 Hello and welcome to the session. This is Professor Farhad and this session we would look at computing the weighted average number of shares outstanding and we computing EPS. This topic is covered in intermediate accounting. I'm going to be working a quasi CPA simulation. Now although I'm going to be working an exercise, I highly doubted that you will see that type of exercise that comprehensive exercise on the CPA exam. I'll be shocked if you do because it's going to be a little bit more complicated. That's going to take some time to complete. But nevertheless, if you understand it, if you can follow the steps, then you should be able to easily compute the weighted average number of shares outstanding and compute EPS. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where I house my 1500 plus accounting, auditing, finance and tax lecture. This is a list of all my resources of all the courses on my website. On my website, you will have additional resources such as PowerPoint slides, true, false, multiple choice, 2000 plus CPA questions if you're studying for your CPA exam. So let's go ahead and take a look at this exercise on January 1, 2018. Wilk Corporation had 480,000 shares outstanding. This is at the beginning of the year. During 2018, it had the following transaction that affect common stock. February 1, they issued 120 shares. March 1, they issued a stock dividend of 10%. May 1, they acquired 100,000 shares. June 1, they issued 341 stock split. October 1, they reissued 60,000 shares. Question one, determine the weighted average number of shares outstanding as of December 31, 2018. So here you have to know how this is going to work. So I'm going to walk you through it real quick with a shorthand computation. Then we would look at the Excel sheet. You started the year with 480,000 shares. This is this number right here. Then you had those shares outstanding until February 1. So February 1, you issued 120,000 shares. Now you have 600,000 shares. So this is 1,1. This is 1,1. And this is February 1. This is what happened February 1. From 1,1 till February 1, you had 480. Now starting February 1, you had 600,000 shares. And you had 600,000 shares until March 1, where you issued 10% stock dividend. What does it mean you issued 10% stock dividend? It means 10% of 600,000. That's plus 60,000. Now you have 660,000 shares because 10% of 600,000 is 60%. So this is the stock dividend. This is the 10% stock dividend. 10%. Then what happened next? May 1, you acquired 100,000 shares. What does it mean acquired? It means you bought back 100 treasury stocks. You have to deduct 100,000 shares. We're down to 560. So starting May 1, you had 560,000 shares. June 1, we had 341 stock split. What does it mean you had 341? It means those shares, the 560 were tripled. You're going to multiply them by 3. And now we're up to 1,680,000 shares. Now remember, once we have a stock split or stock dividend, the stock split and the stock dividend will have to apply to all the other shares, which we're going to go back and do the computation for that. So 1,680,000. Then October 1, you reissued. You sold again 60,000 shares. You end up with 1,740,000 number of shares. Now remember, we have to weigh them. Now this is what happened. So basically I took this information and showed you how to analyze it. 480 plus 120,600,000. Then we added the 10% stock dividend. Then we deducted 100,000 for the shares that we acquired. Then we multiply the outstanding shares by 3. Then we added 60,000 shares. Now we need to take all these shares and weigh them. So let's go to the Excel sheet and we'll weigh them properly and making sure the stock dividend and the stock split applies to all previous dates as of the beginning of the year. Let's take a look at this Excel sheet starting the beginning balance. The beginning balance, if you remember, we had 480,000 shares from January 1st till February 1st. That fraction of the year is 112 for one month because they went from January 1st till February 1st until we issued new shares. I like to use the percentage. Those shares were outstanding 112 of the year, which is, let me just, 8.33%. Now we have to remember, those shares, they're going to have to have stock split and they're going to have to apply stock dividend. They're going to be a 10% stock dividend and 341 stock split. What does that mean? It means I'm going to take 480,000 shares times 8.33% times increased by 1.1, then increased by 3. Because the 1.1 is the 10% stock dividend, then I increase the stock split by 3. So the weighted average of those 480,000 shares is 132. Remember, I had to go back and adjust it for the stock split and adjust it for the stock dividend. Now, the second event went from February 1st till March 1st. I issued 120,000 shares, which is, I had 480 plus I issued 120,000 shares. And those were outstanding also for one month, 112. That's also 8.33%. And those are also subject to the stock dividend and stock split. What does that mean? It means I have 600,000 shares times 8.33, weigh them. Then I have to multiply them by 1.1 because the stock dividend applied to them as well as the stock split. Because the stock dividend took place. The stock dividend took place, let's see when did it took place. The stock dividend took place March 1st. So anything before March 1st will have to have the stock dividend. Therefore, the stock dividend would apply to them March 1st. Now, then we had the stock dividend. On March 1st, we had the stock dividend. What does that mean? It means from March till May, we had the stock dividend. Therefore, we have to add, we have to add, we have to add 6, 10% to those shares times 1.1, 660. And that went from March 1st till May 1st. And that's 212 and percentage wise, that is 17%, 16.667. Now, these shares, they're already adjusted for the stock dividend. All we need to adjust them for is the stock split. So we're going to have to multiply it by 3. Therefore, 600,000 times the time they were outstanding times the stock split. That's 330,000. Now, on May 1st, we had, on May 1st, we re-acquired some shares. May 1st till June 1st. That's the next event. We re-acquired 100,000 shares. It means we have to deduct 100,000 shares, 560. And June, May 1st till June 1st, that's May, that's it, one month of the year, one month of the year, 112, that's 8.33%. Those are subject to the stock split because they took place before the stock split. Therefore, we have to adjust them by 3. That means we have to take 560 times 112 times 3. That's the weighted average. Whoops, that's too big of a number. What did I do? So we have to take 560 times 8.33 times 3. That's 140,000 shares. Now, we had the stock split and that took place June, June till October. Then in October, we had a, we re-issued some shares. Well, it means we have to take all the shares here. We have to take all the shares, multiply them by 3. And those were outstanding from June till October, which is 412. That's percentage-wise 33% of the year, which is 33.33%. Those are already adjusted for the stock split, already adjusted for the stock dividend. It means we're going to take them 1,680,000 times the fraction of the year. Those are been properly adjusted for both. Then from October 1st till December 31st, the last event is we re-issued 60,000 new shares. So let's go back and take the previous plus 60,000 new shares. And those were outstanding for 312 of the year. And that's equal to percentage-wise, equal to 25%. They're already been adjusted for stock dividend and stock split. We'll take the number of shares, outstanding times the percentage we were outstanding for the year. Now we can sum the weighted average number of shares, sum them 1,762,000. So this is the weighted average number of shares outstanding. Now make sure you add this up if you have time on your exam to make sure they add up to 100%. And it does add up to 100%. Now, the first thing we're going to compute is compute the, let's see what we're being asked to do. Determine, assuming net income is 3,456,000. In addition, it had 100,000 shares. Let's take a look at what we have here. That's that income. In addition, it has 100,009%, $100 non-convertible, non-cumulative preferred outstanding for the entire year. Because of liquidity consideration, however, the company did not declare dividend and pay preferred dividend in 2018. What does that mean? This tells us that those shares were non-cumulative and the company did not declare the dividend. If they're non-cumulative and the company did not declare the dividend, we have no preferred dividend to deduct. What does that mean? It means we can go back and compute, we can compute EPS, earnings per share, by taking net income, dividing net income by the weighted average number of shares outstanding, and we find out that EPS is $96. Let's look at C. Assume the same fact in Part B, except that the preferred was cumulative. Cumulative means we have to deduct the preferred dividend. How much preferred dividend do we have? Well, it's a 9% $100 power value. It means we have to pay $9 per share and we have 100,000 shares. It means we have to deduct from the numerator now $900,000 for the preferred. Let's go back. Now to compute earnings per share under this scenario, assuming that the preferred is dividend, we're going to take net income minus 100,000 shares times $9. Because each one of them gets $9, which is going to give us $900,000, divide this by the weighted average number of shares outstanding, simply put the numerator change. What we did now is from the numerator we deducted $900,000. And this is going to give us, so what did I do wrong with the formula? Just EPS equal to net income minus 100,000 times 9 close parentheses divided by this number. Let me close this here. So we'll do the numerator first. Why is it not? Let's do the numerator first. Let's compute the net income minus preferred dividend. We'll just make sure we do this. So 3,546,000 minus 900,000. And now we can compute EPS. Now we deducted the dividend. So net income divided by the common shares outstanding EPS becomes $45. This is assuming that we have a preferred dividend because we don't assume that all this dividend is cumulative, therefore we have to deduct it. Assume the same fact in part B where we did not have to deduct the dividend, except that net income included a loss from discontinued operation of 432,000. What does that mean? It means we're going to go back and work with this scenario here. Now we don't have to worry about the preferred dividend. Let me block this because we don't have to worry about the preferred dividend scenario. They're told us there is a loss in net income. There is a loss of 432,000. That's from discontinued operation. So what does that mean? Here you have to understand what you are giving. You are told, basically you are told, let me get the 10 here. You are told that net income, which is 3,456,000, before we got the net income, there was a loss. And that loss was 432,000. There was a loss from discontinued operation. What does that mean? It means income from continuing operation. Now we add those two. Income from continuing operation is 3,888,000. Because what we had, we had income from continuing this much, then we deducted discontinued operation, then we got the net income. So this is net income. Now we're going to have to compute EPS from EPS from continuing operation. It means we have to take 3,888,000 divided by 1,762,000 shares. So this is EPS from continuing operation. This is EPS from continuing operation. And that's going to give us 2.21. Now we have to compute EPS from discontinued operation, which is a loss. 432,000 divided by 1,762,000, which is going to give us 0.25, which is negative. Then obviously 2.21 minus 0.25, that's going to give us 1.96. And we can double check that because if we take 3,456,000 divided by 1,762,000, that's going to give us 1.96. So we have to compute EPS from continuing operation. We have to compute EPS from this continuing operation. And this minus this will give you EPS over all EPS. Now as investors, investors will focus on this EPS. They will focus on EPS from continuing operation because that's what we matters. That's what's going to stay with the company, net income from continuing operation. So hopefully this exercise is a really, really good exercise for computing the weighted average number of shares outstanding. Also shows you the effect of cumulative versus non-cumulative preferred and compute EPS. 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