Basic EPS and diluted EPS explained through a CPA exam simulation — this Intermediate Accounting and FAR lecture works through calculating earnings per share with convertible bonds, adjusting net income and the weighted average shares for dilution. Professor Farhat helps CPA, CMA, and EA exam candidates and college accounting students master high-search topics like "how to calculate diluted EPS," "basic vs diluted EPS," and "convertible bonds EPS effect."

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

Video Timeline & Key Concepts:

0:00 — Introduction and Scenario A: bonds outstanding at the start of the year

0:07 — Basic EPS: net income less preferred dividends over weighted average shares

3:41 — Diluted EPS: assuming conversion, adding back after-tax interest and shares

6:47 — Scenario B: bonds issued mid-year and prorating interest and shares

9:38 — Scenario C: bonds partially converted during the year

Frequently Asked Questions:

Q: How is basic EPS calculated?

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

Q: How does diluted EPS differ from basic EPS?

A: Diluted EPS presents a more conservative figure by assuming dilutive convertible securities are converted into common stock. This adds after-tax interest back to the numerator and additional shares to the denominator.

Q: Why do you add interest back to the numerator for diluted EPS?

A: If convertible bonds are assumed converted, the company would no longer pay interest on them, so the interest expense, net of its tax effect, is added back to net income to reflect the hypothetical conversion.

Q: How are convertible bonds issued mid-year handled?

A: When bonds are issued partway through the year, both the interest add-back and the additional potential shares are prorated for the portion of the year the bonds were outstanding.

Q: How are bonds converted during the year treated in diluted EPS?

A: For diluted EPS, you generally assume any remaining convertible bonds are converted for the full period, capturing their maximum dilutive effect on earnings per share.

#CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #FAR #intermediateaccounting #EPS #dilutedEPS #convertiblebonds #ProfessorFarhat #accountingstudents