FAR – EPS Question

  • Creator
    Topic
  • #195411

    Hi all,

    At first i thought I understood the EPS calculations as it seemed pretty straightforward. After doing the homework, that thought went out the window. The main thing i am confused on is how do you the time weighted period to measure the shares by in order to get the weighted average of shares outstanding? Here are a couple of examples where the methods seem to vary.

    1.) Deck Co. had 120,000 shares of common stock outstanding at January 1, Year 2. On July 1, Year 2, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate Year 2 earnings per share?

    Choice “c” is correct. 140,000 shares of common stock is the weighted average for earnings per share. The calculation is as follows:

    1-1-Year 2: Outstanding all year $ 120,000

    7-1-Year 2: 40,000 issued x 6/12 20,000

    Weighted average $ 140,000

    I know that this is a fairly easy question but notice that the timing of the first number (120k) is all year and the second 20k is for half of the year. I understand why they got this answer but then when i got another question involving stock dividends, they started adding up the shares together before multiplying them by the time-weighted average. See next example.

    Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During Year 1, 100,000 shares of common stock were outstanding. In Year 2, two distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in Year 2 and $350,000 in Year 1. What amounts should Strauch report as earnings per share in its Year 2 and Year 1 comparative income statements?

    Choice “b” is correct. $1.78 and $1.75 EPS Year 2 and Year 1.

    Year 2 Year 1

    Net income $ 410,000 $ 350,000

    Weighted Avg. Shares ÷ 230,000 ÷ 200,000

    EPS $ 1.78 $ 1.75

    1/1/Year 2 to 4/1/Year 2 – 100,000 x 2 (stock split) X 3/12 = 50,000

    4/1/Year 2 to 7/1/Year 2 – 120,000 X 2 (stock split) X 3/12 = 60,000

    7/1/Year 2 to 12/31/Year 2 – 240,000 X 6/12 = 120,000

    Can someone please explain why they started adding the 20k to the 100k and why they used that specific time period? Going back to the first example, they didnt add the share amounts together and just multipled them for the period outstanding. Is there another way of doing this problem that is consistent with how the first problem is solved? I just need to know if there are certain times where i have to add the shares together first before multiplying them and times when i can just take what they give and multiply by the time-weighted average. I know that the stock split is applied retroactively so i’m good with that part. Just confused on why they started adding the shares together before multiplying them by the time-weighted average. Thanks for any help.

    BEC - 76 (1/24/15)
    REG - 82 (4/13/15)
    AUD - 89 (5/31/15)
    FAR - 78 (8/16/15)

    Starting right now I'll be strong
    I'll play my fight song
    And I don't really care if nobody else believes
    'Cause I've still got a lot of fight left in me

Viewing 10 replies - 1 through 10 (of 10 total)
  • Author
    Replies
  • #681901
    JohnWayneIsGod
    Participant

    Stocksplits are applied retroactively throughout the whole year. So the shares that were issues in April will be weighted to equal 15,000 shares, but the stock split will make it 30,000. Similarly, the 100,000 shares outstanding at the start of the year will be multiplied by 2 to become 200,000 shares. Total shares in year 2 will be 200000+30000 = 230,000 shares.

    Since we have a retrospective adjustment, year 1 also becomes 100,000*2 = 200,000 shares outstanding.

    FAR - 80

    Courage is being scared to death, but saddling up anyway.

    -John Wayne

    #681902

    thanks, where did you get the 15k from?

    BEC - 76 (1/24/15)
    REG - 82 (4/13/15)
    AUD - 89 (5/31/15)
    FAR - 78 (8/16/15)

    Starting right now I'll be strong
    I'll play my fight song
    And I don't really care if nobody else believes
    'Cause I've still got a lot of fight left in me

    #681903
    JohnWayneIsGod
    Participant

    20000 * 9/12

    FAR - 80

    Courage is being scared to death, but saddling up anyway.

    -John Wayne

    #681904

    ohhh gotcha. so your method is similar to the first example where you don't have to cumulatively add up the shares before multiplying? So you did.

    100,000 X 2(stock split) X 12/12 = 200,000

    20,000 X 2(stock split) X 9/12 = 30,000

    Total = 230,000

    Can i use this method for all stock split questions??? This seems so much easier to remember!!!

    BEC - 76 (1/24/15)
    REG - 82 (4/13/15)
    AUD - 89 (5/31/15)
    FAR - 78 (8/16/15)

    Starting right now I'll be strong
    I'll play my fight song
    And I don't really care if nobody else believes
    'Cause I've still got a lot of fight left in me

    #681905
    JohnWayneIsGod
    Participant

    Exactly. That is how I normally do it and I've never had any problems. It's been awhile since I've really done EPS, so hopefully I didn't miss anything that is key. But as far as I know, what I did should always work.

    FAR - 80

    Courage is being scared to death, but saddling up anyway.

    -John Wayne

    #681906

    Awesome thank you. You are a lifesaver!!!!I am assuming you passed FAR already?

    BEC - 76 (1/24/15)
    REG - 82 (4/13/15)
    AUD - 89 (5/31/15)
    FAR - 78 (8/16/15)

    Starting right now I'll be strong
    I'll play my fight song
    And I don't really care if nobody else believes
    'Cause I've still got a lot of fight left in me

    #681907

    Quick question on this one. I tried applying your method instead of the one they gave.

    Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:

    4/1 – Issued 30,000 shares of common stock.

    6/1 – Issued 36,000 shares of common stock.

    7/1 – Declared a 5% stock dividend.

    9/1 – Purchased as treasury stock 35,000 shares of its common stock. Balm used the cost method to account for the treasury stock.

    What is Balm's weighted average of common stock outstanding at December 31?

    Choice “b” is correct. See chart below for calculation. Stock dividends are assumed to be issued at the beginning of the year. The 139,300 is calculated as follows: 166,000 shares × 1.05 = 174,300 outstanding when the treasury shares are acquired. Then, 174,300 minus 35,000 treasury shares = 139,300.

    100,000 X 3/12 (Jan-March) X 1.05 = 26,250

    130,000 X 2/12 (April-May) X 1.05 = 22,750

    166,000 X 4/12 (June-August) X 1.05 = 43,575

    139,300 X 4/12 (sept-Dec) X 1.05 = 46,433

    Total Weight Average = 139.008

    If i were to do this problem like the way you mentioned up top. Would I do this?

    100,000 X 1.05 X 12/12 = 105,000

    30,000 X 1.05 X 9/12 = 23,625

    36,000 X 1.05 X 7/12 = 22,050

    Total 150,675

    Treasury = 35,000 X 4/12 = 11,667

    150,675-11,667 = 139,008!!! Same answer! This way is so much easier for me to understand. Although, i see that treasury wasn't multiplied by 5%. This may be a dumb question, but stock splits /dividends don't apply to treasury stock right?

    BEC - 76 (1/24/15)
    REG - 82 (4/13/15)
    AUD - 89 (5/31/15)
    FAR - 78 (8/16/15)

    Starting right now I'll be strong
    I'll play my fight song
    And I don't really care if nobody else believes
    'Cause I've still got a lot of fight left in me

    #681908
    JohnWayneIsGod
    Participant

    Glad I could help. I’m still studying for FAR, but I hope to take it soon. My application is still being processed by The Board though. But I like to help people out if I know the answer.

    As for your question, you got it. It worked over here for me too. In this question, the treasury stock was acquired after the stock dividend so it would not get multiplied by 5%. You calculate all of the events through 7/1, and then you subtract the treasury purchase for 9/1.

    This leads to the question of ‘What about cases of treasury stock purchased before a stock split or dividend?’ Now I’m not 100% sure about the answer to this, although I know balance sheet equity wouldn’t be affected. But in the case of a question like this, all we need to know is how to calculate stock outstanding.

    It looks like you got it. 🙂

    FAR - 80

    Courage is being scared to death, but saddling up anyway.

    -John Wayne

    #681909

    sounds good! thanks so much for the help!!

    BEC - 76 (1/24/15)
    REG - 82 (4/13/15)
    AUD - 89 (5/31/15)
    FAR - 78 (8/16/15)

    Starting right now I'll be strong
    I'll play my fight song
    And I don't really care if nobody else believes
    'Cause I've still got a lot of fight left in me

    #681910

    and Good luck to you. You sound like u got this 🙂

    BEC - 76 (1/24/15)
    REG - 82 (4/13/15)
    AUD - 89 (5/31/15)
    FAR - 78 (8/16/15)

    Starting right now I'll be strong
    I'll play my fight song
    And I don't really care if nobody else believes
    'Cause I've still got a lot of fight left in me

Viewing 10 replies - 1 through 10 (of 10 total)
  • The topic ‘FAR – EPS Question’ is closed to new replies.