Acct 4120 Chapter 19 Spiceland 5th edition

Acct 4120 Chapter 19 Spiceland 5th edition - Acct4120...

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Acct 4120 Chapter 19 Share-Based Compensation and Earnings Per Share
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Earnings per Share (EPS) EPS = / Number of Shares PE ratio = Market price per  share / EPS Chapter 19 page 2
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EPS Presentation  If the income statement includes separately  reported items, company must disclose EPS for:      Income from continuing operations,      Separately reported items, and      Net income Income from continuing  operations ± Discontinued operations ± Extraordinary items = Net income Chapter 19 page 3
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Two Estimates of EPS   Basic EPS      highest estimate of EPS      ignores all potential dilution Diluted EPS      worst case estimate of  EPS      includes all potential  dilution Chapter 19 page 4
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Type of Capital Structure Affects EPS  Disclosure     Complex Capital Structure       Company has issued securities which could  reduce EPS      Referred to as “Potentially Dilutive Securities”      Must disclose both Basic and Diluted EPS       Simple Capital Structure       Company has not issued any potentially dilutive  securities      Disclose only Basic EPS Chapter 19 page 5
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Basic EPS Ignores the effect of potentially dilutive securities Where: IACS = Net income Preferred stock  dividends For cumulative PS, always deduct the dividends. For non-cumulative PS, only deduct dividends actually  declared. Basic  EPS = Income Available to Common Shareholders Weighted Average Number of Common  Shares Chapter 19 page 6
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Weighted Average Shares Represents the average capital base  available to management during the year. Shares of common stock are weighted by the  percentage of the year that the shares were  outstanding. Chapter 19 page 7
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Weighted Average Shares  continued Example: Date Event January 1 Firm has 500,000 shares of common stock  outstanding March 1 Issue 50,000 new shares of common stock June 1 Declare and issue 550,000 shares in a 100% stock  dividend November  1 Purchase 40,000 shares of treasury stock Chapter 19 page 8
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Weighted Average Shares  continued One approach: Date Event Number Of Shares Time Stoc k Div Jan 1 Original shares 500,000 × 12 / 12 × 2 = 1,000,00 0 March 1 Issue of common  stock 50,000 × 10 / 12 × 2 = 83,333 Nov 1 Purchase of  treasury stock (40,000) ×  2 / 12 × = (6,666) Weighted Average Number of Shares 1,076,66 7 Chapter 19 page 9
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Weighted Average Shares  continued Another approach: Date Event Number Of Shares Time Stoc k Div Jan 1
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Acct 4120 Chapter 19 Spiceland 5th edition - Acct4120...

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