3.4 Example
As discussed above, basic EPS is calculated by first determining income
available to common stockholders, which takes into account dividends declared and
accumulated for preferred stock, among other adjustments to net income. Income
available to common stockholders (numerator) is then divided by the weighted-average
number of common shares outstanding (denominator). Dilutive securities are not
considered outstanding common stock for basic EPS. If there are contingently
issuable shares (shares issuable for little or no cash consideration upon the
satisfaction of certain conditions in accordance with a contingent stock agreement),
they are considered outstanding common stock in the calculation of basic EPS when
issuance is no longer contingent. The example below illustrates the first-quarter
calculation of basic EPS for an entity with a complex capital structure.
Example 3-32
Basic EPS for Entity With Complex Capital Structure
Assume the following facts:
- Company A has 20,000, $1,000 par value, 6 percent shares of convertible preferred stock outstanding for the entire period. The preferred stock does not participate in earnings with common shareholders.
- Income from continuing operations and net income for the first quarter ended March 31, 20X1, was $4 million.
- Company A had 4 million shares of common stock outstanding on January 1, 20X1.
- On March 1, 20X1, A issued 500,000 shares of common stock in a secondary offering, and on March 15, 20X1, options on 50,000 shares of common stock were exercised by employees.
- Employees hold options on 200,000 additional shares of common stock that vest and become exercisable over the next three to seven years. These options are not considered participating securities.
On the basis of the facts, the calculation of income available to common stockholders for the first quarter ended March 31, 20X1, is as follows:
The weighted-average shares of common stock outstanding during the first quarter ended March 31, 20X1, are calculated as follows:
Basic EPS for the first quarter ended March 31, 20X1, is calculated as follows:
The calculation of basic EPS is not affected by either the conversion option in the preferred stock or the unexercised employee stock options because neither security is considered a participating security. However, both would affect the denominator in the calculation of diluted EPS. For an example illustrating the calculation of basic EPS under the two-class method, see Chapter 5.