Crash Course in Accounting and Financial Statement Analysis, Second Edition

Representation of Shares Outstanding in the Income Statement

Shares outstanding are reflected on the income statement in two line items:

1. Weighted average basic shares outstanding

   • Shares of common stock outstanding

2. Weighted average diluted shares outstanding

   • Shares of common stock outstanding plus: potential shares that may result from the conversion of other securities into common stock, and thus dilute the share base (increase the number of shares outstanding).

   • Securities that can be converted into common stock include:

     • Stock options and warrants (the right to buy shares at predetermined price)

     • Convertible preferred stock

     • Convertible debt

Since the total number of shares outstanding fluctuates as shares from other securities are converted or the company repurchases shares, companies usually show the number of shares outstanding on the income statement as weighted average of the amount of shares outstanding during the period of the income statement (quarter or year).

What Is the Relevance of Shares Outstanding? While the absolute level of a company’s profitability (net income) is important, its per-share amount is a useful indication of the profit available per unit of ownership.

17. Shares Outstanding

Exercise Q1: At year-end 2007, basic shares outstanding were 145 million. During 2008, the following things happened: January 26, 2008: Company repurchased 2 million shares. March 21, ...