INTERPRETING THE EQUITY SECTION. The following information is taken from financial statements and notes included in the annual report of Toys “R” Us:

REQUIRED:
1.
Approximately 2.8% of shares issued are held as treasury shares (.028 = 8,416 +
297,938). Yet the treasury shares account balance is 60.4% of the total contributed capital for all common stock [.604 = $292,358 + ($29,794 + $454,061)]. How can this be?
Why does Toy “R” Us purchase treasury shares?
Why must earnings per share be adjusted for the future exercise of stock options?
. What is the general purpose of the company’s stock option plans?
. The note on stock options states that shareholders must approve the new stock option plan, as required by law in most states. Why does such a requirement exist?
If you were a shareholder, what considerations would influence your decision to vote for or against the new stock option plan?
. Suppose that you are a senior executive at Toys “R” Us and receive the option to buy 5,000 shares. How will you decide when to exercise this option?

Transcribed Image Text:

TOYS "R" US AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS [Excerpt] (In thousands) January 29, 1994 Stockholders' Equity: Common stock Additional paid-in capital Retained earnings Foreign currency translation adjustments Treasury shares, at cost TOYS "R" US AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Excerpt] Common Stock Additional $ 29,794 454,061 3,012,806 (56,021) (292,358) $3,148,282 (In thousands) Balance, January 30, 1993 Net earnings for the year Share repurchase pro- gram (4,940 Treasury shares) Exercise of stock options (1,394 Treasury shares) Tax benefit from exercise of stock options Balance, January 29. 1994 Issued in Treasury paid-in Retained Shares Amount Amount capital earnings 297,938 $29.794 $(150,437) $465,494 $2,529,853 482.953 (183,233) 41,312 (21.464) 10,031 297,938 $29,794 $(292,358) $454,061 $3,012,806