Hi, Else here.
And this is the last in our series of shareholders' equity.
We are going to calculate the earnings per share.
We already have the information from 2017
and we're going to be using that to calculate
earnings per share.
Let's look at our ending T-accounts from 2017.
Here we know we have the preferred shares, the preferred
number of shares, we have the common shares,
ending balance, the common share number of shares,
and we also have the contributed surplus,
and the retained earnings.
We know what the net income was and we
know the total amount of the preferred share dividend.
Let's use this information to calculate earnings per share.
The first step in the earnings per share calculation
is to calculate the weighted average number of shares.
In order to do that calculation, we
need to know when all the shares were issued.
There are a number of ways to calculate
the weighted average number of shares.
I prefer to use a time line.
The time line always covers from the beginning
of the year, in this case, January 1,
to the end of the year, December 31.
For each date where new shares are issued,
I show it on the time line.
For instance on January 1, I know that 326,095 shares
were outstanding.
Those shares were outstanding for the whole year.
Therefore, they contributed 326,095 shares
to the production of wealth in this company.
On February 1, we issued an additional 25,000 shares.
As you can see on the time line, the contribution
to the wealth of the company was not equivalent to 12 months.
In fact, those 25,000 shares only contributed 11 months out
of the total of 12.
Therefore, the weight of those shares
is less, because they did not exist
for the whole period of time.
By multiplying 25,000 by the 11 months over the 12
total months, it provides me with the number
of shares that is equivalent to 25,000
if they had been outstanding for the whole year, 22,917.
Next on October 1, we had to repurchase.
Because those shares were repurchased,
it reduced the amount of shares available to produce wealth
for the corporation.
Therefore, a repurchase is indicated as a negative.
Again, October, November, December,
this only impacted the production
of wealth for three months.
Doing this calculation results in negative 1,875 shares.
Those 1,875 shares are equivalent to the 7,500
for a period of 12 months.
Adding those together, we get the weighted average number
of shares, which is equal to 347,137.
Those are the weighted average number of shares.
Now, we're going to use that in our calculation.
That was step 1.
Let's move on to step 2.
Step 2 is we have to determine the preferred share dividend.
In this case, we paid $13,200 twice--
once in the middle of the year, once at the end of the year,
therefore the preferred share dividend was 26,400.
Step 3, calculate the earnings per share using the formula.
Profit minus the preferred share dividend,
divided by the weighted average number of shares.
Using the information available to us,
we know that profit was 192,460.
We already know the preferred share dividend, 26,400.
We also know the weighted average number
of shares, 347,137.
Do the calculation and we learn that our earnings per share
was $0.48 per share.
Note that this is the basic earnings per share.
A diluted earnings per share calculation
is quite different and more complex
and beyond the level of an introductory financial
accounting course.
In this series of videos, we learned how
to record the issue of shares--
both for cash as well as for an asset.
We learned the entries for a cash dividend,
as well as the entries for a stock dividend.
Finally, we learned how to record the share repurchase
using contributed surplus.
We also learned how to calculate the basic earnings per share.
Thank you very much for joining me in these videos.