1. Demonstration Problem
Accounting
What the Numbers Mean 6e
Demonstration Problem
Chapter 10 – Exercise 6
Calculate EPS and the Effect of Stock Split on EPS

2. Problem Definition
During the year ended December 31, 2004, Gluco, Inc., split its stock on a 3-for-1 basis. In its annual report for 2003, the firm reported net income of $925,980 for 2003, with an average 268,400 shares of common stock outstanding for that year. There was no preferred stock.

3. Problem Definition
What amount of net income for 2003 will be reported in Gluco’s 2004 annual report?
Calculate Gluco’s earnings per share for 2003 that would have been reported in the 2003 annual report.
Calculate Gluco’s earnings per share for 2003 that will be reported in the 2004 annual report for comparative purposes.

4. Problem Solution a. Net income for 2003 = $925,980
Stock dividends and stock splits do not cause changes to reported earnings amounts.

5. Problem Definition
What amount of net income for 2003 will be reported in Gluco’s 2004 annual report?
Calculate Gluco’s earnings per share for 2003 that would have been reported in the 2003 annual report.
Calculate Gluco’s earnings per share for 2003 that will be reported in the 2004 annual report for comparative purposes.

6. Problem Solution
b. Earnings per share =

7. Problem Solution
b. Earnings per share =
Net income

8. Problem Solution
b. Earnings per share =
Net income
$925,980

9. Problem Solution b. Earnings per share = Net income $925,980
/ Weighted average number of shares outstanding

10. Problem Solution b. Earnings per share = Net income $925,980
/ Weighted average number of shares outstanding
268,400

11. Problem Solution b. Earnings per share = Net income $925,980
/ Weighted average number of shares outstanding
268,400
= $3.45

12. Problem Definition
What amount of net income for 2003 will be reported in Gluco’s 2004 annual report?
Calculate Gluco’s earnings per share for 2003 that would have been reported in the 2003 annual report.
Calculate Gluco’s earnings per share for 2003 that will be reported in the 2004 annual report for comparative purposes.

13. Problem Solution
For the EPS calculation in 2004 the weighted average number of shares outstanding in 2003 must reflect the 3 for 1 stock split in 2004. c.

14. Problem Solution
For the EPS calculation in 2004 the weighted average number of shares outstanding in 2003 must reflect the 3 for 1 stock split in 2004. c.
EPS = Net income / Weighted average number of
shares outstanding

15. Problem Solution
For the EPS calculation in 2004 the weighted average number of shares outstanding in 2003 must reflect the 3 for 1 stock split in 2004. c.
EPS = Net income / Weighted average number of
shares outstanding
= $925,980

16. Problem Solution
For the EPS calculation in 2004 the weighted average number of shares outstanding in 2003 must reflect the 3 for 1 stock split in 2004. c.
EPS = Net income / Weighted average number of
shares outstanding
= $925, / (268,400 x 3)

17. Problem Solution
For the EPS calculation in 2004 the weighted average number of shares outstanding in 2003 must reflect the 3 for 1 stock split in 2004. c.
EPS = Net income / Weighted average number of
shares outstanding
= $925, / (268,400 x 3)
= $1.15

18. Accounting What the Numbers Mean 6e David H. Marshall Wayne W. McManus
You should now have a better understanding of EPS and the effect of a stock split on EPS.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele