1. Earnings per Share

2. Earnings per Share
Financial statement users use earnings per share (EPS) to judge a company’s performance and to compare it with performance of other companies
Shown on the income statement
Shown for income from continuing operations
Income before extraordinary items
Cumulative effect of accounting change
Net income

3. 2000 Earnings per share (basic) Income before extraordinary
loss and cumulative effect
of accounting change $4.69
Extraordinary loss
Cumulative effect of accounting
change (.19)
Net income $4.50

4. Basic EPS Net income / weighted average of common shares outstanding
Example:
EPS = $334,500/117,500 shares = $2.85
Weighted average:
100,000 shares x 3/12 = ,000
120,000 shares x 6/ ,000
130,000 shares x 3/ ,500
117,500

5. Capital structures Simple capital structure Complex capital structure
No convertible bonds, stocks, or stock options
Complex capital structure
Convertible bonds, stocks, stock options (Potentially dilutive securities)
Potential dilution or possibility of conversion of these instruments creating more shares of stocks and diluting the EPS per stock
Diluted EPS – calculated by adding all potentially diluted instruments to the number of shares

6. Retained Earnings
RE = Profits – Losses – dividends – transfers to contributed capital
Restrictions on RE:
Contractual - may restrict an amount that can be paid out for dividends
State law – may not allow payment of dividends if reduces the equity level
Board of Directors – may want an x amount in for future needs

7. Stockholders’ Equity: Common stock, $5 par,
Small Stock Dividend (less than 20-25% of a company’s oustanding stock) 30,000 x .10 = 3,000 3,000 x $20 Market Price = $60,000 - $15,000 = $45,000 3,000 x $5 par value = 15,000
Before After
Stockholders’ Equity:
Common stock, $5 par,
30,000 shares issued $ 150,000 $150,000
Common stock distributable
3,000 shares ,000
Additional paid-in cap , ,000
Retained earnings , ,000
Total $1,080,000 $1,
Total S/E is unchanged

8. Large Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par,
10,000 shares $ 50,000 $100,000
Additional paid-in cap , ,000
Retained earnings , ,000
Total $ 150,000 $150,000
Before After + -
Dividend deducted from retained earnings and recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected.

9. Stock Splits Results in additional issuance of shares
Reduces par value per share
No change in Stockholders’ Equity accounts
Certificate of Stock
$1 par value
Certificate of Stock
$3 par value

10. Stock Splits Not recorded in accounts
Splits reduce market value per share and make stock more affordable to a wider range of investors
Disclose
in notes

11. 2-for-1 Stock Split Example
Stockholders’ Equity:
Common stock, $10 par,
5,000 shares $ 50,000
Additional paid-in cap ,000
Retained earnings ,000
Total $ 150,000
Before
Split
Assume Shah Company declares 2-for-1 stock split.

12. 2-for-1 Stock Split Example
Stockholders’ Equity:
Common stock, $5.00 par,
10,000 shares $ 50,000 $ 50,000
Additional paid-in cap , ,000
Retained earnings , ,000
Total $ 150,000 $150,000
Before After
Only disclosures are affected
All accounts are unchanged