302926 Flashcards
Huntex Corp. had the following capital structure and earnings for the year 20X1:
Preferred shares (5%, $100 par) outstanding throughout 20X1 100,000
Common shares ($50 par) outstanding January - April 200,000
Common shares ($50 par) outstanding May - December 300,000
Net income for 20X1 $1,000,000
What was the basic earnings per share (rounded to nearest cent) for 20X1?
$2.00
$3.75
$1.67
$1.87
$1.87
The basic earnings per share is $1.87, calculated as follows:
Weighted-average common shares = 200,000(4/12) + 300,000(8/12)
= 66,667 + 200,000
= 266,667
Basic EPS = Income available to common shareholders/Weighted-average
common shares
= ($1,000,000 - (100,000 x .05 x $100))/266,667
= ($1,000,000 - $500,000)/266,667
= $1.87
FASB ASC 260-10-45-10
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 shares outstanding increased by the dilutive potential common shares.
Preferred Stock
Preferred stock is ownership interest (class of stock) that carries preferences or specified priorities when compared to common stock; it is usually nonvoting and senior to common stock in dividend and liquidation preference and participation rights (to specified limits). It has characteristics of both debt and equity and may have other features, such as convertibility to other securities, call features, and redemption. Preferred stock is a “security.”
While preferred stockholders generally must be paid before common stockholders, preferred stockholders are paid after creditors.
Dividend preference is usually expressed as a percentage of the par value of the preferred stock but may also be expressed as a specific dollar amount per share. Preference may be cumulative or noncumulative, as well as participating, nonparticipating, or partially participating (where it is participating along with common stock in the receipt of dividends in excess of the stated preferred dividend).
2142.01
Earnings per share (EPS) is a comparison of the earnings applicable to common stock with the number of shares of common stock of that enterprise. The concept relates only to common stock and should be thought of as “earnings per common share” or “earnings available to common shareholders.”
2142.02
Assuming that there is no preferred stock outstanding, the fundamental EPS computation is:
EPS = Net income
Weighted-average common shares outstanding
FASB ASC 260-10-45-10
