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25 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Primary components of Income
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1) Income or loss from continuing operations
2) Results from discontinued operations - gain or loss from discontinued component, gain or loss from disposal of discontinued component |
3) Extraordinary gains or losses from from unusual and infrequent events
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Basic Earnings Per Share
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Net Income - Preferred Dividends
divided by |
Weighted Average Number of Common Shares Outstanding
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Numerator Calculations
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If noncumulative preferred stock it deducts the dividends declared during the current period from net income
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If it has cumulative preferred it deducts the dividend during the current period whether declared or not
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Denominator Calculations
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Weighed Average Shares
Start with actual # of shares outstanding beginning of period. Multiply this layer by amount of time outstanding |
As more shares are issued, they are added to the beginning balance and it multiplies this layer by the fraction of the year it is outstanding. The resulting equivalent whole units are added to determine the weighted average number of common shares.
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Weighted Average Shares Example
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Jan-Feb 12000 x 2/12 = 2000
Mar-June 14700 x 4/12=4900 July-Nov 18000 x 5/12=7500 December 17520 x 1/12= 1460 Total Weighted Average = 15860 |
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Stock Dividends or Splits
A corporations shares outstanding might increase due to stock dividends or stock splits. It must give retroactive recognition for all comparative statements. |
Assume that the split or stock dividend occurred at the beginning of the earliest comparative period.
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Then assume that all stock transactions between this beginning date and the actual date of the stock dividend or split included the additional shares resulting from the assumed dividend or split.
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Stock Dividend and Split
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Jan-Dec 2010 5000x200%x120%x12/12= 12000
10,000 below is new share amt 10000 from above (12,000) includes dividend Jan-May 2011 10000x120%x5/12=5000 |
Remember only between periods actual back to beginning. Anything after is just added in normally.
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Diluted Earnings Per Share
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1 Compute basic earnings per share
2 Include dilutive share options and warrants and compute DEPS 3 Develop a ranking of each convertible preferred stock and convertible bond on DEPS |
4 Include each dilutive convertible security in order based on ranking and compute new tentative DEPS
5 Select as diluted earnings per share the lowest computed tentative DEPS. |
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Stock Options and Warrants
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Treasury Stock Method. Assumes Stock are reacquired at average market price during the period.
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Steps for the treasury stock method
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1 Determine the avg market price of common shares during the period.
(if less than option price stop) 2 Compute the shares issued from assumed exercise of all options and warrants |
3 Compute proceeds received from assumed exercise price by multiplying the shares by the option price (+ compensation cost net of tax)
4 Compute shares reacquired by dividing the proceeds by avg mkt price 5 Compute the incremental common shares |
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Impact on DEPS
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Increase in earnings per share Numerator/
Increase in number of shares Denominator |
The security which has the lowest amount and causes the greatest impact on earnings per share is the one used to calculate DEPS
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Cash Dividends
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1 the date of declaration - dividend is declared
2 the ex dividend rate - no dividend if purchased after a certain date |
3 The date of record - only shareholders recorded on that date get the dividends
4 The date of payment |
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Partially Participating Preferred Stock
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If it is 12% participating and the dividend is 10%, when there is an amount to participate only the additional amount, in this case 2% is allocated to get the 12%
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Company has $9,000 to allocate to dividends
10% Preferred 2000 Common Dividend (10% par) 3000 2% preferred (20K x 2%) 400 2% common (30K x 2%) 600 Remainder to Common 3000 Remainder calc = 9000 to allocate - above dividends 2000+3000+400+600=3000 |
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Declaration and payment of dividends
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Nov 2, 2010
Dr Retained Earnings 30,000 Cr Dividends Payable Preferred 10,000 Cr Dividends Payable Common 20,000 Nov 23 Memorandum: The company will pay dividends to stockholders as of today, date of record |
Dec 14, 2010
Dr Dividends Preferred Stock 10,000 Dr Dividends Common Stock 20,000 Cr Cash 30,000 |
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Prior Period Adjustment corrections of errors on prior periods
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resulting from errors of oversight, incorrect use of accounting facts, mathematical mistakes, errors in accounting principles
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Dr Retained Earnings 10,000
Cr Interest Payable 10,000 Dr Income Tax Refund Receivable 3,000 Cr Retained Earnings 3,000 |
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Restrictions/Appropriations on Retained Earnings
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Company may not distribute any assets that would reduce restricted retained earnings.
1 meet legal requirements 2 meet contractual requirements |
ie treasury stock. restricted to an amount equal to cost of treasury stock.
-long term bonds - bond covenants - may restrict retained earnings. |
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Stock Dividend Example
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Number of Shares X dividend % x current market price
40,000 shares x 2% x 22 per share Stock is $10 par 4,000 x.02 = 800 shares x $10 par value |
Dr Retained Earnings 17,600
Cr Common to be dist (value) 8,000 Cr Additional Paid in capital 9,600 Dr Common Stock to be dist 8,000 Cr Common Stock Par 8,000 |
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Stock Dividend Tip
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When a stock dividend is declared, remember to increase the # of shares in future calculations when calculating cash dividends.
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The Stock Dividend increased the number of shares.
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Dilutive Earnings Per Share
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Add each Security back in by ranking and calculate a new tentative Dilutive Earnings Per Share
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When the New DEPS is less than the remaining securities Stop ( remaining securities Earnings Per Share is greater than new tentative DEPS
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Dilutive Earnings Per Share when bonds are included
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Premium Formula is Interest Expense - premium/amortization rate x tax rate divided by new shares in conversion
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Discount Formula is Interest Expense + discount/amortization rate x tax rate divided by new shares in conversion
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Earnings Per Share Calculation Notes
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When new shares are issued, add to the original balance to get new share total
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Stock Splits Notes
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Remember Stock Splits occur at a specific time. Also, Stock Dividends occur on a specific date. That stock dividend date actually causes a change in actual shares ie Aug 3 20% split increases 15,000 shares to 18,000
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Share Options example
1000 options available option price $18 + compensation cost $2 |
Shares issued from assumed exercise 1000
Shares reacquired = |
Proceeds/Avg Mkt price per share
1000x (18+2)/25 avg price = 800 avg increment in common shares for dilutive earnings per share 200 |
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Fully Participating Preferred Stock
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After dividend is declared say 10%, if there is any left over preferred gets a percentage based on what percentage of total stock it is.
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Impact of convertible securities on diluted Earnings Per Share
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For a convertible bond, the numerator increases by by the savings in interest expense (net of taxes)
denominator increase by new shares of common stock |
For preferred stock the numerator increases by the savings in preferred dividends
denominator increases by new shares of common stock |
