Define EPS

 Income earned for each share of stock

The 5 factors that make a corporation a Simple Capital Structure:
1. No Convertible Bonds Outstanding

2. No Convertible Preferred Stock Outstanding

3. No Stock Warrants, Stock Rights, Stock Options Outstanding

4. No Stock Appreciation Rights Outstanding

5. No Contingent Issuance of Common Stock Outstanding

If a corporation has outstanding ANY of the following, it is a Complex Capital

Structure (5):

 1. Convertible Bonds
2. Convertible Preferred Stock
3. Stock Warrants, Stock Rights, Stock Options
4. Stock Appreciation rights
5. Contingent Issuance (issuance made in common stock)

Who must report Earnings Per Share? (2)

 1. Firm has common stock that trades in public market

2. Firms that are preparing to sell common stock in public market

What does a corporation with a simple capital structure have to report?

Earnings Per Share

 For a corporation that has a complex capital structure it has to report both:
1. Basic Earnings Per Share
2. Diluted Earnings Per Share

EPS must be reported in the body of which statement?

 Income Statement

EPS must be reported in body of income statement for these Totals & Subtotals
(3):

 1. Net Income from Continuing Operations

2. Net Income Before Extraordinary
3. Net Income
EPS must be reported in body of income statement or in footnotes for these 2
non-recurring items:
 1. Gains/Loss from Discontinued Operations
2. Extraordinary Gains & Losses

What is the formula for Earnings per Share?

 Net Income-Preferred Stock Dividends/ Weighted Average Number of Shares of
Common Stock Outstanding

Now lets look at each part of this formula. First, Net Income is the Net Income
from...
 Net Income from Continuing Operations

When determining a check figure for anti-dilution

Why is it "Net Income from Continuing Operations" rather than "Net Income"?
FASB standard says this is the number all dilution & other check must be made.
T or F

(If Cumulative)
-ALWAYS deduct preferred dividends in the numerator.
- Doesn't matter if they have been declared in this period or not.
 True

(If Cumulative)
Do you deduct dividends in arrears in the numerator?
 No

Why do you not deduct dividends in arrears in the numerator?

 Because they've already been deducted in prior year when computing that years'
EPS

List the two types of earnings per share.

 Basic and Diluted.

What is a simple capital structure?

 One in which the corporation only has common stock outstanding or one in which the
corporation has common stock and nonconvertible preferred stock outstanding.

What does a complex capital structure include?

 Typically includes common stock, along with equity contracts and convertible securities.
What amount of preferred dividends is subtracted for noncumulative preferred stock?
 Amount declared.

How is basic earnings per share calculated?

 (Net Income) / (Weighted Average Common Shares Outstanding).

Where must earnings per share (EPS) be disclosed?

 On the face of the financial statements.

What is the tax effect for preferred stock dividends?

 There is no tax effect.

What amount of preferred dividend is subtracted for cumulative preferred stock?

 One full year's dividends regardless of amount declared or paid.

What is the term that refers to the following concept?: If a year's preferred dividend is not
paid (skipped), no other dividends may be paid before the skipped dividends (dividends
in arrears) are paid.
 Cumulative.

How is diluted earnings per share calculated?

 (Net income available to common adjusted for effects of potential common stock) /
(weighted average common shares plus shares issuable from potential common stock).

Define "contingent shares".

 Shares issuable for little or no cash consideration upon satisfaction of certain conditions.

When are contingent shares considered outstanding?

 When their conditions have been met.

What is the general rule for stock splits and dividend in the weighted average share
calculation?
 Treat as outstanding from inception of firm ("AS IF").
How is basic earnings per share calculated if common stock and nonconvertible
preferred stock are outstanding?
 (net income - preferred dividends) / (weighted average common shares outstanding).

What is the accounting effect of a stock split dividend between balance sheet date and
issuance
 Adjustment of all earnings per share (EPS) amounts for stock split or dividend.

(EPS) EARNINGS PER SHARE

 In a company with a simple capital structure, the amount the holder of a single share of
common stock would receive if all earnings were distributed in the form of dividends or the
amount of loss that would be allocated to the holder of a single share of common stock. EPS=
(Net income or loss -current period preferred dividends declared-current period preferred
dividends on cumulative preferred stock not declared)

SIMPLE CAPITAL STRUCTURE

 A capital structure under which there are no potentially dilutive securities that can be converted
into common stock, options, rights, and warrants.

COMPLEX CAPITAL STRUCTURE

 A capital structure under which there are potentially dilutive securities that can be converted
into common stock

BASIC EPS
 In a company with a complex capital structure, the amount the holder of a single share of
common stock would receive if all earnings were distributed in the form of dividends or the
amount of loss that would be allocated to the holder of a single share of common stock. Basic
EPS= (NET Income or loss-current preferred dividends declared-current preferred dividends on
cumulative preferred stock not declared)/weighted average common shares outstanding

DILUTED EPS
 In a company with a complex capital structure, the amount the holder of a single share of
common stock would receive if all earnings were distributed in the form of dividends or the
amount of loss that would be allocated to the holders of potentially dilutive securities converted
their holdings into common stock when it was advantageous for them to do so.
Diluted EPS= (net income or loss -current preferred dividends declared-current preferred
dividends on cumulative preferred stock not declared + current preferred dividends on dilutive
convertibles preferred stock assumed to be converted into common stock + interest, net of tax,
on dilutive convertible bonds assumed to be converted into common stock )/(Weighted average
shares outstanding + the weighted average of shares that would be issued upon the conversion
 of the dilutive convertible preferred stock dilutive convertible bonds + the net number of shares
that would be issued as a result of the exercise of options applying the treasury stock method)

DILUTIVE
 The characteristic of a security that will reduce EPS, or increase loss per share, if it were
converted into common stock.

ANTI - DILUTIVE
 The characteristic of a security that will increase EPS, or reduce loss per share, if it were
converted into common stock.

TREASURY STOCK METHOD

 The method for determining the increase in the weighted average shares outstanding for
computing diluted EPS that assumes that Rights/Options will be exercised when it is
advantageous for holders to do so and that the proceeds from the exercise of the rights will be
used to reacquire treasury stock at the shares' average market price.

THE "IF-CONVERTED' METHOD

 The calculation of diluted EPS (assume anyone who 'could convert' does so) for a company with
convertible Preferred stock or Convertible Bonds assuming the conversion at the beginning of
the earliest period reported (or at the time of issuance, if later).

Why calculate EPS

 EPS shows how much to each shareholder, can easily compare across time and firms

Types of EPS
1. Basic EPS
2. Diluted EPS
Basic EPS
 represents the earnings available to common share holders

Dilutive EPS
 represents the worst case scenario, if all potentially dilutive securities are converted

Basic EPS calculation

 net income less preferred dividends divided by weighted average shares outstanding

General rule for how to subtract preferred dividends from net income
-subtract dividends declared in year
-if preferred stock is cumulative, would subtract dividends in arrears
-if preferred share are cumulative, would add any current undeclared dividends
Why do weighted average shares outstanding
 because matches with how earnings are earned throughout the year

How to account for stock dividends and splits

 would simply restate previous years if applicable, and in current year would act as if the
stock split or dividend occurred on the first day of year
How to calculate diluted EPS
-first calculate basic EPS
-for every dilutive security, would calculate the marginal EPS
-to basic EPS add the lowest margin EPS, continue adding until marginal EPS would increase if
included the dilutive security
Impact of convertible bond
-earnings increase by interest savings, net of tax--have to multiply interest by 1-tax rate
-increase shares outstanding by the conversion amount
-if bonds issues mid-year would have to calculate partial amounts
Impact of convertible preferred stock
-increase numerator by dividend savings, no tax effect
-increase denominator by conversion amount
-if dividend was declared before conversion need to adjust, if conversion occurs then have
dividend would not include
Impact of stock option
-options are always dilutive, unless earnings are negative
-impact only on denominator
-assume that with the exercise price company goes and buy shares
-net increase in shares = shares exercisable - (shares exercisable x exercise price / average
market price)
-remember to adjust for partial months
Are options out of the money included in diluted eps calculation
 no, no one would exercise an option out-of-the-money

Which stock options are going to be the most dilutive

 the ones that issue the most net shares

Impact of contingent contracts

-need to see if earnings benchmark has been meet in the current year
-if benchmark meet, would increase denominator by the number of shares to be issued
-if benchmark not meet, do nothing

 
BEPS
Basic Earnings per share
BEPS Formula (if they just have common stock)
 net income/ weighted avg common stock outstanding

BEPS formula (if they have common + nonconvertable preferred stock outstanding)
 (net income - preferred stock dividend) / (weighted average common shares
outstanding)

or

(net income available to common) / (weighted average common shares outstanding)

DEPS (diluted earnings per share)
(net income available to common adjusted for effects of PCS) / (weighted average common
shares plus shares issuable from PCS)
Basic EPS does not assume the conversion of bonds
...
BEPS if there are changes that happen and you are asked to calculate two years eps then you
have to take into count a stock split retroactively by adding it to the denominator
...
When issuing more stock/buying stock back during the year you must must prorate it to how
long you have it outstanding during the year and add that to your denominator
...
If it says that they did not issue or declare any dividends the preferred stock always gets their
dividends
...
EPS is used primarily as an input to predictions of future earnings.
Therefore if there is any events that occur in the subsequent period then it need to be taken into
the prior year shares outstanding (if there is a stock split or stock dividend)
The four amounts that are reported on a per share basis for both basic and diluted EPS
(8 in total) are
income from continuing operations, discontinued operations, extraordinary items, and net
income.
The treasury stock method of entering stock options into the calculation of diluted EPS:
Is called the treasury stock method because the proceeds from assumed exercise are assumed
to be used to purchase treasury stock.
When there is a stock dividend it is considered to be outstanding for the full year
...
Potential investors and current investors are interested in the future earnings potential of the
entity. Thus, they are interested in the earnings per share on continuing income, which would be
the $10.50 per share. The EPS attributed to discontinued operations and to extraordinary items
cannot be used in predicting future earnings, as they are one-time events.
...
other: To qualify for a discontinued operation,
the component to be disposed of must be approved as a sale and represents a strategic shift in
the entity's operations.
There are two components for discontinued operations:
(1) the operating income or loss for the period in which the decision is made to dispose, and (2)
the disposal loss. Only actual operating income (or loss) is recognized, but estimated as well as
actual disposal losses are recognized.

EPS is calculated on
the common shares outstanding and is shown for income from continuing operations and net
income, on the face of the income statement
EPS (extraordinary items)
on extraordinary items and on gains/losses from discontinued segments may be shown on the
face or in the footnotes
Basic EPS
is used for a simple capital structure (company has only common and preferred stock)
Basic EPS (formula)
EPS = (net income - preferred dividends) / average common shares outstanding this period
Diluted EPS
is used for a complex capital structure (company shows both Basic and Diluted EPS)
Diluted EPS may contain
1. convertible preferred stock
2. convertible bonds
3. stock options (warrants)
4. contingent shares
Cumulative preferred stock
dividend is subtracted whether declared or not
Noncumulative preferred stock
dividend is subtracted only if declared
Stock split
we pretend it happened in the beginning of the year and ended on the day of the split
Stock dividends
are treated the same way as stock split
Diluted EPS < Basic EPS
dilutive
Diluted EPS > Basic EPS
anti dilutive (do not use)
Convertible bonds
bonds payable to the public, where the bond contract provides that the public has the right to
convert them into common stock
Taxes
there is no dividend on tax, only on interest
Stock options
give the right to buy stock at a certain price, use Treasury Stock method

Indicates the income earned by each share of common stock

Earnings per Share
Only reported for common stock
Earnings per Share
Net Income - Preferred Stock Dividends/ Weighted Average Common Shares Outstanding
Earnings Per Share
Only ratio that is reported on the face of the income statement
Earnings Per Share
Tells you how much each share would be earning if company paid out all common shares
Earnings Per Share
Theoretical of what the company could have paid out but not the actual dividends paid out
Earnings Per Share
Do not have to report EPS on the face of the income statement
Nonpublic Companies
When the income statement has intermediate components of income (discontinued operations
or extraordinary items)
Companies should disclose EPS for each component
 If it has only common stock or includes no potential common stock that upon
conversion/exercise could dilute EPS
Capital Structure is simple
 If it includes securities that could have a dilutive effect on EPS

Capital Structure is complex

 Preferred Stock dividends and weighted average number of shares outstanding

Items needed to calculate EPS for a simple capital structure

Net Income - Preferred Dividends
=Income available to common stockholders
Numerator of EPS
 Net Income - Preferred Dividends

Do this for all intermediate components of income as well as net income

 Net Income - Preferred Dividends

If preferred stock is cumulate and company has net income but declares no dividend in
current year
 Subtract an amount equal to the preferred dividend that should have been declared for
the current year only
 

D
EPS disclosure are required for

A. Entities whose ordinary shares and potential ordinary shares are publicly traded
B. Entities that are in the process of issuing ordinary shares i the public market
C. All entities
D. Entities whose ordinary shares and potential ordinary shares are publicly traded and
entities that are in the process of issuing ordinary shares in public market
C
When an entity issues both consolidated and separate financial statements, the EPS
information is required

A. For both sets of financial statements

B. In neither set of financial statements
C. Only for consolidated financial statements
D. Only for separate financial statements
C
Earnings per share shall be computed on the basis of

A. The number of shares outstanding at the end of the year

B. A weighted average of the number of shares outstanding during the year regardless of the
extent of fluctuations
C. A weighted average of the number of shares outstanding during the year except that
mirror fluctuations in the number of shares may be disregarded
D. The number of shares outstanding at the middle of year
D
Earnings per share shall be reported for all of the following except

A. Continuing operations
B. Discontinued operations
C. Net income
D. Net cash provided by operating activities
C
In computing earnings per share, if the preference shares are cumulative, the amount that
should be deducted as an adjustment to the numerator is the

A. Preference dividends in arrears

B. Preference dividends paid during the year
C. Annual preference dividend
D. Annual ordinary dividend
B
In computing basic earnings per share, the amount of preference dividends on non cumulative
preference shares should be

A. Deducted from net income whether declared or not

B. Deducted from net income only when declared
C. Added to net income only when declared
D. Ignored
C
In computing basic earnings per share, the full amount of the required preference dividends on
cumulative preference share for the period should be

A. Ignored
B. Deducted from net income only when declared
C. Deducted from net income whether declared or not
D. Added to net income whether declared or not
C
In computing basic loss per share, the annual preference dividend on cumulative preference
shares should be

A. Ignored
B. Declared from the net loss whether declared or not
C. Added to the net loss whether declared or not
D. Added to the net loss only when declared
B
Earnings per share shall be calculated before accounting for which of the following

A. Preference dividend for the period

B. Ordinary dividend
C. Taxation
D. Minority interest
A
If a bonus issue occurs between the year-end and the date that the financial statements are
authorized for issue

A. The EPS for both the current and the previous year are adjusted
B. The EPS for the current year only is adjusted
C. No adjustment is made to EPS
D. Diluted EPS only is adjusted
C
If a new issue of shares for cash is made between the year-end and the date that the financial
statements are authorized for issue

A. The EPS for both the current and the previous year are adjusted
B. The EPS for the current year only is adjusted
C. No adjustment is made to EPS
D. Diluted EPS only is adjusted
A
The weighted average number of shares outstanding during the period for all periods other than
the conversion of potential ordinary shares should be adjusted ffor

A. Any change in the number of ordinary shares without a change in resources

B. Any prior period adjustment
C. Any new issue of shares for cash
D. Any convertible instruments settled in cash
D
Which figure for earnings does EPS information use?

A. Profit attributable to ordinary equity holders and preference shareholders of the parent
B. Profit before taxation
C. Profit from operations
D. Profit attributable to ordinary equity holders of the parent
B
Ordinary shares issued as part of a business combination are included in the EPS calculation
from

A. The beginning of the accounting period

B. The date of acquisition
C. The end of the accounting period
D. The midpoint of the accounting year
D
Shares which are issued to settle a liability are included in the EPS calculation from

A. Date of the contract for services

B. Halfway through the rendering of services
C. The completion of services
D. The settlement date

Earnings per Share (EPS)

The amount of income earned by a company on a per share basis.
Simple capital structure
A firm that has no potential common shares (outstanding securities that could potentially dilute
earnings per share).
Potential common shares
Securities that, while not being common stock, may become common stock through their
exercise, conversion, or issuance and therefore dilute (reduce) earnings per share.
Basic EPS
Computed by dividing income available to common stockholders (net income less any preferred
stock dividends) by the weighted-average number of common shares outstanding for the period.
Complex capital structure
Potential common shares are outstanding
Diluted EPS
Incorporates the dilutive effect of all potential common shares in the calculation of the EPS.
Antidilutive securities
The effect of the conversion or exercise of potential common shares would be to increase,
rather than decrease, EPS.
Treasury stock method
The assumption that treasury shares are purchased with the cash proceeds of the exercise of
the options.
If converted method
Assumes that the conversion into common stock occurred at the beginning of the period (or at
the time the convertible security is issued, if that's later)

Ans. True
True or False: The convertible bonds do not affect the calculation of basic EPS.
Ans. True
True or False: When a company has a net loss, rather than net income, it reports a loss per
share. In that situation, stock options that otherwise are dilutive will be antidilutive.
Ans. True
True or False: If the incremental effect of a security is higher than basic EPS, it is antidilutive.
 
Weaver Company had 100,000 shares of common stock issued and outstanding at December
31, year 1. On July 1, year 2, Weaver issued a 10% stock dividend. Unexercised stock options
to purchase 20,000 shares of common stock (adjusted for the year 2, stock dividend) at $20 per
share were outstanding at the beginning and end of year 2. The average market price of
Weaver's common stock (which was not affected by the stock dividend) was $25 per share
during year 2. Net income for the year ended December 31, year 2 was $550,000. What should
be Weaver's year 2, diluted earnings per common share, rounded to the nearest penny?

$4.82
$5.00
$5.05
$5.24
100,000 + 10 = 110

Proceeds from exercise (20,000 shares × $20)$400,000

Shares issued upon exercise 20,000
Less: Treasury shares purchasable ($400,000/$25) 16,000
20,000 - 16,000 Incremental shares 4,000
The incremental shares of 4,000 are added to the 110,000 shares.
DEPS = $550,000/114,000 shares = $4.82.
A firm with a net income of $30,000 and weighted average actual shares outstanding of 15,000
for the year also had the following two securities outstanding the entire year: (1) 2,000 options
to purchase one share of stock for $12 per share. The average share price during the year was
$20, (2) cumulative convertible preferred stock with an annual dividend commitment of $4,500.
Total common shares issued on conversion are 2,900. Compute diluted EPS for this firm.

$1.70
$1.60
$1.55
$1.61
Basic EPS = ($30,000 - $4,500)/15,000 = $1.70.

The option's numerator effect is zero; the denominator effect = 2,000 - (2,000)$12/$20) = 800.
2,000 - 1,200 = 800

DEPS final = ($30,000 - $4,500 + $4,500)/(15,000 + 800 + 2,900) = $1.60.

Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following
events occurred during the year:

4/1 Issued 30,000 shares of common stock.

6/1 Issued 36,000 shares of common stock.
7/1 Declared a 5% stock dividend.
9/1 Purchased as treasury stock 35,000 shares of its common stock. Balm used the cost
method to account for the treasury stock.
What is Balm's weighted average of common stock outstanding at December 31?
131,000
139,008
150,675
162,342
This approach yields 139,008 = [100,000(12/12) + 30,000(9/12) + 36,000(7/12)](1.05) -
35,000(4/12).
The beginning shares are outstanding the entire year (12/12)
The following information pertains to Ceil Co., a company whose common stock trades in a
public market:
Shares outstanding at 1/1 100,000
Stock dividend at 3/31 24,000
Stock issuance at 6/30 5,000

What is the weighted average number of shares Ceil should use to calculate its basic earnings
per share for the year ended December 31?

120,500
123,000
126,500
129,000
126,500

The weighted average is therefore:100,000+24,000+ (5,000X6/12) = 126,500.

West Co. had earnings per share of $15.00 for year 1 before considering the effects of any
convertible securities. No conversion or exercise of convertible securities occurred during year
1. However, possible conversion of convertible bonds, not considered common stock
equivalents, would have reduced earnings per share by $0.75. The effect of possible exercise of
common stock options would have increased earnings per share by $0.10. What amount should
West report as diluted earnings per share for year 1?.

$14.25
$14.35
$15.00
$15.10
Diluted EPS = $15.00 − $.75 = $14.25.
Strauch Co. has one class of common stock outstanding and no other securities that are
potentially convertible into common stock. During Year 1, 100,000 shares of common stock
were outstanding. In Year 2, two distributions of additional common shares occurred:
On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was
issued.
Net income was $410,000 in Year 2 and $350,000 in Year 1.
What amounts should Strauch report as earnings per share in its Year 2 and Year 1
comparative income statements?

Year 2 - Year 1
$1.78-$3.50
$1.78-$1.75
$2.34-$1.75
$2.34-$3.50
$1.78-$1.75

Weighted average shares, Year 1 = 100,000(2) = 200,000.

EPS, Year 1 = $350,000/200,000 = $1.75.
Weighted average shares, Year 2 = [100,000 + 20,000(9/12)]2 = 230,000
EPS, Year 2 = $410,000/230,000 = $1.78.
On December 31, year 1, Case, Inc. had 300,000 shares of common stock issued and
outstanding. Case issued a 10% stock dividend on July 1, year 2. On October 1, year 2, Case
purchased 24,000 shares of its common stock for treasury, and recorded the purchase by the
cost method. What is the number of shares that should be used in computing basic earnings per
share for the year ended December 31, year 2?
306,000
309,000
324,000
330,000
Outstanding 12/31/Y1 300,000
Stock dividend (10% × 300,000) 30,000
10/1 purchase (3/12 × 24,000) (6,000)
324,000

300,000 shares and the additional 30,000 shares (10% × 300,000) are treated as outstanding
for the entire year. The 10/1/Y2 purchase of 24,000 treasury shares results in a weighted-
average deduction of 6,000 shares (3/12 × 24,000) because the shares were outstanding for
only 3 months during year 2
Timp, Inc. had the following common stock balances and transactions during year 2:
1/1/Y2 Common stock outstanding 39,000
2/1/Y2 Issued a common stock dividend 3,000
7/1/Y2 Issued common stock for cash 8,000
12/31/Y2 Common stock outstanding 50,000

What was Timp's year 2 weighted-average shares outstanding?

40,000
44,250
44,500
46,000
1/1 39,000 ×12/12 = 39,000
2/1 3,000×12/12= 3,000
7/1 8,000 × 6/12 = 4,000
46,000
...
...
Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value
cumulative preferred stock. No dividends on common stock were declared during the year. Net
income was $2,000,000. What was Jen's basic earnings per share?

$9.00
$9.09
$10.00
$11.11
Earnings per share is: (net income - preferred dividends)/common shares outstanding.
Preferred stock dividends are $100 × 10% × 20,000 shares = $200,000.

Earnings per share is (2,000,000-200,000)/200,000=$9 per share.

Chape Co. had the following information related to common and preferred shares during the
year:

Common shares outstanding,1/1 700,000

Common shares repurchased,3/3 120,000
Conversion of preferred shares,6/30 40,000
Common shares repurchased,12/1 36,000

Chape reported net income of $2,000,000 at December 31. What amount of shares should
Chape use as the denominator in the computation of basic earnings per share?

684,000
700,000
702,000
740,000
Weighted average shares outstanding are weighted by the number of months the shares were
outstanding during the year. The easiest way to do this is to take each change in common stock
and multiply by the number of months remaining - add the shares that increased shares
outstanding and subtract shares that reduced shares outstanding.

Shares Months Wtd avg

700,000 12/12 700,000
- 20,000 9/12 - 15,000
+40,000 6/12 +20,000
-36,000 1/12- 3,000
702,000
A company had 400,000 shares of common stock issued and outstanding on January 1, year 1,
and had the following equity transactions for year 1:
Transactions Date
Issued 200,000 new shares for cash
April 1 Issued new shares as a result of a 3-for-1 stock split
July 1 Purchased 300,000 shares treasury stock for cash October 1

What should the company use as the denominator for the calculation of basic earnings per
share for year ended December 31, year 1?
1,650,000
1,575,000
1,325,000
1,075,000
The weighted average shares outstanding are calculated as follows:
({[400,000(200,000×9/12)]×3}
−300,000×3/12)=
1,575,000 (1,574,999) rounded
If everything else is held constant, earnings per share is increased by:

-Purchase of treasury stock.

-Issuance of new shares of common stock.
-Payment of a cash dividend to common stockholders.
-Payment of a cash dividend to both preferred and common stockholders.
-Purchase of treasury stock.

Earnings per share is calculated by dividing earnings (profit) available to common stockholders
by weighted average number of shares of common stock outstanding. If the denominator is
decreased by purchasing treasury stock, then the EPS result is increased.
When computing diluted earnings per share, potentially dilutive securities are

Recognized only if they are dilutive.

Recognized only if they are antidilutive.
Recognized whether they are dilutive or antidilutive.
Ignored.
Recognized only if they are dilutive.

Apotentially dilutive security is a security that gives the holder the right to acquire shares of
common stock through conversion or exercise, and therefore is considered in the computation
of diluted earnings per share (DEPS) if dilutive. Antidilutive securities are securities that would
create an increase in DEPS if included in the calculation of diluted EPS and should not be
considered when computing either basic or EPS.
Why do preferred stock dividends appear in the calculation of earnings per share (EPS)?

-Preferred stock may be converted into common stock at the option of the shareholder.
-Preferred stock dividends are not included in the calculation of EPS unless they have been
outstanding for the entire year.
-The denominator includes the weighted average number of shares of both preferred and
common shares outstanding.
-Preferred stock dividends are subtracted from the earnings for the period in the
calculation of earnings per share.
-Preferred stock dividends are subtracted from the earnings for the period in the calculation of
earnings per share.

Earnings per share (EPS) is calculated on net income available to the common stockholders,
divided by weighted average shares of common stock outstanding. The preferred dividends
must be subtracted from the net income, as that amount is not available to the common
stockholders.