howtoreadafinancialreport.pptVIP

The Income Statement,  Primary Earnings Per Common Share, cont. Add the two and get 200,000 shares altogether. Further, assume earnings are $500,000 for the year. With these facts, the computation--assuming the conversion of the preferred is: Earning Per Common Share Assuming Conversion of preferred: $500,000 Earnings for the year = $2.50 200,000 Adjusted Shares The Income Statement,  Primary Earnings Per Common Share, cont. However, as mentioned earlier, the “common stock equivalent” shares are only included in the computation if the effect of conversion on earnings per common share is dilutive. Dilution occurs when earnings per share decreases or loss per share increases on the company’s common stock. The Income Statement,  Primary Earnings Per Common Share, cont. For example, assume the preferred stock paid $3 a share in dividends. Without conversion, the earnings per common share would be $2, as opposed to $2.50. The Income Statement,  Primary Earnings Per Common Share, cont. In this case, the common stock equivalent shares would be excluded from the computation. That’s because conversion results in the $2.50 per share amount computed previously, a higher (antidilutive) earnings per share. Therefore, primary earnings per share of $2 will be reflected on the income statement. The Income Statement,  Fully Diluted Earnings Per Common Share The primary earnings per share item takes into consideration common stock and “common stock equivalents.” The purpose of fully diluted earning per common share is to reflect maximum potential dilution in earnings that would result if all contingent issuances of common stock had taken place at the beginning of the year. The Income Statement,  Fully Diluted Earnings Per Common Share, cont. This computation is the result of dividing the earnings for the year by common stock and common stock equivalents and all other securities that are convertible (ever though they do not qualify as “common stock equi