14 Earnings Per Share
And Retained Earnings
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
1,Basic Earnings Per Share
Net Income – Preferred Dividends
Weighted Average Number of
Common Shares Outstanding
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
Since a corporation earns its net
income over the entire year,the
earnings are related to the common
shares outstanding during the year.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
A corporation had 12,000 shares of common stock outstanding
at the beginning of the year,On March 2,it issued 2,700
shares; on July 3,it issued another 3,300 shares,and on
December 1,it reacquired 480 shares as treasury stock.
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-February 12,000 x 2/12 = 2,000
March-June 14,700 x 4/12 = 4,900
July-November 18,000 x 5/12 = 7,500
December 17,520 x 1/12 = 1,460
15,860Total weighted average common shares
The nearest
whole month is
used
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
A corporation begins operations in January 2004,and issues
5,000 shares of common stock that are outstanding all during
2004,On December 31,2004,it issues a 2-for-1 stock split.
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-December 5,000 x 12/12 = 5,000
Total weighted average common shares 10,000
The two-for-one split is retroactive to January 1 + 5,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
On May 28,2005,the corporation issues 5,000 shares of
common stock; on August 3,it issues a 20% stock dividend;
and on October 5,it issues 2,005 shares of stock.
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-December 5,000 x 12/12 = 5,000
2004 Data on 2004 Statement
5,000 x 200% x 120% = 12,000 equivalent whole units
Continued
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
2005 Data on 2001 Statement
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-May 10,000
June-July 15,000
August-September 18,000
Issued 5,000 sharesIssued 20% stock dividend
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
2005 Data on 2005 Statement
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-May 10,000
June-July 15,000
August-September 18,000
Increases 20%12,000
Increases 20%18,000
October-December 20,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
2005 Data on 2001 Statement
Assumed Shares Shares Fraction of Year Equivalent
Outstanding Outstanding Outstanding Whole Unitsx =
January-May 10,000
June-July 15,000
August-September 18,000
12,000
18,000
October-December 20,000
x 5/12 = 5,000
x 2/12 = 3,000
x 2/12 = 3,000
x 3/12 = 5,000
16,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
2,Diluted Earnings Per Share
A corporation with a complex
capital structure is required to
report two amounts on the face of
its income statement.Yes… basic earnings per share and diluted
earnings per share.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Diluted Earnings Per Share
Diluted earnings per share shows the
earnings per share after including all
potential common shares that would
reduce earnings per share.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
To be included in the diluted earnings
per share calculation,any potential
common share must have a dilutive
effect on earnings per share.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Diluted Earnings Per Share
Step 1,Compute the basic earnings per share.
Step 2,Include dilutive stock options and warrants
and compute a tentative DEPS.
Step 3,Develop a ranking of the impact of each
convertible preferred stock and convertible
bond on DEPS.
Step 4,Include each dilutive convertible security in
DEPS in a sequential order based on the
ranking and compute a new tentative DEPS.
Step 5,Select as the diluted earnings per share the
lowest computed DEPS.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Diluted Earnings Per Share
Net Income - Preferred Dividends
Weighted Average Common Shares
Flowchart of EPS Computations
Capital Structures
Simple Capital Structure
No
Any options,warrants,or
convertible securities
outstanding?
Complex Capital Structure
Yes
Basic EPS Go to next slide
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Continued
next slide
Stock Options
and Warrants
Convertible
Securities
Diluted EPS
Complex Capital Structure
Basic Net Income - Preferred Dividends
EPS Weighted Average Common Shares=
Average Market Price > Option Price?
Yes,go to next slide
No
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Options
and Warrants
Convertible Securities
Outstanding?
Average Market Price > Option Price?
Yes
Apply Treasury
Stock Method
Diluted EPS Computations
* Options and Warrants
Adjustments
* Convertible Securities
Adjustments
Individually
Dilutive?
Yes StopNo
NoNo
No Develop Ranking of All
Convertible Securities
Yes
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Convertible bonds and
convertible preferred stock are
considered in DEPS after stock
options and warrants.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Numerical Value Impact on
Diluted Earnings Per Share
Increase in Earnings Per Share Numerator
Increase in Earnings Per Share Denominator
9% convertible preferred stock dividends
of $5,400 were declared during the year,
The preferred shares are convertible into
3,000 shares of common stock.
$5,400
3,000
= $1.80Security A:
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Numerical Value Impact on
Diluted Earnings Per Share
10% convertible bonds,Interest expense (net
of income taxes) of $4,800 were recorded
during the year,The bonds are convertible into
1,920 shares of common stock.
$4,800
1,920
= $2.50Security B:
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Numerical Value Impact on
Diluted Earnings Per Share
8% convertible preferred stock,Dividends of
$8,000 were declared during the year,The
preferred shares are convertible into 5,000
shares of common stock.
$8,000
5,000
= $1.60Security C:
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Numerical Value Impact on
Diluted Earnings Per Share
7% convertible bonds,Interest expense (net of
income taxes) of $6,300 was recorded during
the year,The bonds are convertible into 3,150
shares of common stock.
$6,300
3,150
= $2.00Security D:
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Security C has the lowest impact on DEPS and
is the most dilutive,It is the first convertible
security (after options and warrants) to be
included in DEPS (if dilutive).
Security Impact Order in Ranking
A $1.80 2
B $2.50 4
C $1.60 1
D $2.00 3
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Revised
= Tentative
Diluted EPS
Add Increase to Numerator
Revised Numerator
Add Increase to Denominator
Revised Denominator
If Convertible Security Is Dilutive
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Additional Disclosures
1,Identifies the amount of preferred dividends
deducted to determine the income available to
common stockholders.
2,Describes the potential common shares that were
not included in the diluted earnings per share
computation because they were antidilutive.
3,Describe any material impact on the common
shares outstanding of subsequent transactions
after the close of the accounting period but before
the issuance of the financial report.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
When a corporation reports its basic and
diluted earnings per share on its income
statement,it also is required to make
additional disclosures in the notes to its
financial statem nts.
3,Dividends
? The date of
declaration
? The ex-dividend
date
? The date of
record
? The date of
payment
There are four
significant dates for
a cash dividend.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Cash Dividend
Cash Dividend
Date Accounting Procedures
Date of Declaration
Reduce Retained Earnings
Increase Liabilities
Memorandum Entry
Reduce Assets
Reduce Liabilities
Date of Record
Date of Payment
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
On November 3,2004,the board of directors of a
corporation declares preferred dividends totaling
$10,000 and common dividends totaling $20,000,
These dividends are payable on December 15,2004 to
stockholders of record on November 24,2004.
November 3,2004
Retained Earnings 30,000
Dividends Payable,Preferred Stock 10,000
Dividends Payable,Common Stock 20,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Cash Dividend
November 24,2004
Memorandum entry,The company will pay dividends
on December 15,2004,to preferred and common
stockholders of record as of today,the date of record.
On November 3,2004,the board of directors of a
corporation declares preferred dividends totaling
$10,000 and common dividends totaling $20,000,
These dividends are payable on December 15,2004 to
stockholders of record on November 24,2004.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Cash Dividend
On November 3,2001,the board of directors of a
corporation declares preferred dividends totaling
$10,000 and common dividends totaling $20,000,
These dividends are payable on December 15,2001 to
stockholders of record on November 24,2001.
December 15,2004
Dividends Payable,Preferred Stock 10,000
Dividends Payable,Common Stock 20,000
Cash 30,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Cash Dividend
Fully Participating Preferred Stock
A corporation has issued
10%,participating,
cumulative preferred stock
with a total par value of
$20,000 and common stock
with a total par value of
$30,000,The preferred stock
is two years in arrears,The
Corporation declares a
$13,000 dividend.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Preferred Common
Dividends in arrears:
2 x (10% of $20,000) $4,000
Current dividend (10% x $20,000) 2,000
Common dividend (10% x $30,000) $3,000
Total to allocate $13,000
Allocated ( 9,000)
Remainder $ 4,000
$20,000/$50,000 to preferred and
$30,000/$50,000 to common 1,600 2,400
Dividend to each class of stock $7,600 $5,400
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Fully Participating Preferred Stock
Preferred Common
Partially Participating
Preferred Stock (up to 12%)
Dividends in arrears:
2 x (10% of $20,000) $4,000
Current dividend (10% x $20,000) 2,000
Common dividend (10% x $30,000) $3,000
2% dividend on par 400 600
Remainder to common
($13,000 – $10,000) 3,000
Dividend to each class of stock $6,400 $6,600
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
Occasionally,a corporation will
declare a property dividend that is
payable in assets other than cash.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
The corporation typically uses
marketable securities of other
companies that it owns for the
property dividend.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
Corporation C declares a property dividend on
March 16,2005,payable in Company D stock
on June 1,2005,The Company D stock was
purchased early in 2004 for $24,000 and was
reported at its fair market value of $29,000 on
December 31,2004 (along with an unrealized
increase in value of $5,000),The market value
on the declaration date is $31,000.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
March 16,2005
Allowance for Change in Value of
Investment in Available-for-Sale
Securities 2,000
Unrealized Increase in Value of
Available-for-Sale Securities 5,000
Gain on Disposal of Investments 7,000
Retained Earnings 31,000
Property Dividends Payable 31000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
June 1,2005
Property Dividends Payable 31,000
Investment in Available-for-Sale
Securities 24,000
Allowance for Change in Value of
Investment in Available-for-Sale
Securities 7,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
Stock Dividends
? They receive no corporate
assets.
? Their percentage ownership
does not change.
? Theoretically the total market
value of their investment will
remain the same.
? Future cash dividends may be
limited because retained
earnings is decreased by the
amount of the stock dividend.
Stockholders
often view
stock dividends
favorably even
though--
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
What factors might
enhance the perceived
attractiveness of stock
dividends?
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
? The stockholders may see the stock
dividend as evidence of corporate
growth.
? The stockholders may see the stock
dividend as evidence of sound financial
policy.
? Other investors may see the stock
dividend in a similar light,and
increased trading in the stock may
cause the market price not to decrease
proportionally.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
? The corporation may state that it will pay
the same fixed cash dividend per share.
? The stockholders may see the market price
decreasing to a lower trading range,
making the stock more attractive to
additional investors so that the market price
may eventually rise.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
Retained
Earnings
Capital
Stock
Additional
Paid-In
Capital
Retained
Earnings
Capital
Stock
Small
(<20 or 25%) Large
Par ValueFair Value
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
Common stock,$10 par (20,000 shares
issued and outstanding $200,000
Additional paid-in capital 180,000
Retained earnings 320,000
Total stockholders’ equity $700,000
Stockholders’ Equity Prior to Stock Dividend
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
Small Stock Dividend
M Corporation declares and issues a 10%
stock dividend,On the date of declaration,
the stock sells for $23 per share.
Date of Declaration
Retained Earnings 46,000
Common Stock To Be Distributed 20,000
Additional Paid-in Capital From
Stock Dividend 26,00020,000 shares x 0.10 x $23Par
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Date of Issuance
Common Stock To Be Distributed 20,000
Common Stock,$10 par 20,000
Par
M Corporation declares and issues a 10%
stock dividend,On the date of declaration,
the stock sells for $23 per share.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Small Stock Dividend
Common stock,$10 par (22,000 shares
issued and outstanding $220,000
Additional paid-in capital 206,000
Retained earnings 274,000
Total stockholders’ equity $700,000
Stockholders’ Equity After Stock Dividend
Note,Total
remained the same
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Small Stock Dividend
Large Stock Dividends
M Corporation declares and issues a 40%
stock dividend,On the date of declaration,
the stock sells for $23 per share.
Date of Declaration
Retained Earnings 80,000
Common Stock To Be Distributed 80,000
20,000 shares x 0.40 x $10Date of IssuanceCommon Stock To Be Distributed 80,000
Common Stock,$10 par 80,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Common stock,$10 par (28,000 shares
issued and outstanding) $280,000
Additional paid-in capital 180,000
Retained earnings 240,000
Total stockholders’ equity $700,000
Stockholders’ Equity After Stock Dividend
Note,Same total as
small stock dividend
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Large Stock Dividends
4,Statement of Retained Earnings
Although not a required separate
financial statement,some
corporations include a statement
of retained earnings in their
financial statements.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Retained earnings,as previously reported,Jan,1,2004
Plus (minus) Prior period adjustments (net of
income tax effect)
Adjusted retained earnings,January 1,2004
Plus (minus),Net income (loss)
Minus,Dividends (specifically identified,including
per share amounts)
Reductions due to retirement or
reacquisition of capital stock
Reductions due to conversion of bonds or
preferred stock
Retained earnings,December 31,2004
Statem t of Retained Earnings
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
5,Accumulated Other
Comprehensive Income
? Unrealized increases (gains) or
decreases (losses) in the market value of
investments in available-for-sale
securities.
? Translation adjustments from converting
the financial statements of a company’s
foreign operation into U.S,dollars.
? Certain gains and losses on,derivative”
financial instruments.
? Certain pension liability adjustments.
Other comprehensive income might include--
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
? On the face of its income statement.
? In a separate statement of comprehensive
income.
? In its statement of changes in
stockholders’ equity.
Accumulated Other Comprehensive
Income
A corporation may report its comprehensive income
(net of income taxes)--
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Statement of Changes in Stockholders’
Equity
APB Opinion No,12 states:,…disclosures of
changes in the separate accounts comprising
stockholders’ equity (in addition to retained
earnings) and of the changes in the number of
shares of equity securities during at least the most
recent annual fiscal period…is required to make
the financial statements sufficiently informative.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
The End
And Retained Earnings
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
1,Basic Earnings Per Share
Net Income – Preferred Dividends
Weighted Average Number of
Common Shares Outstanding
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
Since a corporation earns its net
income over the entire year,the
earnings are related to the common
shares outstanding during the year.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
A corporation had 12,000 shares of common stock outstanding
at the beginning of the year,On March 2,it issued 2,700
shares; on July 3,it issued another 3,300 shares,and on
December 1,it reacquired 480 shares as treasury stock.
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-February 12,000 x 2/12 = 2,000
March-June 14,700 x 4/12 = 4,900
July-November 18,000 x 5/12 = 7,500
December 17,520 x 1/12 = 1,460
15,860Total weighted average common shares
The nearest
whole month is
used
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
A corporation begins operations in January 2004,and issues
5,000 shares of common stock that are outstanding all during
2004,On December 31,2004,it issues a 2-for-1 stock split.
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-December 5,000 x 12/12 = 5,000
Total weighted average common shares 10,000
The two-for-one split is retroactive to January 1 + 5,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
On May 28,2005,the corporation issues 5,000 shares of
common stock; on August 3,it issues a 20% stock dividend;
and on October 5,it issues 2,005 shares of stock.
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-December 5,000 x 12/12 = 5,000
2004 Data on 2004 Statement
5,000 x 200% x 120% = 12,000 equivalent whole units
Continued
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
2005 Data on 2001 Statement
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-May 10,000
June-July 15,000
August-September 18,000
Issued 5,000 sharesIssued 20% stock dividend
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
2005 Data on 2005 Statement
Months Shares Shares Fraction of Year Equivalent
Are Outstanding Outstanding Outstanding Whole Unitsx =
January-May 10,000
June-July 15,000
August-September 18,000
Increases 20%12,000
Increases 20%18,000
October-December 20,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
2005 Data on 2001 Statement
Assumed Shares Shares Fraction of Year Equivalent
Outstanding Outstanding Outstanding Whole Unitsx =
January-May 10,000
June-July 15,000
August-September 18,000
12,000
18,000
October-December 20,000
x 5/12 = 5,000
x 2/12 = 3,000
x 2/12 = 3,000
x 3/12 = 5,000
16,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Weighted Average Shares
2,Diluted Earnings Per Share
A corporation with a complex
capital structure is required to
report two amounts on the face of
its income statement.Yes… basic earnings per share and diluted
earnings per share.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Diluted Earnings Per Share
Diluted earnings per share shows the
earnings per share after including all
potential common shares that would
reduce earnings per share.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
To be included in the diluted earnings
per share calculation,any potential
common share must have a dilutive
effect on earnings per share.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Diluted Earnings Per Share
Step 1,Compute the basic earnings per share.
Step 2,Include dilutive stock options and warrants
and compute a tentative DEPS.
Step 3,Develop a ranking of the impact of each
convertible preferred stock and convertible
bond on DEPS.
Step 4,Include each dilutive convertible security in
DEPS in a sequential order based on the
ranking and compute a new tentative DEPS.
Step 5,Select as the diluted earnings per share the
lowest computed DEPS.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Diluted Earnings Per Share
Net Income - Preferred Dividends
Weighted Average Common Shares
Flowchart of EPS Computations
Capital Structures
Simple Capital Structure
No
Any options,warrants,or
convertible securities
outstanding?
Complex Capital Structure
Yes
Basic EPS Go to next slide
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Continued
next slide
Stock Options
and Warrants
Convertible
Securities
Diluted EPS
Complex Capital Structure
Basic Net Income - Preferred Dividends
EPS Weighted Average Common Shares=
Average Market Price > Option Price?
Yes,go to next slide
No
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Options
and Warrants
Convertible Securities
Outstanding?
Average Market Price > Option Price?
Yes
Apply Treasury
Stock Method
Diluted EPS Computations
* Options and Warrants
Adjustments
* Convertible Securities
Adjustments
Individually
Dilutive?
Yes StopNo
NoNo
No Develop Ranking of All
Convertible Securities
Yes
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Convertible bonds and
convertible preferred stock are
considered in DEPS after stock
options and warrants.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Numerical Value Impact on
Diluted Earnings Per Share
Increase in Earnings Per Share Numerator
Increase in Earnings Per Share Denominator
9% convertible preferred stock dividends
of $5,400 were declared during the year,
The preferred shares are convertible into
3,000 shares of common stock.
$5,400
3,000
= $1.80Security A:
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Numerical Value Impact on
Diluted Earnings Per Share
10% convertible bonds,Interest expense (net
of income taxes) of $4,800 were recorded
during the year,The bonds are convertible into
1,920 shares of common stock.
$4,800
1,920
= $2.50Security B:
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Numerical Value Impact on
Diluted Earnings Per Share
8% convertible preferred stock,Dividends of
$8,000 were declared during the year,The
preferred shares are convertible into 5,000
shares of common stock.
$8,000
5,000
= $1.60Security C:
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Numerical Value Impact on
Diluted Earnings Per Share
7% convertible bonds,Interest expense (net of
income taxes) of $6,300 was recorded during
the year,The bonds are convertible into 3,150
shares of common stock.
$6,300
3,150
= $2.00Security D:
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Security C has the lowest impact on DEPS and
is the most dilutive,It is the first convertible
security (after options and warrants) to be
included in DEPS (if dilutive).
Security Impact Order in Ranking
A $1.80 2
B $2.50 4
C $1.60 1
D $2.00 3
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Convertible Securities
Revised
= Tentative
Diluted EPS
Add Increase to Numerator
Revised Numerator
Add Increase to Denominator
Revised Denominator
If Convertible Security Is Dilutive
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Additional Disclosures
1,Identifies the amount of preferred dividends
deducted to determine the income available to
common stockholders.
2,Describes the potential common shares that were
not included in the diluted earnings per share
computation because they were antidilutive.
3,Describe any material impact on the common
shares outstanding of subsequent transactions
after the close of the accounting period but before
the issuance of the financial report.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
When a corporation reports its basic and
diluted earnings per share on its income
statement,it also is required to make
additional disclosures in the notes to its
financial statem nts.
3,Dividends
? The date of
declaration
? The ex-dividend
date
? The date of
record
? The date of
payment
There are four
significant dates for
a cash dividend.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Cash Dividend
Cash Dividend
Date Accounting Procedures
Date of Declaration
Reduce Retained Earnings
Increase Liabilities
Memorandum Entry
Reduce Assets
Reduce Liabilities
Date of Record
Date of Payment
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
On November 3,2004,the board of directors of a
corporation declares preferred dividends totaling
$10,000 and common dividends totaling $20,000,
These dividends are payable on December 15,2004 to
stockholders of record on November 24,2004.
November 3,2004
Retained Earnings 30,000
Dividends Payable,Preferred Stock 10,000
Dividends Payable,Common Stock 20,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Cash Dividend
November 24,2004
Memorandum entry,The company will pay dividends
on December 15,2004,to preferred and common
stockholders of record as of today,the date of record.
On November 3,2004,the board of directors of a
corporation declares preferred dividends totaling
$10,000 and common dividends totaling $20,000,
These dividends are payable on December 15,2004 to
stockholders of record on November 24,2004.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Cash Dividend
On November 3,2001,the board of directors of a
corporation declares preferred dividends totaling
$10,000 and common dividends totaling $20,000,
These dividends are payable on December 15,2001 to
stockholders of record on November 24,2001.
December 15,2004
Dividends Payable,Preferred Stock 10,000
Dividends Payable,Common Stock 20,000
Cash 30,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Cash Dividend
Fully Participating Preferred Stock
A corporation has issued
10%,participating,
cumulative preferred stock
with a total par value of
$20,000 and common stock
with a total par value of
$30,000,The preferred stock
is two years in arrears,The
Corporation declares a
$13,000 dividend.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Preferred Common
Dividends in arrears:
2 x (10% of $20,000) $4,000
Current dividend (10% x $20,000) 2,000
Common dividend (10% x $30,000) $3,000
Total to allocate $13,000
Allocated ( 9,000)
Remainder $ 4,000
$20,000/$50,000 to preferred and
$30,000/$50,000 to common 1,600 2,400
Dividend to each class of stock $7,600 $5,400
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Fully Participating Preferred Stock
Preferred Common
Partially Participating
Preferred Stock (up to 12%)
Dividends in arrears:
2 x (10% of $20,000) $4,000
Current dividend (10% x $20,000) 2,000
Common dividend (10% x $30,000) $3,000
2% dividend on par 400 600
Remainder to common
($13,000 – $10,000) 3,000
Dividend to each class of stock $6,400 $6,600
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
Occasionally,a corporation will
declare a property dividend that is
payable in assets other than cash.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
The corporation typically uses
marketable securities of other
companies that it owns for the
property dividend.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
Corporation C declares a property dividend on
March 16,2005,payable in Company D stock
on June 1,2005,The Company D stock was
purchased early in 2004 for $24,000 and was
reported at its fair market value of $29,000 on
December 31,2004 (along with an unrealized
increase in value of $5,000),The market value
on the declaration date is $31,000.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
March 16,2005
Allowance for Change in Value of
Investment in Available-for-Sale
Securities 2,000
Unrealized Increase in Value of
Available-for-Sale Securities 5,000
Gain on Disposal of Investments 7,000
Retained Earnings 31,000
Property Dividends Payable 31000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
June 1,2005
Property Dividends Payable 31,000
Investment in Available-for-Sale
Securities 24,000
Allowance for Change in Value of
Investment in Available-for-Sale
Securities 7,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Property Dividend
Stock Dividends
? They receive no corporate
assets.
? Their percentage ownership
does not change.
? Theoretically the total market
value of their investment will
remain the same.
? Future cash dividends may be
limited because retained
earnings is decreased by the
amount of the stock dividend.
Stockholders
often view
stock dividends
favorably even
though--
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
What factors might
enhance the perceived
attractiveness of stock
dividends?
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
? The stockholders may see the stock
dividend as evidence of corporate
growth.
? The stockholders may see the stock
dividend as evidence of sound financial
policy.
? Other investors may see the stock
dividend in a similar light,and
increased trading in the stock may
cause the market price not to decrease
proportionally.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
? The corporation may state that it will pay
the same fixed cash dividend per share.
? The stockholders may see the market price
decreasing to a lower trading range,
making the stock more attractive to
additional investors so that the market price
may eventually rise.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
Retained
Earnings
Capital
Stock
Additional
Paid-In
Capital
Retained
Earnings
Capital
Stock
Small
(<20 or 25%) Large
Par ValueFair Value
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
Common stock,$10 par (20,000 shares
issued and outstanding $200,000
Additional paid-in capital 180,000
Retained earnings 320,000
Total stockholders’ equity $700,000
Stockholders’ Equity Prior to Stock Dividend
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Stock Dividends
Small Stock Dividend
M Corporation declares and issues a 10%
stock dividend,On the date of declaration,
the stock sells for $23 per share.
Date of Declaration
Retained Earnings 46,000
Common Stock To Be Distributed 20,000
Additional Paid-in Capital From
Stock Dividend 26,00020,000 shares x 0.10 x $23Par
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Date of Issuance
Common Stock To Be Distributed 20,000
Common Stock,$10 par 20,000
Par
M Corporation declares and issues a 10%
stock dividend,On the date of declaration,
the stock sells for $23 per share.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Small Stock Dividend
Common stock,$10 par (22,000 shares
issued and outstanding $220,000
Additional paid-in capital 206,000
Retained earnings 274,000
Total stockholders’ equity $700,000
Stockholders’ Equity After Stock Dividend
Note,Total
remained the same
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Small Stock Dividend
Large Stock Dividends
M Corporation declares and issues a 40%
stock dividend,On the date of declaration,
the stock sells for $23 per share.
Date of Declaration
Retained Earnings 80,000
Common Stock To Be Distributed 80,000
20,000 shares x 0.40 x $10Date of IssuanceCommon Stock To Be Distributed 80,000
Common Stock,$10 par 80,000
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Common stock,$10 par (28,000 shares
issued and outstanding) $280,000
Additional paid-in capital 180,000
Retained earnings 240,000
Total stockholders’ equity $700,000
Stockholders’ Equity After Stock Dividend
Note,Same total as
small stock dividend
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Large Stock Dividends
4,Statement of Retained Earnings
Although not a required separate
financial statement,some
corporations include a statement
of retained earnings in their
financial statements.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Retained earnings,as previously reported,Jan,1,2004
Plus (minus) Prior period adjustments (net of
income tax effect)
Adjusted retained earnings,January 1,2004
Plus (minus),Net income (loss)
Minus,Dividends (specifically identified,including
per share amounts)
Reductions due to retirement or
reacquisition of capital stock
Reductions due to conversion of bonds or
preferred stock
Retained earnings,December 31,2004
Statem t of Retained Earnings
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
5,Accumulated Other
Comprehensive Income
? Unrealized increases (gains) or
decreases (losses) in the market value of
investments in available-for-sale
securities.
? Translation adjustments from converting
the financial statements of a company’s
foreign operation into U.S,dollars.
? Certain gains and losses on,derivative”
financial instruments.
? Certain pension liability adjustments.
Other comprehensive income might include--
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
? On the face of its income statement.
? In a separate statement of comprehensive
income.
? In its statement of changes in
stockholders’ equity.
Accumulated Other Comprehensive
Income
A corporation may report its comprehensive income
(net of income taxes)--
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
Statement of Changes in Stockholders’
Equity
APB Opinion No,12 states:,…disclosures of
changes in the separate accounts comprising
stockholders’ equity (in addition to retained
earnings) and of the changes in the number of
shares of equity securities during at least the most
recent annual fiscal period…is required to make
the financial statements sufficiently informative.
Intermediate Accounting 14 Earnings Per Share And Retained Earnings
The End
