Advanced Financial Accounting Lecture-33 Earnings Per Share

Earnings Per Share Earning per share is used to judge the Performance of an entity.

Earnings Per Share (EPS) Earning Available to Common Stock-holders No. of weighted average shares outstanding during the year

Income Statement Sales xxx Less Cost of goods sold xxx Gross profit xxx Less Operating Exp. Administrative Exp. xxx Selling Exp. xxx xxx Profit from operations xxx Add Other income xxx Less Financial charges xxx Profit before tax xxx Less Income tax Exp. xxx Profit after tax/ Earning available to ordinary share holder xxx

Question 1 Jan, 2007 Opening shares 200,000 1 Oct 2007 Fresh shares issued 200,000 Required Compute weighted average number of shares outstanding. Solution 1 Jan. 2007 Opening shares 200,000 x 12/12 = 200,000 1 Oct. 2007 Fresh issue 200,000 x 3/12 = 50,000 Weighted average shares 250,000

Journal Entry Bank A/c xxx Share capital A/c xxx

Question A listed company has following shares transactions during 2007 Date Details Shares issued Treasury shares Shares outstanding 1 Jan. 2007 Balance at beginning of year 200,000 30,000 170,000 31 May 2007 Issue of new shares for cash 80,000 ---- 250,000 1 Dec. Purchase of treasury shares 25,000 225,000 31 Dec. Balance at year end 280,000 55,000 The data will appear as row wise Required: Calculate the weighted average number of shares outstanding

Solution-1 1 Jan. 2007 Opening balance 170,000 x 12/12 = 170,000 31 May 2007 New issue 80,000 x 7/12 = 46,666 1 Dec. 2007 Treasury shares 25,000x1/12 = ( 2.083) 214,583 Data will appear as row wise

Solution-2 1 Jan. 2007 Opening balance 170,000 x 5/12 = 170,000 31 May 2007 New issue 250,000 x 6/12 = 46,666 1 Dec. 2007 Treasury shares 225,000x1/12 = ( 2.083) 214,583 Data will appear row wise

Question A company has following information: Issued capital 100,000 @ Rs. 1 each 10% Debenture 20,000 @ Rs. 1 each Gross profit Rs. 200,000 Operating Exp. Rs. 50,000 Income tax rate @ 30% Required: Compute Earnings Per Share: 1- 100,000 shares outstanding. 2- Issued further 40,000 shares on 1July 2007.

Solution Gross profit 200,000 Less Operating expenses 50,000 Operating profit 150,000 Less Interest on debenture 2,000 Profit before tax 148,000 Less Income tax @ 30% 44,400 Profit after tax 103,600

Solution Earning per share (Assumption-1) Earning Available to Common Stock-holders No. of weighted average shares outstanding during the year = 103,600 / 100,000 = 1.036 per share Earning per share (Assumption-2) Weighted average shares = (100,000+40,000x612)=120,000 = 103,600 / 120,000 = 0.863 per share