F7 - Earnings Per Share

Question 1

What is the basic formula used for calculating EPS?

Answer 1

_ Income available to common shareholders _
Weighted-average # of common shares outstanding

Question 2

Compare basic and diluted EPS.

Answer 2

Basic: Simple capital structure (only common stock outstanding):

_ Income available to common shareholders _
Weighted-average common shares outstanding

Diluted: Complex capital structure:

Income available to common shareholders
_ assuming conversion of all dilutive securities _
Weighted-average common shares
outstanding after conversion of all dilutive shares

Question 3

Name the potentially dilutive securities or instruments.

Answer 3

• Stock options and warrants and their equivalents
• Convertible securities (bonds or preferred stock)
• Contracts that may be settled in stock or cash
• Contingent issuable shares

Question 4

What is the antidilution rule?

Answer 4

Any conversion, exercise, or contingent issuance that has an antidilutive effect (increases EPS or decreases loss per share) is not included in the calculation unless the shares have actually been converted, exercised, or satisfaction of the contingency met.

Each potential common share is considered separately in sequence from most to least dilutive, with in the money options and warrants generally included first.

Question 5

List the reporting requirement of EPS.

Answer 5

Face of income statement, with equal prominence for basic and diluted per-share amounts, for both income from continuing operations and net income.

Per-share amounts for discontinued operations and extraordinary items can be reported on the face of the income statement or in the notes to the financial statements.