Earnings Per Share
EPS Accounting Report: Development and Problems
Earnings per share is the portion of a company’s profit allocated to each outstanding share of common stock. The computation of earnings per share is income minus preferred stock dividends divided by weighted average number of shares of common stock outstanding at the end of the period. Earning per share is considered to be the single most important metric to determine a company’s profitability which is crucial to the decision making of potential investors and creditors. In other words, earnings per share helps people to have a better insight of different companies’ power to make money. The higher the earnings per share with all other factors equal, the higher each share would be worth. By evaluating earnings per share, investors and creditors can make their decision whether the company is worth investing or lending the money to. Although earnings per share is a very important factor to present a company’s financial status and a significant indicator to investor and creditor, its existence and presentation have been disputed throughout the U.S. history.
Approximately a half century ago, accountants were not supposed to be associated with reporting of EPS amounts. In Accounting Research Bulletin (ARB) No. 43 (AICPA, 1961), the Committee on Accounting Procedure (CAP) stated that an undue attention was given to a single net income figure or earnings per share and regarded it as “undesirable”. However, Earnings per Share presentation has became very common during 1950s. In ARB No. 49, Earnings per Share (AICPA, l961), CAP restated its positions and suggested three guidelines to compute earnings per share. The three guidelines were: “1). . . the term earnings per share should be used to designate the amount applicable to each share of common stock or other residual security outstanding, 2) earnings per share, . . . should generally be stated in terms of the common stock position as it existed in the years to which the
Earnings per share is the portion of a company’s profit allocated to each outstanding share of common stock. The computation of earnings per share is income minus preferred stock dividends divided by weighted average number of shares of common stock outstanding at the end of the period. Earning per share is considered to be the single most important metric to determine a company’s profitability which is crucial to the decision making of potential investors and creditors. In other words, earnings per share helps people to have a better insight of different companies’ power to make money. The higher the earnings per share with all other factors equal, the higher each share would be worth. By evaluating earnings per share, investors and creditors can make their decision whether the company is worth investing or lending the money to. Although earnings per share is a very important factor to present a company’s financial status and a significant indicator to investor and creditor, its existence and presentation have been disputed throughout the U.S. history.
Approximately a half century ago, accountants were not supposed to be associated with reporting of EPS amounts. In Accounting Research Bulletin (ARB) No. 43 (AICPA, 1961), the Committee on Accounting Procedure (CAP) stated that an undue attention was given to a single net income figure or earnings per share and regarded it as “undesirable”. However, Earnings per Share presentation has became very common during 1950s. In ARB No. 49, Earnings per Share (AICPA, l961), CAP restated its positions and suggested three guidelines to compute earnings per share. The three guidelines were: “1). . . the term earnings per share should be used to designate the amount applicable to each share of common stock or other residual security outstanding, 2) earnings per share, . . . should generally be stated in terms of the common stock position as it existed in the years to which the
References: Caster, A. B., Elson, R. J., & Weld, L. G. (2006). Is Diluted EPS Becoming More Art than Fact. The CPA Journal. Retrieved from http://www.nysscpa.org/cpajournal/2006/906/essentials/p26.htm Epstein, B. J., & Jermakowicz, E. K. (2010) WILEY Interpretation and Application of International Financial Reporting Standards 2010. New York, NY: John Wiley & Sons, Inc. John, E., & Bill, C. B. (1997). The FASB 's New Earnings per Share Standard. The CPA Journal. Retrieved from http://www.nysscpa.org/cpajournal/1997/0897/aug/F20897.htm Kelliher, J. (1996). The FASB and the IASC Redeliberate EPS. Journal of Accountancy. Retrieved from http://www.allbusiness.com/professionalscientific/accounting-tax/541912-1.html FASB ASC Paragraph 260-10-45-2 [, Earnings Per Share – Overall – Other Presentation Matters] FASB ASC Paragraph 260-10-45-11 [, Earnings Per Share – Overall - Income Available to Common Stockholders and Preferred Dividends] FASB ASC Paragraph 260-10-10-1 [, Earnings Per Share – Overall – Objectives] FASB ASC Paragraph 260-10-45-40 [, Earnings Per Share- Overall - Convertible Securities and the If-Converted Method] FASB ASC Paragraph 260-10-45-45 [, Earnings Per Share- Overall - Contracts that May Be Settled in Stock or Cash]