Ch 16 Part 2 EPS Narrated Part I

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This is the first of a four part narration of the EPS discussion in Chapter 16 of the text. Please listen to the slides after you have read the text.

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Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting

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Intermediate Accounting 14th Edition 16 Earnings per Share Kieso, Weygandt, and Warfield

Learning Objectives:

Describe the accounting for the issuance, conversion, and retirement of convertible securities. Explain the accounting for convertible preferred stock. Contrast the accounting for stock warrants and for stock warrants issued with other securities. Describe the accounting for stock compensation plans under generally accepted accounting principles. Discuss the controversy involving stock compensation plans. Compute earnings per share in a simple capital structure. Compute earnings per share in a complex capital structure. Learning Objectives

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Debt and equity Convertible debt Convertible preferred stock Stock warrants Accounting for compensation Dilutive Securities and Compensation Plans Computing Earnings Per Share Simple capital structure Complex capital structure Dilutive Securities and Earnings Per Share

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Earnings per share indicates the income earned by each share of common stock. Companies report earnings per share only for common stock. When the income statement contains intermediate components of income (such as discontinued operations or extraordinary items), companies should disclose earnings per share for each component. Computing Earnings Per Share Illustration 16-7

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LO 6 Compute earnings per share in a simple capital structure. Simple Structure --Only common stock; no potentially dilutive securities. Complex Structure --Potentially dilutive securities are present. “ Dilutive ” means the ability to influence the EPS in a downward direction. EPS - Simple Capital Structure

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LO 6 Compute earnings per share in a simple capital structure. Preferred Stock Dividends Subtracts the current-year preferred stock dividend from net income to arrive at income available to common stockholders. Illustration 16-8 Preferred dividends are subtracted on cumulative preferred stock, whether declared or not. EPS - Simple Capital Structure

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LO 6 Compute earnings per share in a simple capital structure. Weighted-Average Number of Shares Companies must weight the shares by the fraction of the period they are outstanding. When stock dividends or share splits occur, companies need to restate the shares outstanding before the share dividend or split. EPS - Simple Capital Structure

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LO 6 Compute earnings per share in a simple capital structure. Illustration: Franks Inc. has the following changes in its common stock during the period. Illustration 16-9 Compute the weighted-average number of shares outstanding for Frank Inc. EPS - Simple Capital Structure

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LO 6 Illustration 16-9 Illustration 16-10 EPS - Simple Capital Structure

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