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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Perspective and Issues

Earnings per share (EPS) is an indicator widely used by both actual and prospective investors to gauge the profitability of a corporation. Its purpose is to indicate how effective an enterprise has been in using the resources provided by its common stockholders. In its simplest form, EPS is net income (loss) divided by the number of shares of outstanding common stock. The EPS computation becomes more complex with the existence of securities that are not common stock but have the potential of causing additional shares of common stock to be issued (e.g., convertible preferred stock, convertible debt, options, and warrants). Omission of an EPS number that takes into account the potential dilutive effects of such securities would be misleading. In addition, a lack of standardization in the way in which these securities are included in such an EPS computation would make comparisons among corporations extremely difficult.

In an effort to integrate with International Financial Reporting Standards and to simplify reporting practices on EPS, the FASB issued FAS 128 in 1997. FAS 128 established standards for computing and presenting EPS for public companies. If, however, a nonpublic company chooses to disclose EPS, it is required to do so in accordance with FAS 128.

Publicly traded corporations with a complex capital structure are obligated to report basic EPS and diluted EPS. The dual presentation is required on the face of the corporation's income statement even ...

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