Financial Accounting: In an Economic Context

EARNINGS-PER-SHARE DISCLOSURE

Generally accepted accounting principles also require that earnings per share be disclosed on the face of the income statement and that the specific dollar amounts associated with (1) net income from continuing operations (after tax), (2) disposals of business segments, (3) extraordinary items, and (4) changes in accounting principles be disclosed separately. Note the form of this disclosure in Figure 13-4. The earnings-per-share amount for each category is calculated by dividing the dollar amount of the gain or loss associated with that category by the number of common shares outstanding. The income statement in Figure 13-6 was taken from the 2008 annual report of Bristol-Myers Squibb. Note, in particular, the earnings-per-share disclosure near the bottom. These breakdowns allow users to focus on the components of earnings per share.

Generally accepted accounting principles require an additional disclosure, called diluted earnings per share, for companies that have the potential for significant dilution. Many companies, for example, have issued and presently have outstanding options to purchase their common stocks or bonds that can be converted to common stocks in the future. If and when these options and conversion privileges are exercised, the number of outstanding common shares will increase, which, in turn, will dilute the ownership interests of the existing common shareholders. The calculation of diluted earnings per share, which is described ...