Financial Accounting Terms Dictionary

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Financial Accounting Terms
Earnings per Share (EPS)


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Earnings per Share (EPS)
  

Earnings per Share

Earnings per Share (EPS)
   = Earnings / Number of shares outstanding  
 

Basic Earnings per Share

Basic Earnings per Share = (A) / (B)
   (A) Income available to common stockholders
          = Net income - dividends to preferred stockholders
   (B) Weighted-average number of common shares outstanding

Potential common stock

Financial instruments that can be increase the number of common shares
 
Examples of potential common stock
1. Options to purchase common stock
2. Warrants to purchase common stock
3. Convertible preferred stock
4. Convertible debt securities
 

Diluted Earnings per Share

Diluted Earnings per Share = (C) / (D)
   (C) = (A) + (A1) + (A2)
   (D) = (B) + (B1) + (B2)
 
   (A) Income available to common stockholders
   (B) Weighted-average number of common shares outstanding
   (A1) Dividends to convertible preferred shares
   (A2) Interests to convertible debt securities
   (B1) Incremental common shares from treasury stock method
   (B2) Incremental common shares from if-converted method
 

Treasury stock method

For options and warrants to purchase common stock
 
Treasury stock method
1. Assume that options and warrants were exercised at the beginning of the period or at the time of issuance, if later.
2. Assume that the proceeds from the exercise were used to purchase common stock, at the average market price during the period.
3. If the number of common stock issued is greater than the number of common stock repurchased, the incremental shares are added to the number of common shares outstanding.
 

If-converted method

For convertible securities
 
If-converted method
1. Assume that convertible securities were converted at the beginning of the period or at the time of issuance, if later.

2. Add the followings to the income available for common stockholders
    (1) Dividends to convertible preferred stockholders
    (2) Interests to convertible securities
3. Add the incremental common shares issued due to the assumed conversion of convertible securities
 

Dilution

If the application of treasury stock method or if-converted method decreases the EPS, such a decrease in EPS is called dilution.
 

Antidilution

If the application of treasury stock method or if-converted method increase the EPS, such an increase in EPS is called antidilution.
 

No Antidilution

If the application of treasury stock method or in-converted method has antidilutive effect on EPS, such potential common shares are not assumed to be exercised or converted.
 

Diluted EPS < Basic EPS

Because antidilutive potential common shares are not assumed to be exercised or converted, Diluted EPS cannot be greater than Basic EPS.
  

Two-class method
(EITF 03-6)

For participating securities, Basic EPS and Diluted EPS are presented separately for participating securities and each class of common stock.
 
EITF 03-6
For participating convertible securities, two-class method is required.
For participating convertible securities, if-converted method is not allowed.
   

Participating securities

Holders of participating securities have the right to get dividends from remaining net income after common stockholders and preferred stockholders receive their portion of dividends.
 
Participating preferred stockholders may receive dividends from two layers of net income
   1. Dividends entitled as preferred stockholders.
   2. Dividends from remaining net income after entitled dividends are paid to common and preferred stockholders.
 


   


 

Basic EPS
Example 1

Data:
1. Net income for the period = $60,000
2. Number of common shares = 20,000 shares
3. No preferred stock, no potential common shares
 

Basic EPS = $60,000 / 20,000 shares = $3 per share
 

Basic EPS
Example 2

Data:
1. Net income for the period = $75,000
2. Number of common shares
    20,000 shares on January 1, 20X1
    10,000 shares were issued on July 1, 20X1
3. No preferred stock, no potential common shares
 
Weighted-average number of common shares
   = 20,000 x 12/12 + 10,000 x 6/12
   = 20,000 + 5,000 = 25,000
  

Basic EPS = $75,000 / 25,000 shares = $3 per share
 

Basic EPS
Example 3

Data:
1. Net income for the period = $60,000
2. Weighted-average number of common shares = 20,000 shares
3. Number of preferred shares = 8,000 shares
4. Dividends per preferred share = $1.50 per share
 

Net income available to common stockholders
   = $60,000 - dividends to preferred stockholders
   = $60,000 - (8,000 shares x $1.50)
   = $60,000 - $12,000
   = $48,000
  

Basic EPS = $48,000 / 20,000 shares = $2.40 per share
 

Treasury stock method
Example 1

Data:
1. Net income for the period = $60,000
2. Weighted-average number of common shares = 20,000 shares
3. During the previous period, the entity sold options to purchase 4,000 shares of common stock
 

Basic EPS = $60,000 / 20,000 shares = $3 per share
 

Treasury stock method
Options are assumed to have been exercised at the beginning of the period
 

Net income available to common stockholders
   = $60,000 - dividends to preferred stockholders
   = $60,000 - (8,000 shares x $1.50)
   = $60,000 - $12,000
   = $48,000
  
Weighted-average number of common shares after assumed exercise of options = 20,000 + 4,000 = 24,000 shares
 
Diluted EPS = $48,000 / 24,000 shares = $2 per share
 

If-converted method
Example 1

Data:
1. Net income for the period = $80,000
2. Weighted-average number of common shares = 20,000 shares
3. Number of convertible preferred shares = 4,000 shares
4. Each share of preferred stock is convertible to one share of common stock
5. Dividends per preferred share = $2 per share
 

Basic EPS = $80,000 / 20,000 shares = $4 per share
 

If-converted method
Convertible preferred shares are assumed to have been converted at the beginning of the period
 

Net income available to common stockholders
   = $80,000 - dividends to preferred stockholders
   = $80,000 - (4,000 shares x $2)
   = $80,000 - $8,000
   = $72,000
  
Weighted-average number of common shares after assumed conversion of convertible preferred stock
   = 20,000 + 4,000 = 24,000 shares
 
Diluted EPS = $72,000 / 24,000 shares = $3 per share
 

Two-class method
Example 1

Data:
1. Net income for the period = $90,000
2. Weighted-average number of common shares = 20,000 shares
3. Number of participating convertible preferred shares = 10,000 shares
4. Each share of preferred stock is convertible to one share of common stock
5. Dividends per preferred share = $2 per share
6. Dividends to common share = $2 per share
7. Preferred stockholder can participate in additional dividends on a 40:60 per share ratio with Class A common stockholders.
 
Net income = $90,000
Dividends to preferred stockholders = 10,000 shares x $2 = $20,000
Dividends to common stockholders = 20,000 shares x $2 = $40,000
  
Distributed earnings
   = $20,000 + $40,000 = $60,000
  
Undistributed earnings
   = $90,000 - ($20,000 + $40,000)= $30,000
 
Allocation of undistributed earnings:
 
   To preferred stockholders
      $30,000 x (10,000 x 0.4) / (10,000 x 0.4 + 20,000 x 0.6)
      = $30,000 x 4,000 / (4,000 + 12,000)
      = $30,000 x 4,000 / 16,000 = $7,500
 
     $7,500 / 10,000 shares = $0.75 per share


   To common stockholders
      $30,000 x (20,000 x 0.6) / (10,000 x 0.4 + 20,000 x 0.6)
      = $30,000 x 12,000 / (4,000 + 12,000)
      = $30,000 x 12,000 / 16,000 = $22,500
 
     $22,500 / 20,000 shares = $1.125 per share



Basic earnings per share amounts:
 

 

Preferred

Class A

Distributed earnings

$2.00

$2.00

Undistributed earnings

0.75

1.125

Total

$2.75

$3.125

 

        



U.S. GAAP by Codification Topic 
 
 105  GAAP Hierarchy 
 105  GAAP History 

 205  Presentation of Financial Statements 
 205-20 Discontinued Operations 
 210  Balance Sheet 
 210-20 Offsetting 
 220  Comprehensive Income 
 225  Income Statement 
 225-20 Extraordinary and Unusual Items 
 230  Statement of Cash Flows 
 250  Accounting Changes and Error Corrections 
 260  Earnings per Share 
 270  Interim Reporting
 
 310  Impairment of a Loan
 320  Investment Securities 
 320  Other-Than-Temporary Impairments, FSP FAS 115-2 
 320-10-05 Overview of Investments in Other Entities 
 320-10-35 Reclassification of Investments in Securities
 323-10 Equity Method Investments
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 325-20 Cost Method Investments 
 330  Inventory

 340-20 Capitalized Advertising Costs 
 350-20 Goodwill 
 350-30 Intangibles Other than Goodwill 
 350-40 Internal-Use Software 
 350-50 Website Development Costs 
 360  Property, Plant and Equipment
 360-20 Real Estate Sales 
 
 410  Asset Retirement and Environmental Obligations 
 420  Exit or Disposal Cost Obligations 
 450  Contingencies 
 450-20 Loss Contingencies 
 450-30 Gain Contingencies
 480  Redeemable Financial Instruments 

 505-20 Stock Dividends, Stock Splits 
 505-30 Treasury Stock 

 605  SEC Staff Accounting Bulletin, Topic 13 
 605-25 Revenue Recognition - Multiple Element Arrangements 
 
 715-30 Defined Benefit Plans - Pension
 718  Share-Based Payment 
 730  Research and Development 
 730-20 Research and Development Arrangements 

 805  Business Combinations  
 810  Consolidation 
 810  Noncontrolling Interests 
 810  Consolidation of Variable Interest Entities, SFAS 167 
 
 815  Derivatives and Hedging Overview 

 820  Fair Value Measurements  
 820  Fair value when the markets are not active, FSP FAS 157-4
 825  Fair Value Option 

 830  Foreign Currency Matters 
 830-20 Foreign Currency Transactions 
 830-30 Translation of Financial Statements 
 835  Interest 
 835-20 Capitalization of Interest 
 835-30 Imputation of Interest 

 840  Leases 
 840-20 Operating Leases 
 840-30 Capital Leases 
 840-40 Sale-Leaseback Transactions
 845  Nonmonetary Transactions 

 855  Subsequent Events 
 860-20 Sale of Financial Assets, SFAS 166 
 860-50 Servicing Assets and Liabilities, SFAS 156 

 985-20 Costs of software to be sold  


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