Chapter4: The Income Statement and Statement of Cash Flows
Earnings per Share Disclosures
As we discussed in Chapter 3, financial statement users often use summary indicators, called ratios, to more efficiently make comparisons among different companies and over time for the same company. Besides highlighting important relationships among financial statement variables, ratios also accommodate differences in company size.
One of the most widely used ratios is earnings per share (EPS) the amount of income earned by a company expressed on a per share basis., which shows the amount of income earned by a company expressed on a per share basis. Public companies report basic EPS and, if there are certain potentially dilutive securities, diluted EPS, generally on the face of the income statement. Basic EPS is computed by dividing income available to common shareholders (net income less any preferred stock dividends) by the weighted-average number of common shares outstanding (weighted by time outstanding) for the period. For example, suppose the Fetzer Corporation reported net income of $600,000 for its fiscal year ended December 31, 2011. Preferred stock dividends of $75,000 were declared during the year. Fetzer had one million shares of common stock outstanding at the beginning of the year and issued an additional one million shares on March 31, 2011. Basic EPS of $.30 per share for 2011 is computed as follows:
All corporations whose common stock is publicly traded must disclose EPS.
Diluted EPS reflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised. These items could cause EPS to decrease (become diluted). Because of the complexity of the calculation and the importance of EPS to investors, we devote a substantial portion of Chapter 19 to this topic. At this point, we focus on the financial statement presentation of EPS. In Graphic 4-2 on page 173, Dell Inc. discloses both basic and diluted EPS in its income statements for all years presented.
When the income statement includes one or more of the separately reported items, we report per-share amounts for both income (loss) from continuing operations and net income (loss), as well as for each separately reported item. We see this demonstrated in income statements of Charming Shoppes, Inc., a specialty retailer of plus-size women's apparel that includes the Lane Bryant brand, partially reproduced in Graphic 4-10.
Companies must disclose per share amounts for (1) income (loss) before any separately reported items, (2) each separately reported item, and (3) net income (loss).
EPS Disclosures—Charming Shoppes, Inc.