 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at a quasi-CPA simulation computing the weighted average number of shares outstanding and EPS, which is you will need the weighted average number of shares in order to compute EPS. This topic is covered in an intermediate accounting course as well as on the CPA exam. As always, I would like to remind my viewers, which is you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,500 plus accounting, auditing, tax, and finance lecture. This is a list of all the courses that I covered, including CPA questions on my website. I do have additional resources in addition to the lectures. I have PowerPoint slides, true, false, multiple choice exercises, 2,000 plus CPA questions. So let's take a look at this exercise to make sure we know how to compute the weighted average number of shares outstanding. So we have the data for this company. And you might see this in a CPA simulation on the exam day, or you might see this in a multiple choice. I would say a problem like this, you might see it in a CPA simulation, or maybe they might ask you about a piece of it, for example, to compute only the weighted average number of shares or to compute EPS. So let's go ahead and take a look at this question and we wanna make sure we know how to solve these type of questions. We have net income of 2.5 million, 2.5 million. Preferred stock, we have to be careful. We have 50,000 shares outstanding, $100 power value, 8% cumulative. This is important. What does that mean? It means each shareholder gets $8 per share, which is 100 times 8%. They have 50,000 shares. This means we have to pay the preferred shareholders. The preferred shareholders, we have to pay them $400,000 per year. Okay, if we pay the shareholders, whether we pay them or not, for the EPS computation, we always going to deduct this 400,000 because, listen to me carefully, because they told us the preferred is cumulative. So now once we know it's cumulative, we have to deduct because the basic earnings per share is net income minus preferred stock, which is this is the 400,000 divided by the weighted average number of shares outstanding. Shares outstanding. So this is the computation for EPS. Now, we already know net income, 2.5 million. Now we know the preferred stock dividend, the preferred dividend, preferred stock dividend, which is 400,000. Now we need to compute the weighted average number of shares outstanding. Okay, now we need to focus on this data right here, on this data right here. This is what we are giving. The first thing you wanna do is to read the whole question. And the reason you do so is because you might have a stock split or stock dividend. So let's take a look at this. Shares outstanding, one-one. At the beginning of the year, 750,000. That's excellent. That's when we started. Then we had that many shares until May 1st. May 1st, we issued 300,000 shares. What does that mean if we issued 300,000 shares? It means we added 300,000 shares. Now we have 1,050,000 shares. So we had 750 from one-one to five-one. Starting from five-one, five-one, which is May 1st, from five-one till August 1st. Sorry. Till August 1st, we added 300,000 shares. It means from five-one to eight-one, to eight-one, we had 1,050,000 shares. On eight-one, we acquired treasury stocks 150. It means we deduct 150,000 shares. And this is gonna bring us down to 900,000 shares. And we had that money, from eight-one to two, nothing happened. Oh, sorry. Yes, something happened on 10-one, on 10-one, but nothing happened after 10-one. Till to 12, 31. Now on 10-one, we had the stock split. So simply put, the two-four-one stock split, because every time we have a stock split or a stock dividend, it's gonna apply to everything. It's gonna apply to everything. Now what do we need to do? Now we need to take this information that I just kind of gave you a picture of it. This is what we started with 750 till May 1st. And by May 1st, we added 300,000. Then we went from May 1st till August 1st, then we subtract 150. This is what we are giving here. Then we had a stock split at the end. So to show you the computation for this exercise, I'm gonna move to the Excel sheet, and I will have all the information on the Excel sheet. The same information here. I wanna make sure you understand this, except I will make the stock split adjustment and show you the weighted average per share. Okay, let's go ahead and move to the Excel sheet. Okay, let's take a look at this Excel sheet. And what I have is a column for the event, column for days outstanding, columns for shares outstanding, column for fraction of the year, and either the percent of the year, restatement and the weighted shares. We started with, if you remember, the date we started from January 1st to May 1st. And if you remember, we had 750,000 shares when we started, and that means we had those 412th of the year. What does it mean, 412th? We had 750,000 January, February, March, and April, four months. Okay, May 1st, it doesn't count, because May, it's only the first day in May. Well, the percentage of the year, the percentage of the year is this amount, the fraction of the year is 33%. So we had that many shares, 33% of the year. So I just like to put the percentages, I'll show you why at the end. Now remember, let's assume there was no, let's assume there was no stock split, we will take 750 divided by 0.333. But since we had a stock split, the stock split applies to everything, we have to include the stock split. Therefore, those weighted shares are the following, 750 times 33% times two. Now if we did not have the restatement, then it's 750 times 33%. Now the next event went from, we issued new shares on May 1st, and we issued new share May 1st, and nothing happened till August 1st. And remember, we added 300,000 shares. Now we have 1,050,000. Why 1,050, can I show you why? Because we started with 750, then on that date, May 1st, we added 300,000. I did this on the PowerPoint, I'll show it to you again here. And that many shares, we had that many shares from May 1st till August 1st, because August 1st, you're gonna find out that we purchased some shares. Percentage-wise, that's 25%, 312 is 25%, and the stock split does apply. Now we do the same thing. We'll take a number, shares outstanding, times the fraction of the year, times the restatement. Now August 1st, from August 1st till the end of the year, something happened and we reacquired shares. What does it mean? We reacquired shares, we had 1,050,000, then we reacquired. We bought back 150,000 shares. And that happens, and that took place all the way till the end of the year, which is from August 1st, August, September, October, November, and December, that's 512 of a month. Percentage-wise, that is 42% of the year. Does the stock split applies? Sure it does, because it applies as of the beginning of the year, and the shares, weighted shares is 750. Now we add all the shares up, 1,775,000. Let me show you why. Let me show you why I do the percentages, because when you add the percentages, when you add those percentages, they should add up to 100%. This way you make sure you allocated the all 12 month, or you count four plus three plus five should be 12 month. Okay, but I like the percentage to make sure. Now, I can compute my earnings per share, my net income is 25 million. My preferred dividend is 40,000, which is 50,000 shares, times $8 per share. This is what I started with. My income allocable to common stockholders, which is net income minus, so basically I'm gonna call this net income to common stockholder, to common stockholders. Why do I call it to common stockholders? Because I deducted the preferred dividend, because some of it, the company made 25 million, but 400 goes to the preferred, what's left is 24,600. So the earnings per share is, I will take my 24,600, divided by 1,775, the weighted average number of shares outstanding, which is this number here, and I will get my EPS earnings per share. I hope you were able to follow on this question. I may work in other questions where we have stock dividend and stock split, but anyhow, you might see these questions on the CPA exam as a simulation, or you might see bits and pieces of it as a multiple choice. For example, they may ask you only to compute the weighted average, or they might give you the weighted average, they might give you net income, and they might give you the dividend information, and you have to compute EPS. So you just have to know, you can ask you many questions about this problem. Make sure you understand it. As always, I would like to remind you to visit my website for additional resources. If you're studying for your CPA exam, I strongly suggest you subscribe as it's an investment in your career. Good luck.