MODULE 9

Basic Earnings per share

Income Statement Presentation of EPS

Earnings per share indicates the income earned by each share of common stock.
Companies report earnings per share only for common stock.

Net income $300,000

Earnings per share $3.00

When the income statement contains intermediate components, such as discontinued

operations, companies should disclose earnings per share for each component.

- One of the deciding factors of a potential share holder

- Assess if you will invest
- The higher, the better

How to compute:

Earnings per share:

Income from continuing operations 4.00

Loss from discontinued operations, net of tax .60

Net income 3.40

Simple Structure--Common stock; no potentially dilutive securities.

Complex Structure--Includes securities that could dilute earnings per common
share.
“Dilutive” means the ability to influence the EPS in a downward direction.

Preferred Stock Dividends

How much per share is being earned

Subtracts the current-year preferred stock dividend from net income to arrive at
income available to common stockholders.
Preferred dividends are subtracted on cumulative preferred stock, whether declared or
not.

Weighted-Average Number of Shares Outstanding

Companies must weigh the shares by the fraction of the period they are outstanding.

When stock dividends or share splits occur, companies need to restate the shares
outstanding before the share dividend or split.

Weighted-Average Shares Outstanding

Illustration: Franks Inc. has the following changes in its common stock during the
period.
Jan 90k x 12/12= 90k

April 30k x 9/12= 22 500

=90k + 22 500=112 500

July -39k x 6/12= -19500

=112 500-19500= 93 000

November 60k x 2/12= 10 000

=93 000 + 10 000= 103 000

Stock Dividends and Stock Splits

When stock dividends or stock splits occur, companies need to restate the shares
outstanding before the stock dividend or split, in order to compute the weighted-
average number of shares.

Companies restate the issuance of a stock dividend or stock split, but not the issuance
or repurchase of stock for cash.

Illustration: Sabrina Company has the following changes in its common stock during
the period.
January 100 000 x 12/12= 100 000 --- 150k

March 20 000 x 10/12= 16 666 ----- 30k (25 000)

June 60 000 (50%) x 7/12= 35 000

November 30 000 x 2/12= 5000

=150k + 25k + 5k

=180 000

Stock dividends- issued as if

- Assumed as if it was issued sa issuance date

- 50% 100k= 50k jan 1
- 50%20k=10k march 1