Chapter18Notes

Chapter18Notes - EarningsPerShare ACCT4050 ACCT 4050 22...

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Click to edit Master subtitle style   4/7/11  ACCT  4050 Earnings Per Share ACCT 4050 Professor Dennis Chambers
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  4/7/11  ACCT  4050 Objectives Know the difference between a simple and a  complex capital structure. Understand how dilutive securities affect  earnings per share computations. Compute basic earnings per share. Use the treasury stock method to compute  diluted earnings per share. Use the if-converted method to compute diluted  earnings per share. 22
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  4/7/11  ACCT  4050 Objectives--continued Factor into the diluted EPS computations the  effect of actual conversion of convertible  securities or the exercise or options, warrants, or  rights during the period. Understand the anti-dilutive effect of potential  common shares when a firm reports a loss from  continuing operations. Determine the order in which multiple  potentially dilutive securities should be  considered in computing diluted EPS. 33
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  4/7/11  ACCT  4050 Background US GAAP requires reporting of earnings per  share of common stock Provides earnings available to a theoretical holder  of one share Very basic if firm has only simple common shares  and no other type of equity Complications come when firms have complex  equity structures 44
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  4/7/11  ACCT  4050 Capital Structure Types  The corporation has  55
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  4/7/11  ACCT  4050 Complex Capital Structures –  Types of Securities Dilutive Securities  -  Securities whose assumed  exercise or conversion results in a reduction in  earnings per share. Antidilutive Securities  -  Securities whose  assumed conversion or exercise results in an  increase in earnings per share. 66
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  4/7/11  ACCT  4050 Related Types of Earnings per  Share Considers only common shares  issued and outstanding. Basic EPS Reflects the  maximum potential  dilution from all  possible stock  conversions that  would have  decreased EPS. Diluted EPS 77
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  4/7/11  ACCT  4050 Basic EPS Formula Basic situation assumes very simple conditions: No preferred stock No changes in number of common shares If these are not true, the formula needs to be  adjusted.
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