Intermediate Accounting

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18 Earnings per Share Overview You may be wondering why an entire chapter is devoted to a topic that you probably previously encountered and mastered in just a few minutes. After all, earnings per share (EPS) is just income divided by the number of shares, right? Right…but then again, that isn’t the whole story. If it were, this topic wouldn’t have its own chapter. The first “surprise” you’ll find is that the income in the numerator doesn’t always equal the income on the income statement. Preferred dividends are taken off of net income to arrive at the numerator. For diluted EPS, other items may also affect the numerator. Those include interest on some convertible bonds and the add-back of preferred dividends for some convertible preferred stock. If this is starting to sound complicated, just wait until we get to the denominator! The other “surprise” is with respect to the denominator. The denominator has probably always been given to you as a single number of shares in the past. Coming up with that single number can actually be quite complex. Factors that affect the denominator include stock splits, stock dividends, purchase of treasury shares, and the issuance of new shares. For diluted EPS, additional portions of the denominator calculation can include the effect of exercising stock options, warrants, rights, and convertible securities. Unlike leases and pensions, you don’t have to look to the disclosure notes to get to the “good stuff” when it comes to EPS. Not only are basic and diluted EPS required to be listed on the face of the income statement, but companies must also list detailed EPS on the face of the statement for separately stated items such as extraordinary gains or losses and discontinued operations. The disclosure notes provide additional information about the composition of the calculation for the curious. EPS is one of the most common, and highlighted, figures given for a company during quarterly announcements. The calculations aren’t always simple, but analysts and investors find EPS to be an important measure of a company’s performance. EPS is useful because it provides for comparability for different sized companies in a single industry and for a single company over time. (i.e., comparing current quarter EPS to the same quarter in the prior year, etc.)
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18-2 Chapter 18 Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered. If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with.
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