Earnings Per Share (EPS)

Flashcards on Earnings Per Share (EPS) from Intermediate Accounting II, Accounting 326, Chapter 20. These flashcards cover the definitions, calculations, and adjustments related to Basic and Diluted EPS, including convertible securities, stock options, and antidilutive securities.

Earnings Per Share (EPS)

An overall measure of firm performance, expressed in terms of each share of common stock outstanding for a particular reporting period.

Basic EPS

Indicates the amount of Net Income (after dividends owed to preferred stockholders) for each share of common stock outstanding. Only considers the average number of common shares that were actually outstanding during the fiscal year.

Diluted EPS

Captures the reduction in basic EPS that would occur if securities (e.g., stock options, convertible debt) that are convertible into shares of common stock are assumed to have been converted. Only securities that decrease EPS (i.e., dilutive) are considered; antidilutive securities are ignored. It presents a 'worst case scenario.'

Basic EPS Calculation

Net Income - Preferred Dividends / Weighted Average Number of Common Shares Outstanding

Weighted Average Number of Common Shares Outstanding

Based on the amount of time the shares are outstanding during the year.

Stock Splits and Stock Dividends impact on EPS

The EPS calculation assumes that a stock split or stock dividend occurs at the beginning of the year for shares that were outstanding as of the beginning of the year. For share issuances that occur before the split or dividend (but after the beginning of the year), assume that the split or dividend occurred at the time of issuance.

Simple Capital Structure

A firm that does not have potentially dilutive securities, which are securities that are not currently but could become common shares through conversion or exercise.

Complex Capital Structure

A firm that has potentially dilutive securities, including convertible debt, convertible preferred stock, employee stock options, etc.

Convertible Debt

Debt that includes an option to convert the debt into common stock. Diluted EPS requires adjusting both the numerator and the denominator. The denominator is increased by the number of shares assumed to be issued at conversion while the numerator is adjusted for the reduced interest expense, net of tax.

Convertible Preferred Stock

Preferred shares that can be converted to a fixed number of shares of common stock at the option of preferred shareholders. The denominator is increased by the number of shares assumed to be issued at conversion, and the numerator is adjusted because the firm can ignore preferred dividends.

Treasury Stock Method

The method that assumes firms use the proceeds from the hypothetical exercise of in-the-money options or warrants to purchase treasury stock at the average market price of the common stock for the period. Subtracting the treasury shares assumed to be repurchased from the total number of shares issued on the assumed exercise determines the incremental shares remaining in the market.

Antidilutive Securities

Securities that, if converted or exercised, would increase EPS or decrease loss per share. The effects of all antidilutive securities are excluded in the EPS computation.

Antidilutive Convertible Securities

Firms determine if a security is antidilutive by computing the incremental income per share effect of the assumed conversion and comparing it to basic EPS. If the incremental income per share effect is higher than basic EPS, then the security is antidilutive.

Out-of-the-Money Options and Warrants

Out-of-the-money securities result in negative incremental shares and are antidilutive. With out-of-the-money securities, the issuing company has more funds received than it needs to buy back the issued shares, and it will be able to acquire more shares than it issued. The number of outstanding shares will decrease, and EPS will increase.