Basic and diluted earnings per share (EPS) worked through a comprehensive example for the CPA Exam FAR and intermediate accounting: this lecture computes basic EPS and then walks the full diluted EPS calculation using the if-converted method and the treasury stock method, testing each security for dilutive vs. anti-dilutive effect. Ideal for CPA candidates studying dilutive securities and EPS and for practitioners refreshing how to adjust the numerator and denominator.

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Video Timeline & Key Concepts:
0:00 Overview of basic and diluted EPS for intermediate accounting and the CPA exam
0:13 If-converted method: assuming convertible bonds and preferred stock convert at the start of the period
1:58 Treasury stock method for options and warrants, plus dilutive vs. anti-dilutive testing
9:15 Basic EPS example: (Net Income - Preferred Dividends) / Weighted Average Shares
10:24 Triple K Corporation example walkthrough for diluted EPS
14:48 Excluding anti-dilutive securities to preserve conservatism
23:26 Arriving at the final diluted EPS of $5.60

Frequently Asked Questions:

How do you calculate basic EPS?

Basic EPS equals net income minus preferred dividends, divided by the weighted average number of common shares outstanding during the period. Preferred dividends are subtracted because that portion of earnings belongs to preferred shareholders, not common shareholders.

What is the if-converted method for diluted EPS?

The if-converted method assumes convertible bonds or convertible preferred stock are exchanged for common shares at the beginning of the period (or issuance date). You add the converted shares to the denominator and add back the after-tax interest or preferred dividends to the numerator, then check whether the result is dilutive.

What does dilutive versus anti-dilutive mean?

A security is dilutive if including it lowers EPS and anti-dilutive if including it would raise EPS. Only dilutive securities are included in diluted EPS; anti-dilutive ones are excluded to present the most conservative (lowest) EPS figure.

Why use the treasury stock method for options and warrants?

The treasury stock method assumes the proceeds from exercising options and warrants are used to buy back shares at the average market price. Only the net increase in shares (issued minus repurchased) is added to the denominator, reflecting the true dilutive impact when the exercise price is below market.

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