When a company issues additional shares of common stock, it reports the money it receives from the issuance on its balance sheet, but the number of additional shares affects the earnings per share (EPS) calculation on the income statement. EPS is the amount of earnings to which each share of common stock outstanding is entitled. If your company issues common stock during the year, you can add the number of additional shares to the calculation of your weighted average number of shares, which is part of the earnings per share calculation.
Determine the number of shares of common stock your company had outstanding at the beginning of the year. Determine the number of additional shares you issued and the date on which you issued them. For example, assume you had 150,000 shares outstanding at the beginning of the year and that you issued 50,000 additional shares on July 1.
Add the additional shares of common stock to the beginning shares to determine the number of shares outstanding after the stock issuance. In this example, add 50,000 and 150,000 to get 200,000 shares outstanding on July 1.
Determine the fraction of the year for which the beginning number of shares was outstanding and the fraction for which the new share count was outstanding after the issuance. Use the number of months each share count was outstanding as each numerator with 12 as each denominator. In this example, the beginning share count was outstanding for six months from January 1 through June 30, or 6/12 of the year, and the new share count was outstanding for the remaining 6/12 of the year.
Multiply each share count by its respective fraction. Add your results together to determine the weighted average number of shares outstanding during the year. In this example, multiply 150,000 by 6/12 to get 75,000. Multiply 200,000 by 6/12 to get 100,000. Add 75,000 and 100,000 to get a weighted average number of shares of 175,000.
Determine from your company’s accounting records your net income for the year and the amount of preferred dividends you paid during the year. In this example, assume you had net income of $200,000 and paid $25,000 in preferred dividends.
Subtract preferred dividends from net income. Divide your result by the weighted average number of shares to calculate the earnings per share. Continuing the example, subtract $25,000 from $200,000 to get $175,000. Then divide $175,000 by 175,000 to get $1 in earnings per share, which you report on your income statement.
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