Flashcards in Earnings per share Deck (12):
In computing diluted EPS an entity must take its basic EPS and then give weight to the potential impact of all convertibles. How is weight given for the effect of a convertible preferred stock?
the assumption is made that the preferred stock was actually converted into common stock at the first day of the year. Thus, the number of common shares that could be issued is added to the weighted-average number of shares used in the basic EPS computation
if this preferred stock had been converted, there would have been no preferred dividends, therefore, any preferred stock dividends for the period are eliminated by adding the figure back to the income figure used in basic EPS
In computing diluted EPS, an entity must take its basic EPS and then give weight to the potential impact of all convertibles. How is weight given for the dilutive effect of a stock option?
the assumption is made that all of these options are converted on the first day of the year so that the number of weighted-average shares outstanding increases
the assumption is also made that the proceeds collected from the exercise are used to buy back treasury stock at the average market price for the year. This number of shares reduces the weighted-average number of shares outstanding
What type of entity must report its EPS?
Where is the EPS information presented?
Publicly held companies must report EPS it is optional for companies that are not publicly held
EPS is presented on the face of the income statement for each year in which net income is reported
How many EPS figures must be reported on an entity's income statement?
all publicly held companies must report a basic EPS on its income statement
In addition, any entity that has convertible items that will dilute EPS must also report a diluted EPS figure.
If the entity reports a figure at the bottom of the income statement for discontinued operation or an extraordinary item, separate EPS figures must be shown for each of these items for income, net of tax and for net income before the reporting of these items.
How is basic EPS computed?
(net income - preferred stock dividends)/Weighted-average number of CS shares
In computing basic EPS, preferred stock dividends are subtracted from net income. Is this reduction made if the dividends are not paid?
if the preferred stock is cumulative it is subtracted whether it was paid or only declared and remains unpaid
if a preferred stock dividends is not cumulative, it is only subtracted if it is declared
An entity has 100,000 shares outstanding on Jan 1, issues 20,000 additional shares on May 1, and then buys 5,000 shares back as treasury stock on Nov 1.
What is the weighted-average number of shares for this entity?
shares x months
100,000 x 4 = 400,000
120,000 x 6 = 720,000
115,000 x 2 = 230,000
1,350,000/12 = 112,500 shares
In computing a weighted-average number of shares for basic EPS, the issuance or repurchase of stock is assumed to occur on the date of the transaction. However, certain stock transactions are assumed to have happened on the first day of the first year being reported. What transactions are handled as if they happened on the first day of the first year being reported?
An entity starts the year with 100,000 shares outstanding. On July 1, a 2-for-1 stock dividend is issued so that the number of shares is now 200,000. On Oct 1, an additional 20,000 shares are issued so that it ends the year with 220,000 shares outstanding.
What is the weighted-average number of shares for this entity
shares x months
200,000 x 9 = 1,800,000
220,000 x 3 = 660,000
In general, how is diluted EPS computed?
first basic EPS must be computed. that figure is then adjusted to give weight for the potential impact of any convertible item, such as convertible bonds or stock options
What is meant by an anti-dilutive convertible?
an anti-dilutive convertible is on that would cause diluted EPS to be higher than Basic EPS. because of conservatism these are not included in the computation of diluted EPS