1. What is return on investment? What are some types of measures for return on investment? Why is the following ratio preferred?
   NI before noncontrolling interest + (Int*T) / average (LT debt + equity)

Return on investment is a profitability measure comparing income to capital utilized by the firm. Some measures are return on assts, return on equity, or income available to all capital sources, divided by capital. The given ratio is preferred, since it measures the profit available to all long-term sources of capital against that capital. The interest is multiplied by the tax adjustment factor to put interest on an after-tax basis.

2. G. Herrich Company and Thomas, Inc. are department stores. For the current year, they reported a net income after tax of $400,000 and $600,000, respectively. Is Thomas, Inc. a more profitable company than G. Herrich Company? Discuss.

This cannot be determined based only upon the absolute measures. It is necessary to compare these dollar figures to a base, such as investment or sales. Also, it is necessary to know if nonrecurring items are part of the firm's income picture.

3. Since interim reports are not audited, they are not meaningful. Comment.

Interim reports are less reliable because they are not audited, but they can be very meaningful in indicating trends before the end of the year.

4. Speculate on why accounting standards do not mandate full financial statements in interim reports.

An objective considered here is timeliness rather than completeness. Full statements would take too long and involve too much cost to produce.

5. Why may comprehensive income fluctuate substantially more than net income?

Comprehensive income includes net changes in (a) foreign currency translation adjustments, (b) unrealized holding gains and losses on available-for-sale marketable securities, and (c) changes to stockholders' equity resulting from additional minimum pension liability adjustment. These items will tend to fluctuate more than other income items.

6. Give a simple definition of earnings per share.

Earnings per share is the amount of income earned on a share of common stock during an accounting period.

7. Assume that a corporation is a nonpublic company. Comment on the requirement for this firm to disclose earnings per share.

The Financial Accounting Standards Board suspended the reporting of earnings per share for nonpublic companies.

8. Keller & Fink, a partnership, engages in the whole-sale fish market. How would this company disclose earnings per share.

Keller & Fink is a partnership. Earnings per share is a concept that only applies to corporate income statements.

9. Dividends on preferred stock total $5,000 for the current year. How would these dividends influence earnings per share?

Earnings per share is a concept that only applies to common stock. The earnings per common share computation only uses earnings available to common stockholders. To arrive at the income that applies to common stock, preferred dividends are subtracted from net income in the numerator of the ratio.

10. The denominator of the earnings per share computation includes the weighted average number of common shares outstanding. Why use the weighted average instead of the year-end common shares outstanding?

Since earnings pertain to an entire year, they should be related to the common shares outstanding during the year. The year?end common shares outstanding may not be representative of the shares outstanding during the year. Potentially dilutive securities must be converted to common shares for the part of the year that if converted those shares would be outstanding during the year if they decrease the earnings per share. The converted shares must be included in the weighted average common shares outstanding during the year.