Essay: Calculating Earnings Per Share

Sample Essay

The current dividends on preferred stock are deducted from company net income during calculation of earnings per share.

The earnings per share are calculated by dividing the net income by weighted average number of outstanding shares and the shares purchased by the company are classified as treasury stock which will be deducted from outstanding shares during the calculation of EPS.

A two for one stock split entails that the total number of shares outstanding is doubled and the earning per share will be calculated using the revised number of shares implying that each share will be entitled to half EPS than EPS before the stock split.

There will be no effect of creating a provision for contingent liability out of retained earnings on the earnings per share of a company.

The dividends on these preferred shares will be paid before common stock and the remaining amount will be attributable to common stock which entails that EPS will be calculated after deducting the amount of dividends on preferred stock. The premium offered on issue of preferred stock would result in recognition of loss which would eventually decrease EPS.

When common stock options are exercised at a price higher than par value, the common shares of the company are increased and it results in the dilution of EPS. Therefore the average number of shares will be higher and the reported EPS would be lower.

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