In its 2004 Annual Report to shareholders, Comfort Stores disclosed the following footnote about its eps:

NOTE 9 -- EARNINGS PER SHARE:

The following represents the reconciliation from basic earnings per share to diluted earnings per share. Options to purchase 8.3 million and 9.7 million shares of common stock were outstanding at May 31, 2004 and May 31, 2003, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. No such antidilutive options were outstanding at May 31, 2002.

	YEAR ENDED MAY 31,
	2004	2003	2002
	(IN MILLIONS,
Determination of shares:	EXCEPT PER SHARE DATA)
Average common shares outstanding	270.0	275.7	283.3
Assumed conversion of dilutive stock options and
awards.	3.3	3.7	5.0
Diluted average common shares outstanding	273.3	279.4	288.3
Basic earnings per common share	$ 2.18	$ 2.10	$ 1.59
Diluted earnings per common share	$ 2.16	$ 2.07	$ 1.57

160. How are outstanding stock options and awards taken into account in computing diluted EPS for Comfort Stores?

Answer: We assume, hypothetically, that the options have been exercised and then treasury shares were repurchased with the proceeds at the average market price during the period.

Learning Objective: 9 Level of Learning: 2

161. At the end of 2004, what is the maximum number of shares that could possibly be issued if all stock options and awards are exercised? Explain why Comfort Stores used only 3.3 million in its computation for 2004.

Answer: A total of 11.6 million shares is the maximum. As the footnote indicates, 8.3 of these were not included because the exercise prices were higher than the average market price during the year. If they were exercised, there would be more shares bought back than the assumed number issued. This would decrease the denominator and, therefore, be antidilutive.

Learning Objective: 9 Level of Learning: 2

162. Reacting to opposition to the FASB's “Share-Based Payment” Exposure Draft, Senator Carl Levin stated, “Stock options are the 800-pound gorilla that has yet to be caged by corporate reform.” In reference to a bill that would thwart the FASB's position, Senator John McCain said, “This legislation blocking stock option expensing not only undermines FASB's independence, but undermines the effort to restore confidence in our financial markets as well.” Discuss what these two senators meant by their statements.

Answer: The rest of Senator Levin's statement explains the first, namely “Corporate scandals have shown how current U.S. accounting rules are fueling stock option abuses linked to deceptive accounting, excessive executive pay, and nonpayment of taxes by profitable corporations. Honest accounting of stock options would strengthen the accuracy of U.S. financial statements and help restore investor confidence in our financial markets.” Senator McCain's comment on the FASB's independence was in reference to the purpose of having an independent standard setting body in the private sector, something that would be undermined by congressional intervention. The rest of his statement reinforced what Senator Levin indicated about the need for financial reporting improvements to overcome investor skepticism after highly publicized corporate reporting scandals.

Learning Objective: 2 Level of Learning: 2