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Accounting Information > Accounting and Terminology > Earnings Per Share
Earnings Per Share

Earnings per share is a figure considered by many to give the best representation of a company’s performance. The calculation of earnings per share is normally very simple. The amount of income available to the common stockholders is divided by the weighted average of shares outstanding. The amount of income available to the common stockholders consists of net income less any preferred dividends.

 

The accounting profession dictates that earnings per share has to be disclosed on the face of the income statement. Per share amounts must be shown for net income, income from continuing operations, income before extraordinary items and cumulative effect of accounting changes, and cumulative effect of changes in accounting principles. Some companies report earnings per share for gain or loss on extraordinary items and/or for gain or loss on discontinued operations, but it is not required.

The weighted average of shares outstanding is a very important figure. Shares that are issued or retired during the period are weighted based on the amount of the period for which they were outstanding. The amount of time is expressed as a fraction. For example, if a share was outstanding for one month out of a quarter, the share would be weighted as 1/3. The total for the weighted number of shares is then added to the number of shares that were outstanding for the whole period, with the result being the weighted average number of shares outstanding for the period.

In the case of stock dividends or stock splits, the calculation of the weighted average number of shares outstanding requires the restatement of shares that were outstanding prior to the stock dividend or stock split. Rather than weighting the shares related to the stock split or dividend, a retroactive adjustment is done. The reason behind this difference is that there is no increase or decrease in net assets due to stock splits or dividends, while there is an increase or decrease in net assets when shares of stock are issued or purchased for cash.

Another important issue to be considered related to earnings per share is the effect of dilutive securities on the outstanding stock of a company. Dilutive securities are convertible securities, options, warrants, or other rights that if converted or exercised could dilute earnings per share. When a company has such dilutive securities, they are required to report both primary earnings per share and fully diluted earnings per share on the face of the financial statement. Fully diluted earnings per share shows what earnings per share would be if all possible issuances of common stock that could have reduced earnings per share had occurred. Certain footnote disclosures are required in the case of companies required to report fully diluted earnings per share.

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