Weighted average number of shares and basic earnings per share (EPS) explained for the CPA exam and intermediate accounting — this lecture shows how to calculate the weighted average number of shares outstanding (WAXO) and use it to compute basic EPS. Ideal for accounting practitioners and CPA, CMA, and EA candidates studying earnings per share and financial reporting, this session covers two WAXO methods, the retrospective treatment of stock splits and dividends, cumulative vs. non-cumulative preferred dividends, and EPS for continuing operations.

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Video Timeline & Key Concepts:
0:00 Introduction: computing weighted average shares and basic EPS
0:30 Stock splits and stock dividends applied retrospectively to all transactions
5:00 Calculating WAXO: Method 1 using outstanding balances at each transaction date
12:58 Calculating WAXO: Method 2 focusing on changes in share counts
17:05 Basic EPS formula: net income minus preferred dividends over WAXO
20:34 EPS for continuing operations after accounting for discontinued operations

Frequently Asked Questions:

What is the weighted average number of shares outstanding (WAXO)?

The weighted average number of shares outstanding adjusts the share count over a reporting period for changes such as stock splits, share issuances, and buybacks. It gives a more accurate denominator for earnings per share by reflecting how long each block of shares was actually outstanding.

How do stock splits and stock dividends affect the WAXO calculation?

Stock splits and stock dividends are applied retrospectively to all share transactions during the year, and to prior periods presented. This means the shares are restated as if the split or dividend had existed from the beginning, keeping EPS comparable across periods.

How does preferred stock affect basic EPS?

The basic EPS formula subtracts preferred dividends from net income. For non-cumulative preferred stock, only dividends actually declared during the period are deducted. For cumulative preferred stock, the full amount accumulated during the period is deducted, whether or not it was declared.

Why must companies report EPS for continuing operations?

Companies with a simple capital structure must disclose EPS for both net income and income from continuing operations on the face of the income statement. This separation helps investors distinguish ongoing, recurring performance from the effects of discontinued operations.

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