Earnings Per Share

Question 1

Tested on CPA Exam:

Answer 1

• Terminology
• How to Calculate EPS
• Disclosure Requirements

Question 2

What are the two measures for EPS?

Answer 2

• Basic Earnings Per Share

- Diluted Earnings Per Share (as if calculation)

Question 3

What is the formula for Basic EPS?

Answer 3

(net income - preferred dividends)/ Weighted Average Shares of Common Stock Outstanding

• Only for common stock outstanding
• PCS is not considered for BEPS
• Common Stock dividends do not have an impact
• Denominator is the weighted average

Question 4

How do you interpret EPS?

Answer 4

It is not the amount of common dividends THAT COULD be paid out of current year earnings!

Question 5

Why are preferred stock dividends deducted?

Answer 5

EPS is a measure of income to the common shareholder.

Question 6

What is the formula to DEPS?

Answer 6

(Net Income - Dividends +/- Adjusted to NI for assumed conversion of PCS)/(Weighted av shares of CS O/S + Shares from assumed conversion of PCS)

Question 7

Reporting requirements for EPS?

Answer 7

BEPS is required
DEPS is required if the firm has dilutive PCS
BEPS and DEPS are shown on the face of time statement for continuing operations and net income

IF there is a discontinued operations, then you can report BESP and DEPS for that section as well.

Question 8

What amount of preferred dividends are deducted for CUMULATIVE PREFERRED STOCK

Answer 8

Deduct one full year of dividends regardless of amount declared or paid. Dividends in arrears are not deducted. There is also NO Tax effect.

Question 9

What amount of preferred dividends are deducted for for Noncumulative Preferred dividends?

Answer 9

Deduct dividends declared in the current year

Question 10

How do you calculated the weighted average common shares outstanding?

Answer 10

Reference page 201 of book!

NOTE: (IT IS NOT JUST BEGINNING PLUS ENDING/2)

Question 11

How do you handle comparative statements for prior years?

Answer 11

You have to retroactively go back and calculate EPS

Question 12

What techniques can be used to calcualte the numerator and denominator effects of PCS?

Answer 12

1) For convertible preferred stock and convertible bonds, use the “if converted method.” The convertible securities are assumed to have been converted.
2) For stock options and warrants, use the “treasury stock method.” The options are warrants are assumed to have been exercised, and treasury stock is purchased.

Question 13

Under the Treasury Stock Method, what is the impact to the numerator and denominator?

Answer 13

• There is no impact to the numerator

- Add the amount of shares that the company wouldn’t be able to purchase back