Reading 25: Understanding Income Statements

Question 1

Basic EPS

25.1

Understanding Income Statements

Answer 1

Basic EPS = (Net income - Preferred dividends) / Weighted average number of shares outstanding

Question 2

Diluted EPS (if-converted method for preferred stock)

25.2

Understanding Income Statements

Answer 2

Diluted EPS = (Net Income) / (Weighted average number of shares outstanding + New common shares that would have been issued at conversion)

Question 3

Diluted EPS (if-converted method for convertible debt)

25.3

Understanding Income Statements

Answer 3

Diluted EPS = (Net income + After-tax interest on convertible debt - Preferred dividends) / (Weighted average number of shares outstanding + Additional common shares that would have been issued at conversion).

Question 4

Diluted EPS (using treasury stock method)

25.4

Understanding Income Statements

Answer 4

Diluted EPS = (Net income - Preferred dividends) / [Weighted average number of shares outstanding + (New shares that would have been issued at option exercise - Shares that could have been purchased with cash received upon exercise) x (Proportion of year during with the financial instruments were outstanding)]

Question 5

Net Profit Margin

25.x

Understanding Income Statements

Answer 5

Net profit margin = Net income / Revenue

Question 6

Gross Profit Margin

25.x

Understanding Income Statements

Answer 6

Gross profit margin = Gross profit / Revenue