topic10 EPS_3pp - Topic 10 Earnings per share NOTE we are...

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1 1 Topic 10: Earnings per share square6 NOTE: we are dealing with this topic at a basic level only – reading is reduced. square6 Reading boxshadowdwn D: Ch 27: Earnings per share (Basic EPS only) square6 Pages 903 – 910 only boxshadowdwn H: AASB133: Earnings per share square6 Outline 1. Use of EPS 2. Calculation of EPS and reporting requirements a) Basic EPS b) Basic EPS when discontinued operations 3. Further comment on EPS 2 Lecture objectives square6 At the end of the class you should be able to: boxshadowdwn Be aware of the use (and further use) of the EPS measure in financial statement analysis boxshadowdwn Know how to calculate basic earnings per share square6 Including when discontinued operations have occurred boxshadowdwn Comment on the use of “simple” measures such as EPS that depend on the financial statements 3 1. Use of EPS square6 Share market information reported (Australian Financial Review) boxshadowdwn Dividends per share (cents) boxshadowdwn No. of times dividends are covered by earnings boxshadowdwn NTA boxshadowdwn Dividend yield boxshadowdwn Earnings per share (cents) square6 EPS is further used in other investment analysis measures, eg Price earnings ratio (P/E ratio) boxshadowdwn P/E ratio = Share price/EPS boxshadowdwn Defects in EPS therefore affect those other measures
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2 4 Use of EPS square6 Thinking: boxshadowdwn Performance of companies of different sizes is difficult to compare boxshadowdwn If report earnings per share, perhaps the per share measure provides an easier comparison square6 Seems simple: boxshadowdwn Earnings divided by the number of shares give a monetary amount for earnings per share boxshadowdwn EPS is the only measure that has its own financial reporting standard (AASB133) square6 Possibly because of its further use in other investor analysis measures 5 2. Calculation of EPS and reporting requirements square6 AASB133 Earnings per share square6 Objective: boxshadowdwn “to prescribe principles for the determination and presentation of earnings per share, so as to improve performance comparisons between different entities in the same reporting period and between different reporting periods for the same entity”(para 1) square6 Requires disclosure on face of income statement of: boxshadowdwn Basic earnings per share (this lecture) boxshadowdwn Diluted earnings per share (calculation beyond scope of ACCT2011) square6 Other reporting and disclosures 6 Calculation of EPS square6 Seems simple… boxshadowdwn Earnings (numerator) divided by the number of shares (denominator) gives us a monetary amount for earnings per share. boxshadowdwn Example: square6 At 30 June 2009 Company B reported profits of $100,000 and it had 200,000 ordinary shares outstanding. square6 Earnings per share: $100,000/200,000 = square6 But as with many “simple” performance measures, it soon becomes complicated… boxshadowdwn What do we mean by “earnings”?
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