Ch 16.4 (Basic Earnings Per Share)

Question 1

Earnings Per Share

Answer 1

Indicates the income earned by each share of common stock.

Companies report earnings per share only for common stock.

Most companies must report this information on the face of the income statement. The exception, due to cost-benefit considerations, is nonpublic companies.

companies should disclose earnings per share for each component (eg. intermediate components of income such as discontinued operations)

Question 2

Simple EPS Structure

Answer 2

Consists only of common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per common share.

Question 3

Complex EPS Structure

Answer 3

Includes securities that could have a dilutive effect on earnings per common share.

Question 4

Income Available to Common Stockholders

Answer 4

Net Income minus current-year preferred stock dividend.

Question 5

Earnings Per Share Formula

Answer 5

(Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding.

If a company declares dividends on preferred stock and a net loss occurs, the company adds the preferred dividend to the loss (thus increasing the amount of the loss) for purposes of computing the loss per share.

If the preferred stock is cumulative and the company has net income but declares no dividend in the current year, it subtracts an amount equal to the dividend that it should have declared for the current year only. If the stock is cumulative and the company reports a net loss, but declares no dividend in the current year, it adds an amount equal to the dividend to the net loss.

Question 6

Weighted-Average Number of Shares Outstanding

Answer 6

Shares issued or purchased during the period affect the amount outstanding.

Companies must weight the shares by the fraction of the period they are outstanding. The rationale for this approach is to find the equivalent number of whole shares outstanding for the year.

Question 7

Weighted-Average Number of Shares Outstanding in relation to Stock Dividends and Stock Splits

Answer 7

When stock dividends or stock splits occur, companies need to restate the shares outstanding before the stock dividend or split.

Assumes the additional shares outstanding as a result of the stock dividend to be outstanding since the beginning of the year.

A stock dividend or split does not change the shareholders’ total investment—it only increases (unless it is a reverse stock split) the number of common shares representing this investment.

Conversely, the issuance or purchase of stock for cash changes the amount of net assets.

Do not restate shares issued after the stock dividend because they are on the new basis.

If a stock dividend or stock split occurs after the end of the year but before issuing the financial statements, a company must restate the weighted-average number of shares outstanding for the year (and any other years presented in comparative form).

In computing the weighted-average number of shares, the company ignores the shares sold on December 31, 2020, because they have not been outstanding during the year.

Must disclose the per share amount for the discontinued operations (net of tax) either on the face of the income statement or in the notes to the financial statements.