Earnings Per Share Flashcards
Earnings per Share (EPS)
Public entities are required to present EPS - basic and diluted EPS
The only time they’d report diluted EPS is if the Co. has a complex captial Structure vs a Simple capital structure
Simple capital structure
Basic EPS
Common Stock
Preferred Stock
Bonds Payable
Complex capital structure
Basic and Diluted EPS Common Stock Preferred Stock Bonds Payable Convertible P/S Convertible Bonds Payable Stock Warrants Stock options (including employee stock options Contingent Shares To use the diluted method co. would only need to have one of the complex items
Calculate EPS - items on the I/S
Income from Continued operations ** Discontinued Operations (net of tax) Extraordinary gains/losses (net of tax) Net Income ** ** Must show EPS on the face of the I/S for these items. The others can be shown on the face or footnotes
Preferred Stock - in EPS
If it Cumulative: Stop - Subtract the CY P/S Dividend (i% x par value of the P/S=CY P/S div)
If it’s non-cumulative:
1. if declared: subtract the CY P/S Div
2. not declared: zero- for the CY P/S Div
Diluted EPS - formula
Numerator: Net Income - CY P/S Div + Net of tax Bond Interest Expense
Denominator: Weighted Avg. # of C/S shares outstanding + C/S equivalents
Basic EPS - formula
Numerator: Net Income - CY P/S dividends
Denominator: Weighted Avg. # of C/S shares outstanding
For either diluted or basic- you will have to weigh any issuance of C/S if it changes total SHE - if it’s not changed then they don’t have to be weighed.
Treasury Stock
Contra Stockholder’s equity account.
If T/S is debited then SHE is decreased.
Calculating # of C/S equivalents
Avg Mkt Price - Exercise Price / Avg Mkt Price x option or warrant shares
If Avg. Mrkt Price > Exercise Price = In the money and it would be dilutive
If Exercise Price > Avg. Mrkt Price = out of the money non-dilutive (in which case we would ignore it).
Stock dividends and Stock Splits
Don’t affect SHE so these aren’t weighted- an exception: If a stock dividend provides that the shareholder may receive either cash or stock, the div is treated as a share issuance and weighted for th time period outstanding.
Redemption of P/S
Per SEC if P/S is redeemed the diff between the fair value of the consideration transferred and the carrying amount of the P/S should be treated the same as a dividend to Preferred shareholder’s in calculating EPS.
Consideration on transferred > CV = subtract from Net income
Consideration transferred < CV = add to NI
Contingent issuance of C/S
If the only contingency is the passage of time they are to be considered issued and treated as o/s in the EPS calculation of diluted EPS.
-contingency to maintain the current earnings level shares are considered o/s for the entire period and included in the computation for diluted EPS.
Loss instead of NI- EPS
If there’s a loss instead of Net income then basic and diluted will be the same.
