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Income Statement Part 3 Notes

Accounting Notes > Accounting (Special Edition) Notes

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Income Statement - Part 3

In this lesson we will look at Earnings per Share (EPS) and other comprehensive income Definition Eps is the share of an entity's net profit distributed to all outstanding shareholders. In other words EPS is simply the net profit that is attributable to ordinary shareholders divided by the number of shares outstanding. Earnings per share acts as a sign of a company's profitability.


Why is it important?
Earnings per share (EPS) ,the most important indicator of a company's performance. It is important for the users of the financial statements: to compare the EPS of different entities and to compare the EPS of the same entity in different accounting periods. Lecture Notes Basic EPS The basic EPS is calculated as follows: Net Profit
--------- No. of Shares


This should be stated as cents per share to 1 decimal place. Net Profit: profit after tax, less non-controlling interests and ir redeemable preference share dividends. No. of Shares: weighted average number of ordinary shares outstanding during the period. Note: The dividends announced to ordinary shareholders are not deducted from EPS because they are related to ordinary shareholders & Preference share dividends include the dividends for the current year only. Bonus issue A bonus issue (or capitalization issue or scrip issue): Does not offer added resources to the issuer, means that the shareholder have the same proportion (%) of the business ownership before and after the issue. In the calculation of EPS: The bonus shares are considered to have been issued at the start of the year

Rights issue


Rights issues present special troubles: They joins the characteristics of issues at full market price and bonus issues. they contribute added resources they are normally priced below full market value (price). Determining the weighted average capital, therefore, involves two steps as follows: (1) Accommodate the bonus component in rights issue, by multiplying issued capital before the rights issue by the following fraction: Actual cum rights price
-------------------- Theoretical ex rights price (2) Compute the weighted average capital in the issue as above. Simple and Complex Capital Structures Simple capital structure is one with a simple structure will only have ordinary shareholders, preferred shareholders and long term debt. A basic EPS is reported by the entities having simple capital structures. Complex structure is a capital structure which includes all the elements of a simple structure plus some potential dilutive securities (e.g. warrants, options etc.) Those companies which have a complex capital structure must report both basic and diluted EPS. Dilutive and Anti-Dilutive Securities: Dilutive Securities are securities which may increase the weighted number of shares outstanding. (E.g. share options, warrants etc.) These securities will reduce EPS if exercised or if they were converted into ordinary shares. Anti-dilutive security is a security which after conversion results in an increased EPS figure, and it should be expelled from the calculation of the dilutive EPS Diluted earnings per share (DEPS) Basic principles of calculation To deal with potential ordinary shares, adjust the basic earnings and number of shares assuming (dilutive securities) converted to equity shares on the first day of the accounting period, or on the date of issue, if later. DEPS is calculated as follows: Earnings + notional extra earnings
------------------------------- Number of shares + notional extra shares

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