Computation of earnings per share (EPS) and the weighted average number of common shares outstanding, worked as a CPA Exam simulation for the FAR section: this lecture shows how to build the basic EPS numerator and denominator, handle cumulative preferred dividends, and adjust the weighted average share count for issuances, buybacks, and stock splits. Ideal for CPA candidates practicing EPS simulations and for intermediate accounting students learning weighted average shares.

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Video Timeline & Key Concepts:
0:00 Introduction to the EPS computation simulation
1:36 Cumulative preferred dividends are subtracted whether or not they are declared
4:12 Basic EPS formula: (net income minus preferred dividends) / weighted average shares
5:18 Balance-based approach: weighting each share balance by time outstanding
8:32 Change-based approach: weighting only the changes in shares by time remaining
11:17 Handling stock splits: applying a 2-for-1 split retrospectively to prior transactions
16:06 How a stock split doubles the share count and roughly halves basic EPS

Frequently Asked Questions:

How do you calculate the weighted average number of shares outstanding?

You weight each block of shares by the fraction of the year it was outstanding. Shares present from the start count for the full period, while shares issued or repurchased mid-year are weighted by the months remaining, giving a time-adjusted average rather than a simple beginning-plus-ending average.

Are preferred dividends always subtracted in the EPS numerator?

For cumulative preferred stock, the annual dividend is subtracted from net income whether or not it was declared, because the company owes it. For noncumulative preferred stock, only dividends actually declared during the period are subtracted.

How does a stock split affect earnings per share?

A stock split is applied retrospectively to all share transactions before the split date. A 2-for-1 split doubles the weighted average share count, which roughly halves basic EPS, keeping the per-share figures comparable across periods.

What is the difference between the balance-based and change-based methods?

The balance-based method recomputes the share balance after every transaction and weights each balance by its time outstanding. The change-based method instead weights only the incremental change in shares by the time remaining in the year. Both produce the same weighted average.

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