Earnings Per Share

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.



A. Simple Capital Structure--if a corporation's capital structure consists
only of common stock or includes no potentially dilutive convertible
securities, options, warrants, or other rights that upon conversion or
exercise could dilute earnings per common share, a single presentation,
expressed in terms such as basic earnings per common share, is required to
be disclosed on the face of the income statement for income from continuing
operations, income before extraordinary items, and net income and is
computed by dividing the income available to common stockholders by the
weighted average number of common shares outstanding during the period
1. Income Available to Common Stockholders--each element of income for
which earnings per share presentation is required should be reduced by
the current period dividend claim on cumulative preferred stock
whether the dividend has been declared or not and by the current
period dividend claim on noncumulative preferred stock only if the
dividend has been declared
a. Illustrations
1) A corporation reported net income of $300,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 100,000 during the current year;
the corporation had 1,000 shares of 8% cumulative preferred
stock with a par value of $100 outstanding during the current
year; the preferred stock dividend was declared
Earnings Per Share = (300,000 - 8% x 100 x 1,000) /
100,000 = 2.92

2) A corporation reported net income of $300,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 100,000 during the current year;
the corporation had 1,000 shares of 8% cumulative preferred
stock with a par value of $100 outstanding during the current
year; the preferred stock dividend was not declared
Earnings Per Share = (300,000 - 8% x 100 x 1,000) /
100,000 = 2.92

3) A corporation reported net income of $300,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 100,000 during the current year;
the corporation had 1,000 shares of 8% noncumulative preferred
stock with a par value of $100 outstanding during the current
year; the preferred stock dividend was declared
Earnings Per Share = (300,000 - 8% x 100 x 1,000) /
100,000 = 2.92

4) A corporation reported net income of $300,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 100,000 during the current year;
the corporation had 1,000 shares of 8% noncumulative preferred
stock with a par value of $100 outstanding during the current
year; the preferred stock dividend was not declared
Earnings Per Share = 300,000 / 100,000 = 3.00

2. Weighted Average Number of Common Shares Outstanding--the number of
common shares outstanding at the beginning of the period is increased
or decreased by any common shares issued or retired during the period
weighted by the fraction of the period in which they were outstanding
a. Stock Dividends or Stock Splits--if a stock dividend or stock
split occurs either during the current period or after the end of
the current period but before the financial statements are issued,
the computation of the weighted average number of common shares
outstanding requires that the common shares outstanding before the
occurrence of the stock dividend or stock split be restated to
reflect the effects of the stock dividend or stock split
b. Illustration--a corporation had 100,000 shares of common stock
outstanding on January 1; the corporation issued 2,000 shares of
common stock on April 1; the corporation issued a 5% stock
dividend on the outstanding common shares on June 1; the
corporation repurchased 3,000 shares of common stock on October 1;
the corporation issued 6,000 shares of common stock on December 1
Weighted Average Number of Common Shares Outstanding:
January 1 100,000 x 1.05 x 12 / 12 = 105,000
April 1 2,000 x 1.05 x 9 / 12 = 1,575
October 1 (3,000) x 3 / 12 = (750)
December 1 6,000 x 1 / 12 = ____500
106,325

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.




B. Complex Capital Structure--if a corporation's capital structure includes
potentially dilutive convertible securities, options, warrants, or other
rights that upon conversion or exercise could dilute earnings per common
share, a dual presentation, expressed in terms such as basic earnings per
share and diluted earnings per share, is required to be disclosed on the
face of the income statement for income from continuing operations, income
before extraordinary items, and net income and is computed by dividing the
income available to common stockholders by the weighted average number of
common shares outstanding during the period
1. Convertible Securities
a. If Converted Method--earnings per share is computed by dividing
the income available to common stockholders by the weighted
average number of common shares outstanding during the period as
if the convertible security were converted
1) Income Available to Common Stockholders--each element of
income for which earnings per share presentation is required
should not be reduced by the current period dividend claim on
convertible preferred stock and should be increased by the
current period interest expense, net of tax, on convertible
bonds
2) Weighted Average Number of Common Shares Outstanding--the
weighted average number of common shares outstanding should be
adjusted as if the convertible security were converted at the
beginning of the period or the date of issuance of the
convertible security if the convertible security were issued
during the period
a) Variable Conversion Rates--the weighted average number of
common shares outstanding is adjusted for the most
advantageous conversion rate available to the holders of
the convertible security
b. Antidilution--a convertible security whose inclusion in earnings
per share computations would increase earnings per share should be
excluded from earnings per share computations
c. Illustrations
1) A corporation reported net income of $800,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 80,000 during the current year;
the corporation had 5,000 shares of 8% cumulative, convertible
preferred stock with a par value of $100 outstanding during
the current year; the preferred stock was issued at par; each
share of preferred stock is convertible into 2 shares of common
stock
Basic Earnings Per Share = (800,000 - 8% x 100 x 5,000) /
80,000 = 9.50

Per Share Effect = 8% x 100 x 5,000 / (2 x 5,000) = 4.00

Diluted Earnings Per Share = 800,000 / (80,000 + 2 x
5,000) = 8.89

2) A corporation reported net income of $800,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 200,000 during the current year;
the corporation had 5,000 shares of 8% cumulative, convertible
preferred stock with a par value of $100 outstanding during
the current year; the preferred stock was issued at par; each
share of preferred stock is convertible into 2 shares of common
stock
Simple Earnings Per Share = (800,000 - 8% x 100 x 5,000) /
200,000 = 3.80

Per Share Effect = 8% x 100 x 5,000 / (2 x 5,000) = 4.00


Diluted Earnings Per Share = 800,000 / (200,000 + 2 x
5,000) = 3.81
The preferred stock is antidilutive; therefore, only a
basic earnings per share presentation is required.

3) A corporation reported net income of $800,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 80,000 during the current year;
the corporation had $750,000 of 10% convertible bonds with a
par value of $1,000 outstanding during the current year; the
bonds were issued at par; each bond is convertible into 20
shares of common stock
Simple Earnings Per Share = 800,000 / 80,000 = 10.00

Per Share Effect = 10% x 1,000 x 750 / 20 x 750 = 5.00

Diluted Earnings Per Share = (800,000 + 10% x 1,000 x 750)
/ (80,000 + 20 x 750) = 9.21

4) A corporation reported net income of $800,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 200,000 during the current year;
the corporation had $750,000 of 10% convertible bonds with a
par value of $1,000 outstanding during the current year; the
bonds were issued at par; each bond is convertible into 20
shares of common stock
Simple Earnings Per Share = 800,000 / 200,000 = 4.00

Per Share Effect = 10% x 1,000 x 750 / 20 x 750 = 5.00

Diluted Earnings Per Share = (800,000 + 10% x 1,000 x 750)
/ (200,000 + 20 x 750) = 4.07
The bonds are antidilutive; therefore, only a basic
earnings per share presentation is required.

2. Options and Warrants--stock purchase contracts, stock subscriptions
not fully paid, deferred compensation packages providing for the
issuance of common stock, and convertible securities that allow or
require the payment of cash upon conversion are considered the
equivalent of stock options and stock warrants
a. Treasury Stock Method--earnings per share is computed by dividing
the income available to common stockholders by the weighted average
number of common shares outstanding during the period as if the
stock options and stock warrants were exercised and the proceeds
from the exercise of the stock options and stock warrants were used
to purchase common stock for the treasury using the average market
price of the stock if the average market price of the stock is
above the exercise price during the period being reported
1) Income Available to Common Stockholders--each element of income
for which earnings per share presentation is required does not
need to be adjusted
2) Weighted Average Number of Common Shares Outstanding--the
weighted average number of common shares outstanding should be
adjusted as if the stock options and stock warrants were
exercised at the beginning of the period or the date of
issuance of the stock options and stock warrants if the stock
options and stock warrants were issued during the period
a) Variable Exercise Prices—-the weighted average number of
common shares outstanding is adjusted for the most
advantageous exercise price available to the holders of the
stock options
b. Antidilution--stock options and stock warrants whose inclusion in
earnings per share computations would increase earnings per share
should be excluded from earnings per share computations
c. Illustrations
1) A corporation reported net income of $800,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 100,000 during the current year;
the corporation had 10,000 stock options outstanding during
the current year; the option price is $45 per share; the
average market price of the common stock is $50 per share, and
the closing market price of the common stock is $55 per
share
Basic Earnings Per Share = 800,000 / 100,000 = 8.00

Proceeds From Exercise = 10,000 x 45 = 450,000

Treasury Stock = 450,000 / 50 = 9,000

Per Share Effect = 0 / (10,000 - 9,000) = 0

Diluted Earnings Per Share = 800,000 / (100,000 + 10,000 -
9,000) = 7.92

2) A corporation reported net income of $800,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 100,000 during the current year;
the corporation had 10,000 stock options outstanding during
the current year; the option price is $45 per share; the
average market price of the common stock is $40 per share, and
the closing market price of the common stock is $55 per
share
Basic Earnings Per Share = 800,000 / 100,000 = 8.00

Proceeds From Exercise = 10,000 x 45 = 450,000

Treasury Stock = 450,000 / 40 = 11,250

Diluted Earnings Per Share = 800,000 / (100,000 + 10,000 –
11,250) = 8.10
The stock options are antidilutive; therefore, only a
basic earnings per share presentation is required.

3. Contingent Issuances--shares of common stock that are issuable upon the
mere passage of time and shares of common stock that are issuable upon
the attainment of a certain earnings level or a certain market value
level or a certain condition other than earnings or market value that
is met at the end of the current period
a. If Issued Method--earnings per share is computed by dividing the
income available to common stockholders by the weighted average
number of common shares outstanding during the current period as
if the contingent shares of common stock were issued
1) Income Available to Common Stockholders--each element of income
for which earnings per share presentation is required does not
need to be adjusted
2) Weighted Average Number of Common Shares--the weighted average
number of common shares outstanding should be adjusted as if
the contingent shares of common stock were issued at the
beginning of the period or the date of the contingent agreement
if the contingent agreement were made during the period
a) Variable Issue Rates--if the common stock is issuable upon
the attainment of a condition other than the mere passage
of time and if the number of shares issuable varies
depending upon the level of the condition, the weighted
average number of common shares outstanding should be
adjusted for the number of shares that would be issued
based upon current conditions
b. Antidilution--a contingent issuance of common stock whose inclusion
in earnings per share computations would increase earnings per
share should be excluded from earnings per share computations
c. Illustrations
1) A corporation reported net income of $600,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 40,000 during the current year;
the corporation had an agreement outstanding during the
current year that entitles the president of the corporation to
a bonus of 5,000 shares of common stock if the net income of
the corporation reaches $550,000 in any of the succeeding 3
years
Basis Earnings Per Share = 600,000 / 40,000 = 15.00

Per Share Effect = 0 / 5,000 = 0

Diluted Earnings Per Share = 600,000 / (40,000 + 5,000) =
13.33

2) A corporation reported net income of $600,000 during the
current year; the corporation had a weighted average number of
common shares outstanding of 40,000 during the current year;
the corporation had an agreement outstanding during the
current year that entitles the president of the corporation to
a bonus of 5,000 shares of common stock if the net income of
the corporation reaches $650,000 in any of the succeeding 3
years
Basic Earnings Per Share = 600,000 / 40,000 = 15.00
The contingent issuance is ignored since the current
level of earnings is less than $650,000; therefore,
only a basic earnings per share presentation is
required.

C. Multiple Dilutive Securities
1. Ranking--the per share effect of convertible securities, stock options
and stock warrants, and other rights on earnings per share is computed
and is used to rank the convertible securities, stock options and
stock warrants, and other rights from the most dilutive to the least
dilutive
2. Computation--earnings per share is computed by adding the convertible
securities, stock options and stock warrants, and other rights one at
a time to the earnings per share computation in order of their ranking
of their per share effects until a convertible security, a stock
option or a stock warrant, or an other right is antidilutive or until
all convertible securities, stock options or stock warrants, or other
rights are included in the computation
3. Illustrations
a. A corporation reported net income of $425,000 during the current
year; the corporation had a weighted average number of common
shares outstanding of 50,000 during the current year; the
corporation had 4,000 shares of 7.5% cumulative, convertible
preferred stock with a par value of $100 outstanding during the
current year; the preferred stock was issued at par; each share of
preferred stock is convertible into 2 shares of common stock; the
corporation had $300,000 of 8% convertible bonds with a par value
of $1,000 outstanding during the current year; the bonds were
issued at par value; each bond is convertible into 40 shares of
common stock; the corporation had 10,000 stock options outstanding
during the current year; the option price is $20; the average
market price of the common stock is $25 per share, and the closing
market price of the common stock is $30 per share
Basic Earnings Per Share = (425,000 - 7.5% x 100 x 4,000) /
50,000 = 7.90

Proceeds From Exercise = 10,000 x 20 = 200,000

Treasury Stock = 200,000 / 25 = 8,000

Per Share Effects:
Preferred Stock = 7.5% x 100 x 4,000 / (2 x 4,000) = 3.75

Bonds = 8% x 1,000 x 300 / (40 x 300) = 2.00

Options = 0 / (10,000 - 8,000) = 0

Diluted Earnings Per Share:
Options = (425,000 - 7.5% x 100 x 4,000) / (50,000 +
10,000 - 8,000) = 7.60

Bonds = (425,000 - 7.5% x 100 x 4,000 + 8% x 1,000 x 300)
/ (50,000 + 10,000 - 8,000 + 40 x 300) = 6.55

Preferred Stock = (425,000 + 8% x 1,000 x 300) / (50,000 +
10,000 - 8,000 + 40 x 300 + 2 x 4,000) =
6.24

b. A corporation reported net income of $425,000 during the current
year; the corporation had a weighted average number of common
shares outstanding of 100,000 during the current year; the
corporation had 4,000 shares of 7.5% cumulative, convertible
preferred stock with a par value of $100 outstanding during the
current year; the preferred stock was issued at par; each share of
preferred stock is convertible into 2 shares of common stock; the
corporation had $300,000 of 8% convertible bonds with a par value
of $1,000 outstanding during the current year; the bonds were
issued at par value; each bond is convertible into 40 shares of
common stock; the corporation had 10,000 stock options outstanding
during the current year; the option price is $20; the average
market price of the common stock is $25 per share, and the closing
market price of the common stock is $30 per share
Basic Earnings Per Share = (425,000 - 7.5% x 100 x 4,000) /
100,000 = 3.95

Proceeds From Exercise = 10,000 x 20 = 200,000

Treasury Stock = 200,000 / 25 = 8,000


Per Share Effects:
Preferred Stock = 7.5% x 100 x 4,000 / (2 x 4,000) = 3.75

Bonds = 8% x 1,000 x 300 / (40 x 300) = 2.00

Options = 0 / (10,000 - 8,000) = 0

Diluted Earnings Per Share:
Options = (425,000 - 7.5% x 100 x 4,000) / (100,000 +
10,000 - 8,000) = 3.87

Bonds = (425,000 - 7.5% x 100 x 4,000 + 8% x 1,000 x 300)
/ (100,000 + 10,000 - 8,000 + 40 x 300) = 3.68
The preferred stock is antidilutive; therefore, the
preferred stock is excluded from the computation of
diluted earnings per share.

D. Reporting
1. Special Transactions--when the earnings of the period include special
transactions, earnings per share amounts (where applicable) should be
presented for discontinued operations and for extraordinary items
either on the face of the income statement or in the notes to the
financial statements
2. Comparative Financial Statements--earnings per share amounts should be
presented for all periods presented
a. Stock Dividends or Stock Splits--if a stock dividend or stock
split occurs either during the current period or after the end of
the current period but before the financial statements are issued,
the earnings per share amounts presented for all prior periods
should be restated to reflect the effects of the stock dividend or
stock split
b. Prior Period Adjustments--if the results of operations of prior
periods have been restated as a result of a prior period
adjustment or a change in accounting principle, the earnings per
share amounts presented for the prior periods should be restated to
reflect the effect of the prior period adjustment or the change in
accounting principle, and the effects of the restatement should be
disclosed in the year of restatement
c. Diluted Earnings Per Share--if diluted earnings per share is
reported for at least one period, diluted earnings per share should
be reported for all periods presented, even if diluted earnings per
share is the same as basic earnings per share
3. Complex Capital Structure--if a corporation has a complex capital
structure, the notes to the financial statements should disclose the
following:
a. Description of pertinent rights and privileges of the various
securities outstanding
b. A reconciliation of the numerators and denominators of the basic
earnings per share and diluted earnings per share computations
including the individual income and share effects of all securities
that affect earnings per share
c. The effect given preferred dividends in determining income
available to common stockholders in computing basic earnings per
share
d. Securities that could potentially dilute basic earnings per share
in the future that were not included in the computation of diluted
earnings per share because they would be antidilutive
e. Effects of conversion subsequent to year end


ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.