In a Set of Financial Statements, What Information Is Conveyed About Stockholders’ Equity.pptVIP

Example 2 Aberdeen Corporation finished the year with a net income of $350,000. It also paid preferred dividends of $25,000. The company began the year with 50,000 common shares outstanding. It sold an additional 20,000 shares on April 1. The company’s stock price is $45. Determine EPS and the P/E ratio for this company. ?2010 Flat World Knowledge, Inc. 16-63 Example 2 Solution Weighted average shares outstanding = 50,000 + 20,000 (9/12) Weighted average shares outstanding = 65,000 EPS = ($350,000 - $25,000)/ 65,000 shares EPS = $5 per share ? P/E ratio = $45/$5 P/E ratio = 9 ?2010 Flat World Knowledge, Inc. 16-64 When Does a Company Report Diluted EPS? Necessary to report when company has items which can be converted into shares of common stock Convertible bonds Convertible preferred stock Stock options Stock warrants ?2010 Flat World Knowledge, Inc. 16-65 What Does Diluted EPS Show? Shows EPS if all dilutive instruments converted Lower EPS Serves as information to common shareholders ?2010 Flat World Knowledge, Inc. 16-66 * * * * Example Treasury stock $1,200,000 Cash $1,200,000 ?2010 Flat World Knowledge, Inc. 16-31 How Is the Reissuance of Treasury Stock Reported? Treasury stock removed at original cost If reissued at higher price than original cost, no gain reported Credit “Capital in Excess of Cost - Treasury Stock” ?2010 Flat World Knowledge, Inc. 16-32 Example Chauncey Company subsequently sells 100,000 shares of its treasury stock for $5.00 each. That is $1.00 more than these shares cost to reacquire. ?2010 Flat World Knowledge, Inc. 16-33 Example Cash $500,000 Treasury stock $400,000 Capital in excess of cost – treasury stock $100,000 ?2010 Flat World Knowledge, Inc. 16-34 What if Treasury Stock Is Sold at a “Loss”? Treasury stock removed at original cost If reissued at lower price than original cost, no loss reported Debit “Capital in Excess of Cost – Treasury Stock” to extent has credit balan