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Unformatted text preview: 17-117EARNINGS PER SHARE AND RETAINED EARNINGS CHAPTER OBJECTIVESAfter careful study of this chapter, students will be able to: 1. Compute basic EPS. 2. Understand how to compute the weighted average common shares for EPS. 3. Identify the potential common shares included in diluted EPS. 4. Apply the treasury stock method for including share options and warrants in diluted EPS. 5. Calculate the impact of a convertible security on diluted EPS. 6. Compute diluted EPS. 7. Record the declaration and payment of cash dividends. 8. Account for a property dividend. 9. Explain the difference in accounting for small and large stock dividends. 10. Understand how to report accumulated other comprehensive income. 11. Prepare a statement of changes in stockholders' equity. 17-2SYNOPSIS Earnings and Earnings Per Share Information1. GAAP contains the current standards for calculating and reporting earnings per share. 2. External decision makers often consider earnings per share to be the best single measure for summarizing a corporation's performance. Earnings per share information is helpful to users in evaluating a corporation's return on investmentand risk. Earnings per share can be used to predict future cash flows per share, to compare intercompany performance using the price/earnings ratio, and to indicate the potential impact of the issuance of common share options, convertible debt, or convertible preferred stock on future earnings per share. Basic Earnings Per Share3. A simple capital structureconsists of only common stock. For a simple capital structure, basic earnings per share is required for reporting purposes and is computed using the following equation: Net Income - Preferred DividendsBasic Earnings per Share = Weighted Average Number of Common Shares Outstanding Basic earnings per share is reported on a corporation's income statement directly below net income. The numerator is the earnings available to common stockholders. Included in the preferred dividends that are subtracted in the numerator are dividends on noncumulative preferred stock that have been declared, as well as the current dividends on cumulative preferred stock whether or not they have been declared. 4. The weighted averagenumber of common shares outstanding in the denominator of the above equation is the number of common shares outstanding at the end of the accounting period if no shares have been issued or reacquired during the year. If a corporation has issued or reacquired shares of common stock, a weighted average of these shares must be calculated by (a) determining the number of shares outstanding for each portion of the year (e.g., January - March, 3,000 shares; April - May, 6,000 shares, etc.), (b) multiplying each number times the fraction of the year the shares were outstanding (e.g., January - March: 3,000 x 3/12) to get (c) the equivalent whole units of shares outstanding (e.g., 3,000 x 3/12 = 750), and (d) summing the equivalent whole units for each fraction of the year. fraction of the year....
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- Spring '11
- Corporate Finance, Dividend