Computation of diluted eps reflects the additional

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income available for dividend payments to common shareholders. Computation of diluted EPS reflects the additional shares that would be issued if all stock options, warrants, and convertible securities had been converted into common shares at the beginning of the year or when issued, if issued during the year. Diluted EPS never exceeds basic EPS. 8 Until recently, gains and losses on debt retirement were treated as extraordinary items. To explain, understand thz; debt is accounted for at historical cost, just like the accounting for equipment. The market price of debt, however, is determined by fluctuations in interest rates. As a result, if a company retires (pays off) its debt before maturity, the c paid to settle the debt often differs from the debt amount reported on the balance sheet, resulting in gains and losses on retirement. These gains and losses were formerly treated as extraordinary. Following passage of SFAS 145, these gains and losses are no longer automatically treated as extraordinary, but instead must be unusual and infrequent to be designated as extraordinary.
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Module 5 I Revenue Recognition and Operating Income 5-30 Pfizer reports Basic EPS of $1.03 in 2010 and Diluted EPS of $1.02. Given the near identical for basic and diluted EPS, we know that Pfizer has few dilutive securities. POL Biophar- nc., however, reports a dilution of 26% in its EPS as evident from its following disclosure: year ended Dece~ber 31 (in thous(lnds, except per share) 2010 2009 2008 net income per share ...................................... $ 0.73 $ 1.59 $ 0.58 net income per share .................. .................. $ 0.54 $ 1.07 $ 0.47 Biopharma reports the following dilutive effects on EPS: 2010 2009 2008 me ................................................... $ 91,874 $189,660 $ 68,387 :Jack interest expense for convertible notes, net of tax ............. 5,087 7,079 10,450 used to compute net income per dilluted share ................ $ 96,961 $196,739 $ 78,837 inator eighted-average shares used to compute income per basic share .. 126,578 119,402 118,728 of dilutive stock options .................................... 9 18 50 ed stock ............................................... 103 42 10 conversion of convertible notes ........................... 52,111 64,938 49,081 used to compute income per dilluted share from continuing ::oerations and net income per dilluted share ...................... 178,801 184,400 167,869 me numerator and the denominator in the EPS calculation are affected by dilutive securities. the convertible notes had been exchanged for stock at the start of the year, the company not have had to pay interest on these notes during the year. Therefore, the after-tax interest ed to net income in the numerator. The denominator in the diluted earnings per share calculation presumes a worst case scenario all employees holding options exercise their right to purchase common shares and all con- Ie notes are converted to common shares as of the beginning of the year. In that event, PDL arma will issue an additional 52,223 thousand shares, thus increasing the denominator by amount and reducing earnings per share from $0.73 to $0.54. 9 Analysts and investors often use EPS figures to compare operating results for companies erent sizes under the assumption that the number of shares outstanding is proportional to income level (that is, a company twice the size of another will report double the income and have double the common shares outstanding, leaving EPS approximately equal for the two .::t::pani·es).This assumption is erroneous. Management controls the number of common shares
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