 Hello and welcome to this session in which you would look at this exercise or a CPA simulation That covers the concepts of earnings per share now for this exercise or CPA simulation I can turn it into a multiple choice and ask you a few questions Or I can keep it as a simulation and ask you to complete the weighted average number of shares outstanding I can ask you to compute EPS. I can ask you to compute only how much dividend is Is is in a rear or how much dividend do you have to pay? There are many questions I can ask about the simulation first I'm going to introduce this simulation as a simple exercise with no stock split or no stock dividend Then I'm going to introduce the concept of stock split and how do we handle the concept concept of stock split? Which is basically the same as handling the concept of a stock dividend. Let's go ahead and get started Before we proceed any further. I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles My accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of Lectures multiple choice questions true false questions as well as exercises. Go ahead start your free trial today We have preferred stocks 50,000 shares $100 par value 8% cumulative not convertible worth 5 million Well few things we have to be aware here right from the beginning The preferred stock are cumulative. What does that mean? It means we have to deduct the preferred dividend from net income before we compute Earnings per share. So simply put we're gonna have net income. We have to deduct the preferred stock Dividend and why do we have to because the preferred is cumulative Whether the company declared the dividend or not since it's a cumulative We have to deduct this and once we deduct the preferred stock. What's left is net income to Common shareholders and this is the net income to common shareholders that we will use in the numerator in Order to compute EPS. So that's important So having this information now you need to understand how much to compute of dividend. Well, here's what we do we have 50,000 shares and You can do it in two different ways. I'm gonna show you both ways I would say the dividend is a percentage of par if the par is a hundred dollar The dividend rate is 8% each shareholder gets $8 if each shareholder gets $8 will take 50,000 shares times $8 and we have to allocate $400,000 to the preferred shareholders or as one student told me once take all the numbers and multiply them together 50,000 shares times 100 times 8% which will give you the same thing or you can take 5 million times 8% So you need to understand this preferred stock is paying $8 per stock $8 per stock and preferred dividend Now we have 50,000 shares. Anyway, you look at it. You want to make sure you understand it inside out So you understand how to compute this. This is for the preferred we're gonna assume net Income of 25 million and we're gonna use that later Starting with common shares common stock. We started the year with 750,000 and let's assume we end up the year with 750,000 in other words There was no other transaction. What does that mean? Well, if we started with 750 and we had the 750,000 shares for 12 out of 12 month That's gonna be 750 times 1 which is 12 divided by 12 and that's gonna be the weighted number of shares Outstanding then we'll take net income divided by that and get EPS Well, but that's not what really happened and that's not what usually happened on the exam We had 750,000 shares from January 1st up till May 1st Well, it means 750,000 shares were outstanding now I have to prorate them because they were not outstanding for the whole year 750 They were outstanding January February March and April because May 1st something happened So those shares I have to prorate them at 4 divided by 12 Then what happened May 1st? May 1st, I added 300,000 shares to the 750 So starting May 1st, I had 1,050,000 shares and I had those shares for May June July hold on a second then something happened in August. So I had them for 3 divided by 12. I have to prorate them on On on August 1st, I repurchased I acquired the treasury stocks It means I have to deduct 150,000 shares from this if I deduct 150,000 shares now I'm down to 900,000 shares and from August till the end of the year there was no activities. So August September October November December I'm gonna have to prorate this by 5 divided by 12 Now 4 plus 3 plus 5 I want to make sure I have 12 month, which is I accounted for this So this is basically how I prorate the shares. This is the basic idea and let's take a look at this in a more formal way So we have the event Days outstanding or time outstanding shares outstanding fraction of a year percentage We're gonna ignore the restatement because there is no stock dividend or stock split for this example So we started the year January 1st beginning balance to May 1st. We had shares outstanding 750 the fraction of the year is 412. I would like to compute the percentage to show you The picture from a different perspective. So simply put here's what I'm gonna say if we're looking at a timeline for the first This is 33 percent of the year 33 percent of the year. We had 750,000 shares in total But they were only outstanding for 33 percent of the year, which is 412 okay, then We're gonna take this and multiply it by We're gonna take this amount multiplied by 412 or 33 percent the weighted average of the 750 is 250,000 then From from May 1st till August 1st we issue shares It means the shares will increase and we had those shares for three month outstanding 1 million and 50 three month out of the year So three month out of the year is you know, 25 percent of the year So we'll take 1 million 50 multiplied by the percentage or by the fraction Which is the same thing will give us equivalent shares of 262 500 then We re-acquire the treasury stocks. It means we deducted Specifically 150 were down to 900,000 and those were outstanding for the remaining of the year, which is 42 percent again, there's some rounding issue, but they should add up to 100 percent and that's equal to 375 weighted average number of shares Then now just to make sure I make I want to make sure that I added all 12 month and to confirm my percentages I'm I want to make sure I do that now on the CPA exam You don't have the time to do that if you are giving such a simulation I just want to make sure you kind of have a ballpark where if something get out out of whack You can spot it immediately now good now. I have I have the number of shares outstanding I'm ready to compute my EPS remember. We said net income is 25 million net income is 25 million This should be giving to you. This is net income preferred dividend We computed the preferred dividend earlier. We said 400,000 So net income minus the preferred dividend gives us net income available to common shareholders Well, if we'll take this number Divided by the common shares outstanding and if my math is right to 24,600,000 divided by 24,600,000 divided by 887,500 we have EPS 24,600,000 I just want to confirm it Divided by 877,500 and that's going to give us this number Approximately 27.72 rounding now. This is how we would compute this Using this data now the on the next slide what I'm going to do I'm going to use the same information Except I am going to assume that we have we have a stock split So the same exact information assume you had a stock split from October 1st Till the end of the year should be October 1st till the end of the year We had a stock split so after we require the treasury stock we had a stock split So what do you need to know about this when we have a stock split? We assume that the stock split happened as of the beginning of the year. It's not an assumption That's exactly what happened when you have a stock split you have to go back and Readjust what does it mean readjust it means go back and double your shares for every single event This is if you have a stock split if you have a stock dividend it cover It's the same concept if you had a stock dividend What do you have to do if you have a stock dividend if you have a stock dividend? What's gonna happen is if you have a stock dividend, let's assume 25% stock dividend you will take the Average the weighted average multiplied by 1.25 because you have to increase your shares by 25% If you have a 40% stock dividend same thing multiplied by 1.4 increase the shares by 1.4 But here we have a stock dividend means you're doubling basically you're doubling your shares So what do we have to do? Well exactly the same thing except what's gonna happen is this There's gonna be a restatement and what's the restatement the restatement is for the stock dividend Why is it to to because we're doubling so now what you do is you'll take 750,000 times 33% or times 412 it doesn't matter. It's the same thing 33% times 2 so notice now the weighted average for those 750,000 shares is 500,000 hold on a second how well because when we looked at the prior session at the prior exercise It was 250 now since we did a stock split and the stock split is Effective as of the beginning of the year. I multiplied by 2 well Guess what the same thing is gonna occur for the 1,050,000 same thing 1,050,000 same computation times 312 times 2 Same thing for the 900,000 because anything that happened prior to that stock split Remember anything happened prior you would apply the stock split or you would apply the stock dividend anything prior now If something happened after the stock after the stock dividend let's assume on 11 111 we really we either reacquired shares or we issued new shares The stock split don't apply because the stocks that happened to the existing shares not the new event now What we do is we compute the weighted average number of shares 1,700 and 1,775,000 We'll take 25 million minus the preferred dividend. We have net income applicable to common shareholders We'll take net income applicable to shareholders 24,600 divided by 1,775 and we have earnings per share of $13 and 86 cent now computing earnings per share is an extremely important concept Whether you are an accounting students CPA candidate CMA candidate What should you do now go to far hat lectures and look at additional lectures? Exercises multiple choice through false notes. That's gonna help you understand this topic Invest in yourself. Good luck study hard and of course Stay safe