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P 4,000,000
400,000
600,000
P 5,000,000
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When there are two classes of Share issued (preference and ordinary shares), the computation must give
recognition to the special rights or preferences of the preference shares similar to the computation of the
dividends per share.
The computation of the book value per share for each class of Share is shown below:
Preference shareholders' Equity
BVPS of preference shares =
Outstanding Preference shares
Note: The Ordinary shareholders' equity is the difference between the total shareholders'
equity and the Preference shareholders' equity.
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EPS is useful to management and other interested parties for the following reasons:
1. It can be used to evaluate the earning potential of the corporation.
2. It can be used to determine the market price of the ordinary shares.
3. It can be used for formulating dividend policies.
The computation of earning per share will depend on whether the capital structure of the corporation is
simple or complex. Capital structure refers to the long-term liabilities plus shareholders' equity.
A simple capital structure is one where the total equity of the corporation consists of ordinary shares
only. Or, if there are preference sharess or bonds payable, they are not convertible into ordinary shares
A complex capital structure is one where in addition to the ordinary shares, there are other potentially
dilutive securities ( securities which will increase the EPS) such as convertible preference shares or
bonds.
There are two types of earnings per share which can be computed according to the pronouncement
of the International Accounting Standards Committee. They are the following:
Basic Earnings per Share (BEPS) - This is applicable if the capital structure is simple.
Diluted Earnings per Share (DEPS) - This is applicable if the capital structure is complex.
Basic Earnings per Share
If there is only one class of Share (ordinary shares), the formula is:
Net Income
Basic EPS =
Weighted average outstanding shares
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If there are two classes of Share (Preference and ordinary shares), the formula is:
Basic EPS =
Note: Preference dividend is subtracted from the net income only if it is declared or if not declared, only
when the preference shares is cumulative.
Illustration 1 Only one class of Share and no changes in the outstanding shares.
Peridot Corporation has 5,000 shares of ordinary shares outstanding with a par value of P100 per share
on December 31, 2012, the net income is P1,000,000.
P1,000,000
Basic EPS =
5,000 shares
= P200/share
Basic EPS =
P 306,000
2,550 shares
= P120/share
Because there were changes in the outstanding shares during the period, the denominator should be
the weighted average outstanding shares computed as follows:
Date
Jan1
Apr 1
Aug 1
Outstanding shares
2,000
x
2,400
x
3,000
x
Months Unchanged
3
=
4
=
5
=
12
Total
6,000
9,600
15,000
30,600