FAR Own Flashcards 4
Are contingent shares used in the calculation of basic EPS?
If contingent shares are dilutive, they would enter into the calculation of basic EPS as long as all conditions have been satisfied. Stock options, however, would not enter into the basic calculation but would be in the dilutive eps calc.
When is earnings per share disclosure required?
When the company is has filed with the SEC in preparation to sell public securities. They must disclose common stock and potential common stock including stock options, stock warrants, convertible securities and “contingent stock” agreement
Name examples of contingent shares to be included in basic EPS
- Share issuable upon reaching a target net income
- Shares issuable with the passage of time
- Shares issuable upon the issuance of a patent
NOT: Shares issuable exercise of a stock options because the option holder must pay the strike price at the exercise date
Calculate basic earnings per share:
=net income available to common shareholders/weighted average common shares outstanding
(when preferred stock is cumulative, subtract preferred dividends ACCUMULATED, when preferred stock is non-cumulative, subtract preferred dividends DECLARED
What do you use to calculate dilutive EPS if given multiple conversion options?
Only use conversion options that REDUCE EPS not increase EPS, rule of conservatism
When calculating the weighted average number of shares outstanding for basic EPS, convertible securities are?
IGNORED, they are only included in dilutive EPS
How do you treat stock dividends and stock splits if they occur after the B/S date but before the issuance of the financials?
Those shares should enter into the shares outstanding for the EPS calculations for all periods presented.
When calculating diluted EPS, how is the numerator handled when there is convertible preferred stock and convertible debt
The preferred dividends are no longer subtracted because we are making the assumption that the preferred shares were converted to common shares at the beginning of the period, thus, no preferred dividends were paid.
Add back interest expense net of tax to the numerator for convertible debt (Int. expense *(1-tax rate)
What are “out of the money” stock options and how do you treat them in the calculation of diluted EPS?
Out of the money stock options are anti dilutive because the exercise price is greater than the market value of the stock. They are not included in the calculation since they are anti dilutive
Under US GAAP, earnings per share data should be included for?
DISCONTINUED OPERATIONS and INCOME FROM CONTINUING OPERATIONS. Should present that basic and diluted if applicable for both of these items either on the face of the income statement or in the notes to the financials. For income from continuing ops basic and diluted should be included on the face
In a simple capital structure, how is eps presented on the financial statements?
Only basic EPS is required for income from continuing operations and net income
In a complex capital structure, how is eps presented on the financial statements
Basic EPS and dilutive EPS are required for income from continuing operations and net income
What is the formula for the treasury stock method?
Number of shares - [(number of shares * exercise price)/(average market price)] = additional shares outstanding
When there is a stock dividend or stock split after more issuance of common stock, how is WACSO calculated?
Retrospectively so include the total number of shares issued as of that date * the stock dividend or stock split
How do options, warrants and their equivalents effect dilutive EPS
No effect to the numerator, only dilutive if they are “in the money” meaning the average market price is greater than the strike or exercise price. If exercised, that person would get more for their money. SO, if in the money, use the TREASURY STOCK METHOD equation to calculate increase to WACSO (again, no numerator effect b/c no interest on these)
