stice18e ppt ch18 student

8/18/2019 Stice18e PPT Ch18 Student

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18-1

Intermediate

AccountingJames D. Stice Earl K. Stice

© 2012 Cengage Learning

PowerPoint presented by Douglas Cloud

ro!essor Emeritus o! Accounting" e##erdine

$ni%ersit&

Earnings PerShare

C'a#ter 18C'a#ter 18

18t'

Edition


2/40

18-2

Sim#le and Com#le(

Ca#ital Structures

• Dilutive securities are securities whoseassumed exercise or conversion results ina reduction in earnings per share, or leadto a dilution in earnings per share.

• Antidilutive securities are securitieswhose assumed conversion or exerciseresults in an increase in earnings per

share, or lead to antidilution in earnings pershare.

)continued*


3/40

18-+

Sim#le and Com#le(

Ca#ital Structures

• A company’s capital structure may beclassified as simplex or complex.

• f a company has only common stoc!, or

common and nonconvertible preferredstoc! outstanding and there are noconvertible securities, stoc! options,warrants or other rights outstanding, it is

classified as a simple capital structure.

)continued*


4/40

18-,

Sim#le and Com#le(

Ca#ital Structures

• f net income includes extraordinary gainsor losses or other below"the"line items, aseparate EPS figure is re#uired for eachma$or component of income, as well as fornet income. %hese historical EPS amountsare referred to as basic earnings pershare.

)continued*


5/40

18-

Sim#le and Com#le(

Ca#ital Structures

• Potential EPS dilution exists if the EPSwould decrease or the loss per sharewould increase as a result of theconversion of securities or exercise stoc!options, warrants, or other rights based onthe conditions existing at the financialstatement date.

• A company with potential earnings pershare dilution is considered to have acomplex capital structure.


6/40

18-

/et Income re!erred Di%idends

eig'ted-A%erage

Common S'ares utstanding

%he weighted"average number of

shares can be computed bydetermining &month"shares' ofoutstanding stoc! and dividing by ().

)continued*

Issuance or 3eac4uisition o!

Common Stoc5


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18-6

Issuance or 3eac4uisition o!

Common Stoc5

*an. ( to +ay ( (, - /() 0 1,111

+ay ( to 2ov. ( (3, - 4/() 0 5,3

2ov. ( to 6ec. 1( (1, - )/() 0 ),(45

7eighted"average number of shares (1,


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18-8

Stoc5 Di%idends and

Stoc5 S#lits

A company had ),4 shares of common stoc!outstanding on *anuary (. %he following activitiesaffecting common stoc! too! place during the year.

)continued*

Dates Economic E%ent C'anges in S'ares utstanding

8eb. ( Exercise of stoc! option 9 +ay ( (: stoc! dividend

;1, x (:< 9 1Sept ( Sale of stoc! for cash 9 (,)2ov. ( Purchase of treasury stoc! =

6ec. ( 1"for"( stoc! split 9 >,)


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• All stoc! splits and stoc! dividends must beincorporated into the computation ofweighted average shares outstanding.

• 7hen comparative financial statements arepresented, the common shares outstandingfor all periods shown must be ad$usted toreflect any stoc! dividend or stoc! split in

the current period.

)continued*

Stoc5 Di%idends and

Stoc5 S#lits


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18-10

• ?etroactive ad$ustments must be madeeven if a stoc! dividend or stoc! splitoccurs after the end of the period butbefore the financial statements areprepared.

• 6isclosure of the situation should be made

in a note to the financial statements.

)continued*

Stoc5 Di%idends and

Stoc5 S#lits


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18-11

re!erred Stoc5 Included in

Ca#ital Structure

• @asic EPS reflects only income available tocommon stoc!holders it does not includepreferred stoc!.

• 7hen a capital structure includes preferredstoc!, dividends on preferred stoc! shouldbe deducted from income beforeextraordinary or other special items from

net income in arriving at earnings related tocommon shares.

)continued*


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18-12

• f preferred dividends are cumulative, the fullamount of dividends on preferred stoc! forthe period, whether declared or not, shouldbe deducted from income in arriving at theearnings or loss balance related to thecommon stoc!.

)continued*


Ca#ital Structure


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18-1+

)()(/( to 4/1 ), - 4/() (,

2o. of Stoc! Portion of 7eighted 6ate Shares 6ividend Bear Average

)continued*


Ca#ital Structure


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18-1,

• Cn *une 1, )(1 the firm paidD An >: dividend on preferred stoc! ;(,

shares at ( par - .> 0 >,<

A .1 per share dividend on commonstoc! ;1, shares - .1 0 F,<

• %hese cash dividends would not affect theweighted"average number of shares of common

stoc!.

)continued*


Ca#ital Structure


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)continues*

Cn *une 1, )(), the company issued(, shares of common stoc!. After theissuance, the firm has 1, shares ofcommon stoc! outstanding. Gowever, these1, are only outstanding for sixmonths, or one"half of the year.


Ca#ital Structure


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18-1

%here are )3, weighted"average

shares outstanding at the end of )(.

%here are )3, weighted"averageshares outstanding at the end of )(.

Cn +ay (, )(1, the firm issued a 3: stoc!dividend on common stoc!.

2012

(/( to 4/1 ), - 4/() (,

5/( to ()/1( 1, - 4/() (3,)3,


)continued*


Ca#ital Structure


17/40

18-16

2012

(/( to 4/1 ), - 4/() (,

5/( to ()/1( 1, - 4/() (3,)3,

201+

(/( to 3/( 1, (.3 - /() (3,


2ow let’s &roll bac!' the stoc!2ow let’s &roll bac!' the stoc!dividend for all the years displayed.dividend for all the years displayed.

)continued*


Ca#ital Structure


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18-18

2012

(/( to 4/1 ), (.3 - 4/() (3,

5/( to ()/1( 1, (.3 - 4/() ))3,153,

201+

(/( to 3/( 1, (.3 - /() (3,


)continued*


Ca#ital Structure

2ow let’s &roll bac!' the stoc!2ow let’s &roll bac!' the stoc!dividend for all the years displayed.dividend for all the years displayed.


19/40

18-17

2012

(/( to 4/1 ), (.3 - 4/() (3,

5/( to ()/1( 1, (.3 - 4/() ))3,153,

201+

(/( to 3/( 1, (.3 - /() (3,3/( to ()/1( 3, - >/() 1,


%he number of shares of common stoc! outstanding%he number of shares of common stoc! outstandingbefore the stoc! dividend ;1,< now becomesbefore the stoc! dividend ;1,< now becomes

3, shares due to the stoc! dividend.3, shares due to the stoc! dividend.

;continued*


Ca#ital Structure


20/40

18-20

2012

(/( to 4/1 ), (.3 - 4/() (3,

5/( to ()/1( 1, (.3 - 4/() ))3,153,

201+

(/( to 3/( 1, (.3 - /() (3,3/( to ()/1( 3, - >/() 1,

3,


)continued*


Ca#ital Structure


21/40

18-21

n )(), the firm made a net income,;including a 53, extraordinary gain< of1>,. %he basic earnings per sharebefore the extraordinary gain is as followsD

Preferred dividends

7eighted"average shares ofcommon stoc! outstanding

>,

153, shares of

Earnings per share from continuing operations 0 .4

2et income after E =13,

)continued*


Ca#ital Structure


22/40

18-22

@asic earnings per common share,extraordinary gain for )() is as followsD


153, shares of

Earnings per share from

extraordinary gain 0 .)

Extraordinary gain53,

)continued*


Ca#ital Structure


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18-2+

@asic earnings per common share, netincome per share ;)()


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18-2,


n )(1, the firm had a net loss of 33, andthere were no extraordinary items. %he basicloss per share is as followsD

2et loss 9 Preferred dividends ;33,< 9 ;>,<3, shares of weighted"

average common outstanding

@asic loss per share 0 ;.1


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18-2

artici#ating Securities and

t'e 9o-Class :et'od

• Sometimes a company issues more thanone class of stoc! with ownership privileges.

• 6ifferent classes do not always have the

same claim upon dividends.

• n such a case, earnings attributed to eachshare of the different classes of stoc! are

different and EPS is computed using thetwo-class method .


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18-2

Diluti%e Earnings #er S'are;

#tions" arrants" and 3ig'ts

• %he two ma$or types of potentially dilutivesecurities are ;(< common stoc! options,warrants, and rights, and ;)< convertiblebonds and convertible preferred stoc!.

• All computations of diluted EPS are made asif the exercise or conversion too! place at thebeginning of the company’s fiscal year or at

the issue date of the stoc! option orconvertible security, whichever comes later.


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18-26

Stoc5 #tions"

arrants" and 3ig'ts

• Stoc! options, warrants, and rights provide nocash yield to the investors, but they havevalue because they permit the ac#uisition ofcommon stoc!.

• t is assumed that exercise of options,warrants, or rights ta!es place as of thebeginning of the year or the date they areissued, whichever comes later.

)continued*


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• Cptions, warrants, and rights are included inthe computation of diluted EPS for a particularperiod only if they are dilutive.

• %he 8AS@ selected the treasury stock method and recommended it be assumed thatthe cash proceeds from the exercise ofoptions, warrants, or rights to purchasecommon stoc! on the mar!et ;treasury stoc!<

at the average mar!et price.

Stoc5 #tions"

arrants" and 3ig'ts

)continued*

S


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18-27

Stoc5 #tions"

arrants" and 3ig'ts

%reasury Stoc! +ethod 6emonstrated%reasury Stoc! +ethod 6emonstrated

• At the beginning of the current year,employees were granted options to ac#uire

3, shares of common stoc! at pershare.

• %he average mar!et price of the stoc! forthe year is 3.

)continued*

St 5 ti


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18-+0

2umber of shares sold 3,

Proceeds from sale ;3, - < 0 ),

2umber of shares that could be purchased with

the proceeds ;),/3< ,

2umber of shares used for diluted EPS (,

Stoc5 #tions"

arrants" and 3ig'ts

%he number of shares ;using the treasurystoc! method< to use for calculating dilutedearnings per share is calculated as followsD

Ill t ti ! Dil t d ES


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18-+1

Illustration o! Diluted ES

it' Stoc5 #tions

• ?asband Horporation had net income of F),>for the year.

• %here are (, shares of common stoc!outstanding all year.

• %here are ), options outstanding to purchaseshares.

• %he exercise price per share is 4.

• %he average mar!et price per share during theyear was (.

)continued*



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18-+2

F),>

(,@asic EPS 0 0 .F1


33/40

18-++

Proceeds from assumed exercise ofoptions outstanding ;), - 4< (),

2umber of outstanding shares assumedto be repurchased with proceeds from

options ;(),/(< (), Actual number of shares outstanding (,ssued on assumed exercise of

options ),

Iess assumed options repurchased (), >,%otal (>,

)continued*

Illustration o! Diluted ES

it' Stoc5 #tions



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18-+,

Diluted Earnings #er S'are=

F),>

(>, 0 .>4

C:A3ED 9=


35/40

18-+

Diluted Earnings #er S'are>

Con%erti?le Securities

• %he method of including convertiblesecurities as if conversion had ta!enplace in the EPS computation is referredto as the if-converted method .

• %o test for dilution, each potentiallydilutive convertible must be evaluatedindividually.

: lti l t ti ll


36/40

18-+

:ulti#le otentiall&

Diluti%e Securities

• %he 8AS@ re#uires selection of thecombination of securities producing thelowest possible EPS figure.

• %o avoid having to test a large number ofdifferent combinations to find the lowest one,companies can compute the incremental EPSfor each potentially dilutive security.

• Any dilutive stoc! options and warrants areconsidered first before introducing convertiblesecurities into the computations.


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@inancial Statement resentation

(. A reconciliation of both the numerators andthe denominators of the basic and dilutedEPS computations for income from continuingoperations.

). %he effect that preferred dividends have onthe EPS computations.

8irms are re#uired to provide the followingdisclosure items in the notes to the financial

statementsD

)continued*


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18-+8

1. Securities that could potentially dilute basicEPS in the future that were not included incomputing diluted EPS this period becausethose securities were antidilutive for the

current period.. 6isclosure of transactions that occurred after

the period ended but prior to the issuance offinancial statements that would havematerially affected the number of commonshares outstanding or potentially outstandingsuch as the issuance of stoc! options.

@inancial Statement resentation


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Hhapter (>Hhapter (>

%he End%he End

₵


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