How do you compute the weighted average number of shares outstanding and earnings per share (EPS)? This video is a comprehensive guide to the weighted average share calculation and basic EPS, using a worked example with share issuances, treasury stock, and a stock split — taught by Professor Farhat for CPA candidates and accounting students in intermediate accounting and the FAR section.

Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students.

You will learn the basic EPS formula (net income minus preferred dividends, divided by the weighted average shares), how to deduct cumulative preferred dividends whether or not paid, and how to weight each share change by the fraction of the year outstanding while restating for a two-for-one stock split.

Video Timeline & Key Concepts:
0:00 — Introduction
1:34 — Handling cumulative preferred dividends
2:12 — The basic EPS formula
3:14 — Issuance of new shares
4:02 — Treasury stock repurchases
4:34 — Applying a two-for-one stock split
5:21 — Excel walkthrough weighting shares by time
8:33 — Final EPS calculation

Frequently Asked Questions:

What is the basic earnings per share formula?

Basic EPS equals net income minus preferred dividends, divided by the weighted average number of common shares outstanding during the period.

Why are cumulative preferred dividends subtracted even if not paid?

Cumulative preferred dividends accumulate whether or not declared, so they reduce income available to common shareholders and must be subtracted from net income in the EPS numerator.

How does a stock split affect the weighted average calculation?

A stock split is applied retroactively to all prior periods in the year, so earlier share balances are restated by the split factor to keep the share count consistent.

How is treasury stock treated in the share count?

Shares repurchased into treasury reduce shares outstanding from the repurchase date and are weighted for the remaining fraction of the year.

What is income available to common stockholders?

It is net income reduced by preferred dividends, representing the earnings attributable to common shareholders and used as the numerator in basic EPS.

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