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Advanced Financial Accounting

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Advance Financial Accounting (FIN-611)
VU
LESSON # 33
EARNINGS PER SHARE (IAS ­ 33)
Earning per share is an accounting ratio that improves comparison of the performance
of different entities in the same period and of the same entity in different accounting
periods.
International Accounting Standard (IAS) 33 provides complete guidelines regarding
calculation and presentation of EPS. Only listed companies need to present EPS.
Where a non listed company chooses to present EPS in its financial statements, it must
do so in accordance with IAS 33.
Basic Earnings per Share (EPS)
Apparently EPS is the outcome of current year's earnings divided by the number of
ordinary shares. IAS 33 guides to use following formula for calculation of basic EPS:
Profitsavailablefor distributi ns to ordinaryshareholde s
o
r
= EPS
Weighted averagenumber of ordinarysharesoutstandin duringthe year
g
Profits available for distribution to ordinary shareholders:
This is the current year's profit figure which is obtained after subtracting all types of
expenses (cost of goods sold, administrative, selling, financial and income tax
expenses) out of all the incomes (revenues and gains) recognized during the year. This
is also known as the profit after tax.
Weighted average number of ordinary shares outstanding during the year:
This is the figure that needs calculation; these are the weighted average of ordinary
shares that remained outstanding during the year. This figure is obtained after making
certain adjustments concerning increase or decrease in the number of ordinary shares
in accordance with the time period due.
The time-weighting factor is the number of days the shares were outstanding
compared with the total number of days in the period.
A very simple example to understand the concept of weighted average is as under:
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Advance Financial Accounting (FIN-611)
VU
FS Company Limited
Number
of
Ordinary
Shares
January 1, 2007
Opening Balance b/f
200,000
September 30, 2007 Issue of ordinary share capital
200,000
December 31, 2007 Closing Balance c/f
400,000
Weighted Average number of ordinary share capital outstanding during the year:
200,000
(outstanding for full year)
200,000
200,000 x 3/12
(outstanding for Oct. Nov. & Dec.)
50,000
Weighted average number of ordinary share capital outstanding250,000
Another example to understand weighted average calculations:
Jubilation Co., a listed company, has the following share transactions during the year
ending on December 31, 2007.
Date
Details
Shares
Treasury
Shares
Issued
shares* Outstanding
Jan 1, 2007
Balance b/f 200,000
30,000
170,000
May 31, 2007
Fresh Issue  80,000
-
250,000
Dec 1, 2007
Treasury shares
25,000
225,000
Dec 31, 2007
Balance c/f 280,000
55,000
225,000
*Treasury shares are the company's own shares held by the company itself
Weighted average number of shares
Shares
weight
weighted
Outstanding
in months
average
170,000
5/12
70,833
250,000
6/12
125,000
225,000
1/12
18,750
214,583
Alternative calculation:
Number of
weight
weighted
shares
in months
average
170,000
12/12
170,000
80,000
7/12
46,666
(25,000)
1/12
(2,083)
214,583
180
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Advance Financial Accounting (FIN-611)
VU
Shares are usually included in the weighted average number of shares from the date
on which the consideration is receivable which is usually the date of issue.
Ordinary shares issued as purchase consideration in an acquisition should be included
as of the date of acquisition because the acquired entity's results will also be included
from that date.
Solved problem # 1:
Famous Co. is a company with an issued and paid up capital of 100,000 ordinary
shares of Re. 1 each and 20,000 10% debentures of Re. 1 each. The company
manufactures electrical appliances.
During its accounting year ending on December 31, 2007 the company had operating
expenses of Rs. 50,000 the gross profit was Rs. 200,000. The company paid the 10%
interest on debentures and declared an ordinary dividend of 40 paisa per share.
Assuming an income tax rate of 30% on the given figures show the trading results and
EPS of the company.
Solution:
Famous Co
Income Statement
For the year ended December 31, 2007
Rupees
Gross profit
200,000
Operating expenses
(50,000)
Profit from operations
150,000
Interest on debentures
(2,000)
Profit before tax
148,000
Income tax
(44,400)
Profit after tax
103,600
Earnings per share
Rs. 103,600 = Rs. 1.036 per share
100,000
Solved problem # 2:
In addition to the information given in the above problem assume the Famous Co also
issued further 40,000 ordinary shares on July 1, 2007.
181
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Advance Financial Accounting (FIN-611)
VU
Solution:
Weighted average number of ordinary shares
Balance on Jan 1, 2007
100,000
Issued on July 1, 2007
40,000 x 6/12
20,000
Weighted average
120,000
Earnings per share
Rs. 103,600 = Rs. 0.863 per share
120,000
Solved problem # 3:
On September 30, 2008, Blue-moon Co made an issue at full market price of 1,000,000
ordinary shares. The company's accounting year runs from January 1 to December 31.
Relevant information for the year 2007 and 2008 is as follows:
2008
2007
Shares in issue as on December 31
9,000,000
8,000,000
Profits after tax (in Rupees)
3,300,000
3,280,000
Required:
Calculate EPS for the year 2008 and corresponding figure for 2007
Solution:
Weighted average number of shares
2008
2007
Shares in issue on opening date
8,000,000
8,000,000
Fresh issue
1,000,000 x 3/12
250,000
Weighted average
8,250,000
8,000,000
Earnings
3,300,000
3,280,000
Rs. 3,300,000 Rs. 3,280,000
Earnings per share
8,250,000
8,000,000
40 paisa
41 paisa
Despite an increase in total earnings by Rs. 20,000 in the year 2008, the EPS is not as
good as in the year 2007, because there was extra capital employed for the last 3
months of the year 2008.
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Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet