Demonstration Problem

Chapter 10 – Exercise 8

Calculate EPS and Effect of Stock Split on EPS

AccountingWhat the Numbers Mean 10e

Problem Definition

During the year ended December 31, 2014, Gluco, Inc., split its stock on a 3-for-1 basis. In its annual report for 2013, the firm reported net income of $7,407,840 for 2013, with an average 1,073,600 shares of common stock outstanding for that year. There was no preferred stock.

a. What amount of net income for 2013 will be reported in Gluco’s 2014 annual report?

b. Calculate Gluco’s earnings per share for 2013 that would have been reported in the 2013 annual report.

c. Calculate Gluco’s earnings per share for 2013 that will be reported in the 2014 annual report for comparative purposes.

Problem Definition

Problem Solution

a. Net income for 2013 reported in Gluco’s

2014 annual report = $7,407,840

Stock dividends and stock splits do not cause changes to reported earnings amounts.

a. What amount of net income for 2013 will be reported in Gluco’s 2014 annual report?

b. Calculate Gluco’s earnings per share for 2013 that would have been reported in the 2013 annual report.

c. Calculate Gluco’s earnings per share for 2013 that will be reported in the 2014 annual report for comparative purposes.

Problem Definition

Problem Solution

b. Earnings per share =

Problem Solution

b. Earnings per share =

Net income

Problem Solution

b. Earnings per share =

Net income

$7,407,840

Problem Solution

b. Earnings per share =

Net income

$7,407,840

/ Weighted-average number of shares outstanding

Problem Solution

b. Earnings per share =

Net income

$7,407,840

/ Weighted-average number of shares outstanding

1,073,600

Problem Solution

b. Earnings per share =

Net income

$7,407,840

/ Weighted-average number of shares outstanding

1,073,600

= $6.90

a. What amount of net income for 2013 will be reported in Gluco’s 2014 annual report?

b. Calculate Gluco’s earnings per share for 2013 that would have been reported in the 2013 annual report.

c. Calculate Gluco’s earnings per share for 2013 that will be reported in the 2014 annual report for comparative purposes.

Problem Definition

Problem Solution

c.

For the EPS calculation in 2014, the weighted-average number of shares outstanding in 2013 must reflect the 3-for-1 stock split in 2014.

Problem Solution

c.

EPS = Net income / Weighted-average number of shares outstanding

For the EPS calculation in 2014, the weighted-average number of shares outstanding in 2013 must reflect the 3-for-1 stock split in 2014.

Problem Solution

c.

EPS = Net income / Weighted-average number of shares outstanding

= $7,407,840

For the EPS calculation in 2014, the weighted-average number of shares outstanding in 2013 must reflect the 3-for-1 stock split in 2014.

Problem Solution

c.

EPS = Net income / Weighted-average number of shares outstanding

= $7,407,840 / (1,073,600 x 3)

For the EPS calculation in 2014, the weighted-average number of shares outstanding in 2013 must reflect the 3-for-1 stock split in 2014.

Problem Solution

c.

EPS = Net income / Weighted-average number of shares outstanding

= $7,407,840 / (1,073,600 x 3)

= $2.30

For the EPS calculation in 2014, the weighted-average number of shares outstanding in 2013 must reflect the 3-for-1 stock split in 2014.

AccountingWhat the Numbers Mean 10e

David H. MarshallWayne W. McManus

Daniel F. Viele

You should now have a better understanding ofEPS and the effects of stock splits on EPS.

Remember that there is a demonstration problem for each chapter that is here for your learning benefit.