Earnings Per Share (EPS)
Earnings per share (EPS) measures the portion of a company's net income allocated to each outstanding share of common stock, reported as both basic and diluted EPS.
Explanation
Basic EPS equals net income minus preferred dividends divided by the weighted-average number of common shares outstanding. Diluted EPS adjusts the denominator (and sometimes the numerator) for the potential dilutive effect of stock options, warrants, convertible bonds, and convertible preferred stock.
The treasury stock method is used for options and warrants — assumed exercised with proceeds used to repurchase shares at the average market price. The if-converted method is used for convertible securities — assuming conversion at the beginning of the period, adding back interest (net of tax) for convertible bonds or preferred dividends for convertible preferred. Antidilutive securities are excluded from diluted EPS.
Key Points
- •Basic EPS = (Net income - preferred dividends) / weighted-average common shares
- •Treasury stock method for options and warrants
- •If-converted method for convertible bonds and preferred stock
- •Antidilutive securities excluded from diluted EPS calculation
Exam Tip
EPS calculations are frequently tested. Practice the treasury stock method and if-converted method, and know how to determine if a security is dilutive or antidilutive.
Frequently Asked Questions
Related Topics
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Stock-Based Compensation (ASC 718)
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Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
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