D) From the date the board approves the issue.
   Show answer & explanation

   Answer: B) From the date consideration is receivable.

   Unlike bonus issues, shares issued for cash provide new resources and are time-weighted from the date the consideration is receivable (usually the issue date).

7. Question 7

   In a rights issue, the exercise price is often lower than the fair value of the shares. How does this affect the EPS calculation?

   • A) It requires a retrospective bonus fraction adjustment to the shares outstanding before the rights issue.
   • B) It is treated identically to a share issued at full market price.
   • C) It only affects diluted EPS.
   • D) It reduces the profit attributable to ordinary shareholders.
   Show answer & explanation

   Answer: A) It requires a retrospective bonus fraction adjustment to the shares outstanding before the rights issue.

   A rights issue contains a bonus element due to the discounted price. This requires adjusting historical shares by a bonus fraction based on the theoretical ex-rights price.

8. Question 8

   If a potential ordinary share increases the EPS when converted, it is known as:

   • A) Dilutive
   • B) Anti-dilutive
   • C) Accretive
   • D) Contingent
   Show answer & explanation

   Answer: B) Anti-dilutive

   An instrument is anti-dilutive if its conversion leads to an increase in EPS or a decrease in loss per share.

9. Question 9

   According to IAS 33, what must an entity do if a potential ordinary share is anti-dilutive?

   • A) Include it in the diluted EPS calculation anyway.
   • B) Exclude it from the calculation of diluted EPS.
   • C) Deduct its impact from basic EPS.
   • D) Disclose it only in the Director's Report.
   Show answer & explanation

   Answer: B) Exclude it from the calculation of diluted EPS.

   IAS 33 strictly prohibits the inclusion of anti-dilutive potential ordinary shares in the calculation of diluted EPS to ensure users are shown the worst-case scenario.

10. Question 10

    Gamma Ltd has 1,000,000 ordinary shares. It has convertible bonds of Rs. 5,000,000 at 4% interest. The tax rate is 30%. What are the incremental earnings for diluted EPS purposes?

    • A) Rs. 200,000
    • B) Rs. 140,000
    • C) Rs. 60,000
    • D) Rs. 1,000,000
    Show answer & explanation

    Answer: B) Rs. 140,000

    Incremental earnings = Interest saved net of tax. 5,000,000 x 4% = Rs. 200,000 interest. Net of 30% tax: 200,000 x 70% = Rs. 140,000.

11. Question 11

    Where must an entity present its basic and diluted earnings per share?

    • A) Only in the notes to the financial statements.
    • B) On the face of the statement of financial position.
    • C) On the face of the statement of comprehensive income.
    • D) In the statement of cash flows.
    Show answer & explanation

    Answer: C) On the face of the statement of comprehensive income.

    IAS 33 requires entities whose ordinary shares are publicly traded to present basic and diluted EPS prominently on the face of the statement of comprehensive income.

12. Question 12

    If a company undertakes a share split after the reporting period but before the financial statements are authorized for issue, how should this affect EPS?

    • A) It only affects the EPS of the following year.
    • B) EPS for the current and prior periods presented must be retrospectively adjusted.
    • C) It is treated as a new issue of shares at fair value.
    • D) It is disclosed only as a non-adjusting event.
    Show answer & explanation

    Answer: B) EPS for the current and prior periods presented must be retrospectively adjusted.

    Bonus issues and share splits occurring after the reporting period but before authorization require retrospective adjustment of per-share calculations for all periods presented.

13. Question 13

    When calculating diluted EPS, share options are assumed to be exercised:

    • A) Only if the exercise price is higher than the average market price.
    • B) Only if the exercise price is lower than the average market price.
    • C) Regardless of the exercise price.
    • D) Only at the end of the reporting period.
    Show answer & explanation

    Answer: B) Only if the exercise price is lower than the average market price.

    Options are dilutive (and thus included in diluted EPS) only when their exercise price is lower than the average market price of the shares during the period (i.e., they are 'in the money').

14. Question 14

    What is the primary objective of IAS 33 Earnings Per Share?

    • A) To determine the exact dividend payout ratio.
    • B) To calculate the tax liability of the entity.
    • C) To improve performance comparisons between different entities in the same reporting period.
    • D) To value the total equity of the business.
    Show answer & explanation

    Answer: C) To improve performance comparisons between different entities in the same reporting period.

    The primary objective of IAS 33 is to prescribe principles for determining and presenting EPS to improve performance comparisons between different entities, and between different periods for the same entity.

15. Question 15

    Zeta Ltd reported a profit of Rs. 1,850,000 and has 1,000,000 basic shares. It also has convertible options that would add Rs. 84,000 to earnings and 160,000 to shares. What is the Diluted EPS?

    • A) Rs. 1.85
    • B) Rs. 1.67
    • C) Rs. 1.50
    • D) Rs. 1.93
    Show answer & explanation

    Answer: B) Rs. 1.67

    Diluted EPS is calculated as adjusted earnings divided by adjusted shares: (1,850,000 + 84,000) / (1,000,000 + 160,000) = 1,934,000 / 1,160,000 = Rs. 1.67.