When calculating basic EPS, which of the following is correct regarding the calculation of weighted average common shares outstanding?I. Include the convertible preferred shares that were converted during the period in the calculation of weighted average common shares outstanding, and time-weight them.II. Ignore convertible preferred shares unless they are converted.

CPA FAR Equity covers stockholders' equity (common/preferred stock, retained earnings, treasury stock) and Earnings Per Share (EPS), focusing on capital structure, dividend, and share transactions.  Key topics include calculating basic EPS [(Net Income−Preferred Dividends)/Weighted Average Shares Outstanding], and diluted EPS, accounting for treasury stock (cost/par method), and stock dividends/splits.  Stockholders' Equity Components Common Stock: Reported at par value. Preferred Stock: Cumulative dividends are deducted from net income in EPS, regardless of declaration. Non-cumulative... Show more

CPA FAR Equity covers stockholders' equity (common/preferred stock, retained earnings, treasury stock) and Earnings Per Share (EPS), focusing on capital structure, dividend, and share transactions. 

Key topics include calculating basic EPS [(Net Income−Preferred Dividends)/Weighted Average Shares Outstanding], and diluted EPS, accounting for treasury stock (cost/par method), and stock dividends/splits. 

Stockholders' Equity Components
Common Stock: Reported at par value.
Preferred Stock: Cumulative dividends are deducted from net income in EPS, regardless of declaration. Non-cumulative dividends are only deducted if declared.
Treasury Stock: Contra-equity account, typically recorded at cost, reducing total equity.
Retained Earnings: Increased by net income, decreased by losses and dividends.
Stock Dividends/Splits: Treated retroactively; No journal entry for stock splits, only memo notation. 

Earnings Per Share (EPS)
Basic EPS: [(Net Income−Preferred Dividends)/Weighted Average Shares Outstanding]

Weighted Average Shares: Adjusted for issuance, buybacks, and stock splits, treated "as if" they happened at the start of the period.
Diluted EPS: Required for complex structures (options, warrants, convertible bonds/stock).
Treasury Stock Method: Used for options/warrants; assumes proceeds from exercise are used to repurchase shares.
If-Converted Method: Used for convertible securities; assumes conversion at the beginning of the period, eliminating interest expense (net of tax).
Antidilutive: Securities that increase EPS are ignored. 

Key Ratios
Rate of Return on Common Stockholders' Equity: [(Net Income−Preferred Dividends)/Average Common Equity]
Debt to Equity: Total Liability / Total Shareholder Equity

Show less