Essay on Earnings Per Share

3215 Words Feb 28th, 2012 13 Pages
EPS Accounting Report: Development and Problems

Earnings per share is the portion of a company’s profit allocated to each outstanding share of common stock. The computation of earnings per share is income minus preferred stock dividends divided by weighted average number of shares of common stock outstanding at the end of the period. Earning per share is considered to be the single most important metric to determine a company’s profitability which is crucial to the decision making of potential investors and creditors. In other words, earnings per share helps people to have a better insight of different companies’ power to make money. The higher the earnings per share with all other factors equal, the higher each share would be worth. By
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On the opposite, companies with complex capital structure are required to present two types of EPS—Primary EPS and Fully dilutive EPS. However, a dual presentation is not required if dilution in the aggregate is less than three percent. In addition to primary EPS and fully diluted EPS, Opinion No. 15 brought out some new concepts such as common stock equivalents, the “if-converted” method, and the treasury stock method in computing diluted EPS figures.
In 1971, due to the complexity and controversy of Opinion No. 15, the AICPA had to publish 102 accounting interpretations relating to it by 1971. As a result, Opinion No. 15 was often misunderstood and misused according to many empirical studies that released by FASB. It was also kind of difficult for people to apply Opinion No.15 correctly. In this case, FASB issued new standards regarding Earnings per Shares in February 1997 which was the Statement of Financial Accounting Standards No. 128. The goal of the Statement of Financial Accounting Standards No. 128 was to simplify and regularize the computation and disclosure of Earnings per Shares compared to the Opinion No. 15. In SFAS No. 128, "primary earnings per share" was replaced by "basic earnings per share." Basic earnings per share is determined from historical data and measures the earnings per common share for the accounting period. The new calculation of EPS is dividing income…

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