What is the Basic EPS formula (two parts)?
(Net income − preferred dividends, if any) ÷ weighted-avg common shares outstanding.
This formula calculates the earnings per share available to common shareholders.
What does “Income available to common” mean when preferred stock exists?
Subtract preferred dividends (and if cumulative, subtract even if not declared).
This adjustment ensures that only the income attributable to common shareholders is considered.
What is the test for Simple vs complex capital structure?
Complex if there are potential common shares that could dilute (options/warrants, convertibles, contingently issuable shares). Simple = no such dilutive potential.
This distinction affects how diluted EPS is calculated.
When do you compute diluted EPS?
Only if capital structure is complex; include only instruments that are dilutive (exclude anti-dilutive).
This ensures that only shares that would decrease EPS are included.
Does the Loss year rule allow diluted EPS to include potential common shares?
No. With a net loss, all potential common shares are anti-dilutive → diluted = basic.
This rule prevents dilution from worsening the EPS calculation during loss years.
Define anti-dilutive in one line.
Any assumed conversion/exercise that would increase EPS or reduce loss per share (i.e., makes EPS look better).
This concept is crucial for determining which shares to include in diluted EPS.
Which instruments use the Treasury Stock Method (TSM)?
Options and warrants.
TSM is a method used to calculate the dilutive effect of these financial instruments.
The TSM “in-the-money” screen is based on what comparison?
Average market price > exercise price → potentially dilutive; if exercise ≥ market → incremental shares = 0.
This screen determines whether options or warrants will dilute EPS.
In TSM Step 2, assumed proceeds equals what?
(# options/warrants × exercise price) + (unrecognized comp cost, if given).
This calculation estimates the funds generated from exercising options or warrants.
In TSM Step 3, shares repurchased equals what?
Assumed proceeds ÷ average market price.
This step calculates how many shares can be bought back with the proceeds.
In TSM Step 4, incremental shares equals what?
options − shares repurchased (net new shares).
This determines the net effect on shares outstanding after accounting for buybacks.
Where do TSM incremental shares go in EPS?
Denominator of diluted EPS only (numerator unchanged).
This ensures that only the dilutive effect is reflected in the EPS calculation.
What is the intuition for subtracting repurchased shares in TSM?
Exercise issues shares, proceeds buy back shares; only leftover shares dilute.
This reflects the actual impact on the number of shares outstanding.
If market price equals exercise price, what are TSM incremental shares?
Zero (proceeds buy back all issued shares).
This scenario indicates no dilution occurs.
The if-converted method applies to which instruments?
Convertible debt and convertible preferred.
This method is used to assess the impact of these instruments on diluted EPS.
In the if-converted method for convertible bonds, what is the numerator adjustment?
Add back interest expense net of tax (after-tax interest), because no interest if converted.
This adjustment reflects the true earnings available to common shareholders.
In the if-converted method for convertible bonds, what is the denominator adjustment?
Add the shares that would be issued upon conversion (as if converted at beginning of period or issuance if later).
This ensures the potential dilution is accurately reflected.
In the if-converted method for convertible preferred, what is the numerator adjustment?
Add back preferred dividends (since conversion means no preferred dividends).
This adjustment ensures that only common shareholder earnings are considered.
In the if-converted method for convertible preferred, what is the denominator adjustment?
Add conversion shares to diluted EPS denominator.
This reflects the potential dilution from the conversion.
What is the one-line “diluted EPS mindset”?
Assume the worst-case dilution, but only when it actually makes EPS worse (dilutive only).
This perspective guides the calculation of diluted EPS.
A company has 100,000 common shares outstanding all year. On Dec 1, it issues a 6% stock dividend (no other stock activity). What share count is used for current-year BASIC EPS?
Stock dividends (and stock splits) are treated retroactively as if they occurred at the beginning of the year for EPS—so you do NOT time-weight themStock dividends (and stock splits) are treated retroactively as if they occurred at the beginning of the year for EPS—so you do NOT time-weight themStock dividends (and stock splits) are treated retroactively as if they occurred at the beginning of the year for EPS—so you do NOT time-weight them
Cumulative preferred dividends were unpaid last year (arrears). This year the company pays more than the current-year dividend. For BASIC EPS this year, do you subtract (1) current-year preferred dividend only, or (2) current-year + arrears paid?
Subtract current-year preferred dividend only.
Arrears paid this year are a prior-year claim being settled; they don’t reduce “income available to common” for the current year beyond the current-year preference.
If a potential common share increases EPS (or reduces loss per share), include it in diluted EPS?
No — it’s anti-dilutive, exclude it. Only include items that make EPS worse.
Interim reporting—costs paid in one quarter but benefiting multiple quarters are recognized how?
Allocated over the benefit periods (match cost to periods benefited, not payment date).
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INTERCO TRANS17
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Equity Method19
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General Terms1
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Balance Sheet - Assets - Cash & Cash Equivalents8
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Balance Sheet - Assets - Trade Receivables24
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Balance Sheet - Assets - Inventory2
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FAR – Week 1: Conceptual Framework & Financial Statements52
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FAR - Week 1: Income Statement15
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Liabilities54
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Stockholders Equity11
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EPS66
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REVENUE RECOGNITION65
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MINI EXAM 18
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F3 ASSETS58
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F4 LIABILITIES38
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F5 Investments, Statement of Cash Flows, and Income Taxes5
