Concepts, Rules, and Examples

Simple Capital Structure

Simple capital structures are those having no potential common shares (options, warrants, etc.). These entities will only have basic EPS. All other entities are considered to have a complex capital structure. Entities with a complex capital structure will have potential common stock in the form of potentially dilutive securities, options, warrants, or other rights that upon conversion or exercise would dilute earnings per common share. Dilutive securities have the potential upon their issuance to reduce earnings per share.

Computational guidelines

The basic EPS calculation is income available to common stockholders (the numerator) divided by the weighted‐average number of common shares outstanding (the denominator) during the period. The objective of the basic EPS calculation is to measure the performance of the entity over the reporting period. Complexities arise because net income does not necessarily represent the earnings available to the common stockholder, and a simple weighted‐average of common shares outstanding does not necessarily reflect the true nature of the situation.

Numerator

The income available to common stockholders used as the numerator in any of the EPS computations must be reduced by any preferential claims against it by other securities. The justification for this reduction is that the preferential claims of the other securities must be satisfied before any income is available to the common stockholder. ...

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