Earnings per Share

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

2000 Earnings per share (basic) Income before extraordinary loss and cumulative effect of accounting change $4.69 Extraordinary loss -0- Cumulative effect of accounting change (.19) Net income $4.50

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 = 25,000 120,000 shares x 6/12 60,000 130,000 shares x 3/12 32,500 117,500

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

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

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 15,000 Additional paid-in cap. 30,000 75,000 Retained earnings 900,000 840,000 Total $1,080,000 $1,080.000 Total S/E is unchanged

Large Stock Dividend Example Stockholders’ Equity: Common stock, $10 par, 10,000 shares $ 50,000 $100,000 Additional paid-in cap. 30,000 30,000 Retained earnings 70,000 20,000 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.

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

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

2-for-1 Stock Split Example Stockholders’ Equity: Common stock, $10 par, 5,000 shares $ 50,000 Additional paid-in cap. 30,000 Retained earnings 70,000 Total $ 150,000 Before Split Assume Shah Company declares 2-for-1 stock split.

2-for-1 Stock Split Example Stockholders’ Equity: Common stock, $5.00 par, 10,000 shares $ 50,000 $ 50,000 Additional paid-in cap. 30,000 30,000 Retained earnings 70,000 70,000 Total $ 150,000 $150,000 Before After Only disclosures are affected All accounts are unchanged