Chapter 16

Comparative Weighted Average Shares

*Calculated when making retroactive entries (resulting from stock split or stock dividend) **for comparative purposes ***Calculated by= Assumed shares outstanding X Fraction of year outstanding

Complex Capital Structure

A _________ capital structure is a type of corporate structure that has both common stock outstanding and potentially dilutive securities (ex: share options, convertible debt, preferred shares). *Corporation with this structure is required to report both basic and diluted EPS amounts on the face of its income statement

Simple

A ___________ capital structure is a type of corporate capital structure that consists of common stock outstanding and possibly nonconvertible preferred stock. *Required to report basic EPS

Restriction (appropriation)

A policy where the board of directors makes a commitment that a portion of Retained Earnings is unavailable for dividends and may be: 1- To meet legal requirements, such as meeting a state's requirements concerning treasury stock 2- To meet contractual restrictions related to issuing long-term bonds **Corp. disclose __________ of Retained Earnings in a note with a clear description of the legal or contractual provisions that are responsible for the ___________.

Retained earnings

Accounting for a small and big stock dividend requires a decrease in this account. *amount when small is found by: # of shares X fair value *amount when big is found by: # of shares X par value

Dilutive

After the corp. computes the impact on diluted EPS for each convertible security, it ranks the securities starting with the most __________ and ending with the least _________ security at the bottom of the ranking. *Then beginning with the most _________ security, the corp. sequentially enters the dilutive securities into its DEPS computations.=

Par value

Big stock dividend is greater than 20-25% and reported at ______ ________. *JE declaration date: Retained Earnings xx CS to be distributed xx *JE date of issuance CS to be distributed xx Common Stock xx

Diluted

Computing __________ EPS: -Step 1: Compute Basic EPS -Step 2: Include all dilutive share options and warrants and compute tentative ___________ EPS -Step 3: Develop a ranking of impact of each convertible preferred stock and convertible bond on _________ EPS, from most _________ to least ________ -Step 4: Beginning with the most _________ security first, include each _________ convertible security in __________ EPS in a sequential order based on the ranking in step 3 and compute a new tentative _________ EPS -Step 5: Report as the ________ EPS the LOWEST computed ___________ EPS

continuing operations

If a corporation reports a loss from ______________ _____________ it ignores potential common shares in calculating DEPS even if it reports a positive over net income from extraordinary items or discontinued operations. *Basic EPS = Diluted EPS

Separate

If a corporations net income includes any results from discontinued operations or extraordinary items, the corporation must report ___________ EPS amounts for both income from continuing operations and net income on its income statement. *Also required to disclose the EPS related to the results from discontinued operations and extraordinary events (may disclose on income statement or notes to financial statements) **Each EPS amount is based on same weight avg. # of shares ***When reported on income statement components are added to report total EPS ****Intent is to show the contribution of each income statement component to the total EPS

Comprehensive Income

Net income + Other comprehensive income= _____________ ________

Net income

Primary components of ______ _________: 1- Income from continuing operations (operating revenues and expenses) 2- Results from discontinued operations (income from operations of discontinued unit + Gain or loss from the disposal of the discontinued unit) 3- Extraordinary gains or losses (unusual and infrequent events)

Earnings per share

Required by GAAP to report this information on its income statement. *The basic _______ _____ ______ is calculated as= (Net Income - Preferred dividends) / Weighted average number of Common Shares Outstanding

Potential Common Shares

Share options and warrants, convertible preferred stock, convertible bonds, participating securities, differing classes of CS, and contingent share are referred to as _____________ __________ __________ if they are securities that can be used by the holder to acquire stock.

Beginning

Simplest way of giving retroactive recognition to stock dividends or stock splits is to assume (for EPS calculations) that the stock dividend or split occurred at the ____________ of its earliest comparative period, then assume that all stock transactions between this ______________ date and the actual date of the stock dividend or split included the additional shares resulting from the assumed dividend or split.

Fair value

Small stock dividend is >20-25% and reported at ________ ________. *JE declaration date: RE xx CS to be distributed xx APIC from Stock dividend xx *JE Date of Issuance: CS to be distributed xx Common Stock xx

DEPS

The impact of each convertible security on the corps. _ _ _ _ is computed as: *Impact on _ _ _ _= Increase in EPS Numerator / Increase in EPS Denominator

Outstanding shares

The number of shares being distributed in a stock dividend is found by multiplying the % times the ________________ ___________. *# of shares= % X ___________ _________

Prior Period Adjustments (restatements)

These are retrospective adjustments of retained earnings that can arise from changes in principles, change in accounting entity, and corrections of errors of prior periods. *must disclose the effect of the error on the prior year's net income and earnings per share in the period in which the correct is made

If Converted Method

This method is used to calc. additional dilutive shares resulting from convertible bonds and convertible preferred stock *Each convertible stock or bond is assumed to have been converted into common stock at the beginning of the earliest period reported

Price/Earning Ratio

This ratio is used by investors to evaluate return and risk, which they then use in inter-company comparisons of share price relative to profitability, equation is: *= Market price per Share of CS -------------------------------------- Earnings Per Share **Investor must be sure that calculations are comparable when using EPS info for inter-company comparisons

Denominator

Weighted Avg. # of common shares outstanding= (shares outstanding X fraction of year outstanding) + " " + " " *Redo calc. when shares outstanding changes then sum at the end of the year when the numerator is 12. **Weighted avg. # of common shares outstanding is the ______________ of the EPS calculation

Total EPS

When a corporation has deducted preferred dividends in the calculation of ________ _ _ _, it also deducts the dividends from the income related to continuing operations to reconcile the _ _ _ amounts.

Retroactive

When events such as a stock split or stock dividend occur they do not affect shareholders' total investment in the corp. but only change the # of shares outstanding, and because these events DO NOT affect the company's assets the company gives ____________ recognition to these events for all comparative income statements that it presents. *___________ adjustment results in comparable EPS amounts for all periods presented in the financial statements, based on the most recent capital structure. **Means if making __________ entry for 2016 you assume all events in 2017 happened at the beginning of 2016 (if 2 for 1 stock split happened in 2017 you multiply 2016 actual shares by 200%)

Steps

________ for Treasury Stock Method: -Step 1: Determine the avg. market price of common shares during the period (must be greater than the option price or warrant exercise to continue) -Step 2: Compute the shares that would be issued from the assumed exercise of all options and warrants -Step 3: Compute the proceeds received from the assumed exercise ((exercise price X # of shares issued)+ Unrecognized compensation costs per share) -Step 4: Compute the assumed shares that would be reacquired (proceeds / avg. market price) -Step 5: Compute the incremental common shares that would need to be issued (Shares assumed issued - shares assumed reacquired) and add that # of shares to weighted avg. to compute diluted EPS

Treasury Stock Method

__________ ________ _________ is used to determine the change in the number of shares when computing Diluted EPS. *Assumes the company uses the proceeds received from the exercise of options or warrants to acquire as many treasury shares as possible, and then only issues the minimum number of additional shares **The # of shares added to the EPS denominator is the difference between the assumed shares issued and the assumed shares reacquired

Dilution occurs

__________ ___________ whenever the average market price is greater than the option (exercise) price.

Denominator

__________ increases by the # of common shares issued in the assumed conversion

Convertible

__________ securities (convertible bonds, convertible preferred stock) are considered for inclusion in Diluted eps AFTER share options and warrants *Only included if dilutive **Important to include individual ___________ securities one at a time, in the proper order, because: - A ______________ SECURITY THAT MAY APPEAR TO BE INDIVIDUALLY DILUTIVE MAY END UP BEING ANTIDILUTIVE IN COMBINATION WITH OTHER ___________ SECURITIES.

Diluted EPS

____________ _ _ _ is the EPS after including all potential common shares that would reduce EPS. *Potential common shares are only included in the calc. of ___________ _ _ _ if the have a dilutive effect (decrease EPS) *Corp. with complex capital structure has to report both basic EPS and _______ _ _ _ amounts on the face of its income statement.

Assumed shares outstanding

____________ ________ ___________ is used in calculation to find weighted avg. shares for retroactive entries (resulting from stock split or stock dividend) -Calculated by= Actual shares outstanding X Stock Split* X Stock Dividend** *IF APPLICABLE (Stock split happened); ex: 2 for 1 stock split, multiply actual shares outstanding by 200% **IF APPLICABLE (stock dividend happened); ex: 20% stock dividend, multiply actual shares outstanding by 120%