Chapter 16 Earnings Per Share

Net Income - Preferred Dividends

=Income available to common stockholders

# Shares Outstanding at Time * (# Months / 12)

=Weighted average number of shares outstanding

If it includes securities that could have a dilutive effect on EPS

Capital Structure is complex

If it has only common stock or includes no potential common stock that upon conversion/exercise could dilute EPS

Capital Structure is simple

When the income statement has intermediate components of income (discontinued operations or extraordinary items)

Companies should disclose EPS for each component

Purchase Common Stock

Decreases Shares Outstanding

If preferred stock is cumulate and company has net income but declares no dividend in current year

Don't include dividends in arrears they should have been included in the previous year

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

Indicates the income earned by each share of common stock

Earnings per Share

Only reported for common stock

Earnings per Share

Whether or not the preferred stock is declared doesn't matter

If Preferred Stock is cumulative

Only subtract the PS that is declared

If preferred stock is noncumulative

Issue Common Stock

Increases Shares Outstanding

Preferred Stock dividends and weighted average number of shares outstanding

Items needed to calculate EPS for a simple capital structure

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

Net Income - Preferred Dividends

Numerator of EPS

Net Income - Preferred Dividends

Do not have to report EPS on the face of the income statement

Nonpublic Companies

If a net loss occurs

Still subtract the preferred dividends and make the net loss bigger

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

Company weights the shares by the fraction of the period they are outstanding

Weighted average number of shares outstanding

Helps to find the equivalent number of whole shares outstanding for the year

Weighted average number of shares outstanding

Shares issued or purchased during the period affect the

Weighted average number of shares outstanding