300797 Flashcards
The following information pertains to Jet Corp.’s outstanding stock for 20X1:
Common stock, $5 par value
Shares outstanding, 01/01/X1 20,000
2-for-1 stock split, 04/01/X1 20,000
Shares issued, 07/01/X1 10,000
Preferred stock, $10 par value, 5% cumulative
Shares outstanding, 01/01/X1 4,000
What are the number of shares Jet should use to calculate 20X1 earnings per share?
45,000
54,000
40,000
50,000
45,000
Earnings per Share (EPS)
Earnings per share (EPS) is, generally, the allocation of a pro rata share of income to each share of common stock (EPS is not computed on preferred stock). It is a comparison of net income of an enterprise with the average number of common shares outstanding during the year.
The Financial Accounting Standards Board (FASB) has established this definition in FASB ASC 260-10-45. The required reporting for public companies is basic EPS and diluted EPS.
The standard is required for all interim and annual reports ending after September 15, 2009.
FASB ASC 260-10 applies to all entities that have issued common stock or potential common stock that trades in a public market. Potential common stock consists of other securities and contractual arrangements that may result in the issuance of common stock in the future, such as options, warrants, convertible securities, and contingent stock agreements.
Corporations with simple capital structures are required to report only basic earnings per share. Corporations with complex capital structures are required to report basic earnings per share and diluted earnings per share.
A simple capital structure is one that consists of capital stock and includes no potential for dilution via conversions, exercise of options, or other arrangements. A complex capital structure would include convertible bonds or preferred stock, outstanding options or warrants, and any contractual arrangement that would include the issuance of new shares.
Basic EPS measures the performance of an entity over the reporting period based on its outstanding common stock. The calculation is to divide the income attributable to common stock by the weighted-average number of common shares outstanding.
Diluted EPS measures the performance of an entity over the reporting period based on its outstanding common stock while giving effect to all dilutive potential shares that were outstanding. The calculation includes income attributable to common stock plus adjustments resulting from the issuance of dilutive potential common shares. This adjusted income figure is divided by the weighted-average number of common share
2142.11
The most common types of potential common stock are convertible securities, stock options and warrants, and other contingent issuances (i.e., arrangements whereby the enterprise is required to issue common stock on the satisfaction of certain conditions). Each potential common stock must be evaluated to determine if it is dilutive.
2142.12
2142.26
“If Converted” Method (for Convertible Securities)
The “if converted” method assumes that convertible securities are converted into common stock for purposes of computing EPS (earnings per share). It requires that the numerator in the basic EPS computation be adjusted for the interest savings (net of the related tax effect) or the dividend savings that would be experienced if a convertible security is assumed to be converted into common stock for purposes of the diluted EPS computation. In other words, if one assumes that a convertible security is converted, it would be inconsistent to assume that interest or dividends would be paid on that security after it is assumed to be converted. Therefore, the numerator earnings must be adjusted for the effect that the assumed conversion of the security would have on the amount of interest or dividends.
2142.30
2142.46
Note that even though the $9.00 per-share effect of the convertible bonds is less than basic EPS (earnings per share) of $10.00, the convertible bonds are antidilutive because their per-share effect of $9.00 is greater than the $5.89 diluted EPS computed with only the convertible preferred stock assumed to be converted. Thus, by computing the per-share effect of each potential common stock and assuming their exercise or conversion in ascending order (smallest to largest per-share effects) and continuing until the next lowest per-share effect is greater than diluted EPS without including that next PCS (or until all PCS have been included in the computation of diluted EPS if all prove to be dilutive), one is assured that the final diluted EPS calculated is the lowest diluted EPS (and therefore the most dilutive diluted EPS) for that period.
FASB ASC 260-10-45-10
FASB ASC 260-10-55-12
