FAR-F7-M4-Earnings Per Share Flashcards
What is the formula for Basic EPS?
Income available to common shareholders
weighted average # of common shares outstanding
Income available to common shareholders is calculated as?
Net income - preferred dividends
Where preferred dividends are dividends declared in the period on noncumulative preferred stock and dividends accumulated in the period on cumulative preferred stock.
For a simple capital structure, what is required to be presented on the income statement?
In a simple capital structure, BASIC EPS for income from continuing operations and net income are presented.
For a complex capital structure, what is required to be presented on the income statement?
In a complex capital structure, BASIC and DILUTED EPS must be presented for income from continuing operations and net income
If an entity reports a discontinued operation, should the company present BASIC and DILUTED EPS (if applicable) amounts for those items either on the face of the I/S or in the notes?
Yes. If an entity reports a discontinued operation, BASIC EPS and diluted (if applicable) eps should be presented in the face of the income statement or in the notes.
How is weighted average number of common shares outstanding calculated?
Shares outstanding at the beginning of the period
PLUS shares sold during the period (time weighted)
LESS shares reacquired during the period (time weighted)
PLUS stock dividends and stock splits (retroactively adjusted)
LESS reverse stock splits (retroactively adjusted)
EQUALS weighted average # of common shares outstanding.
When computing BASIC EPS, how are convertible securities treated?
When computing BASIC EPS, convertible securities are ignored for the purposes of computing the weighted average # of common shares outstanding.
Is the following statement true or false? The stock dividends and stock splits must be treated as though they occurred at the beginning of the period. The shares outstanding BEFORE the stock dividend or stock split must be RESTATED for the portion of the period before the stock dividend or split.
TRUE. The stock dividends and stock splits must be treated as though they occurred at the beginning of the period. The shares outstanding BEFORE the stock dividend or stock split must be RESTATED for the portion of the period before the stock dividend or split.
Is the following statement true or false. Convertible securities are recognized when computing DILUTED EPS ONLY IF THE CONVERSION IS DILUTIVE. Meaning it lowers EPS.
TRUE. Convertible securities are recognized when computing DILUTED EPS ONLY IF THE CONVERSION IS DILUTIVE. Meaning it lowers EPS.
What is the formula to calculate diluted EPS?
Income available to the common stock shareholder PLUS interest on dilutive securities / Weighted average number of common shares assuming all dilutive securities are converted to common stock.
If basic EPS is greater than Dilutive EPS then are the convertible securities dilutive or anitdilutive?
If Basic EPSI is greater then Dilutive EPS, then the convertible securities are dilutive.
When calculating Dilutive EPS, are preferred dividends subtracted from net income?
No, preferred dividends are not subtracted when computing the adjusted net income because we are making the assumption that the preferred shares are converted to common shares at the beginning of the period and thus no preferred dividends are paid.
When is an entity a complex capital structure?
An entity has a complex capital structure when it has securities that can potentially be converted to common stock and would therefore dilute EPS. Main Examples include convertible preferred stock, convertible bonds
With convertible bonds, what are the steps to include them into Diluted EPS calculation?
Step 1: Add to the numerator the interest expense, net of tax, due to assumed conversion of bonds to common stock. (this will increase net income)
Step 2: Add to the denominator the number of common shares associated with the assumed conversion.
