I2CH 16 13ed, updated summer 2010

I2CH 16 13ed, updated summer 2010 - Chapter 16 Page 1 of 10...

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Chapter 16, Page 1 of 10 CHAPTER 16 NOTES Earnings Per Share and Dilutive Securities 1. Prior to APB# 15 (May 1969), only “Basic Earnings Per Common Share was computed and reported; however, it was not always reported, and it was not always reported in a consistent place. Now, FASB Statement No. 128 requires the computation of Basic Earnings Per Common Share for all publicly held corporations, and it must be reported on the face of the income statement. If the Co. has a complex capital structure, diluted earnings per common share must also be computed and reported on the face of the income statement. Basic earnings per common share is computed as follows: Net Income - Preferred Dividends Basic EPS = Weighted Average No. of Common Shares Outstanding 2. Currently, FASB Statement No. 128 requires the following reporting of earnings per share for profit oriented entities: (A) Earnings per common share must be presented on the face of the face of the income statement. When earnings include irregular items, per share amounts (when applicable) should be shown for income from continuing operations, income before extraordinary items, income before accounting change, and net income. For discontinued operations, extraordinary items, and cumulative effect of an accounting change, earnings per share should be reported for these line items either on the face of the income statement or in the notes to the financial statements (see pages 811 and 812 in text). (B) If a corporation has a complex capital structure (convertible securities are outstanding), both Basic and Diluted Earnings Per Common Share must be computed and reported. Diluted Earnings Per Share is computed as follows: Net Income* - Preferred Dividends Diluted EPS = Weighted Average No. of Common Shares and all Sources of Dilution Outstanding *Net Income may have to be adjusted when applying the “if converted” method of dilution for convertible debt and preferred stock. (C) Methods of determining dilution (dilution means to reduce earnings per share): 1) For stock options, rights, and warrants, use the Treasury Stock Method. 2) For convertible debt and convertible preferred stock, use the If Converted Method. (D) Additional disclosures are required for companies with a complex capital structure and dual presentation of EPS. This disclosure includes: (1) description of rights and privileges of the various securities outstanding; (2) a reconciliation of the computations used in computing basic and diluted EPS; (3) effect given preferred dividends in computing income available to common shares; (4)
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Chapter 16, Page 2 of 10 securities that could potentially dilute basic EPS in the future that were not included this period because they were antidilutive; and (5) effect of conversions subsequent to year end, but before statements have been issued. 3.
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I2CH 16 13ed, updated summer 2010 - Chapter 16 Page 1 of 10...

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