As one of the audit associates working on the account of Concept Financial Inc., you are required to examine the company’s computations of earnings per share (EPS). Below is the computations the company provided on how its controller calculated EPS.
Net Income $3,374,900
EPS = $3,374,900/ 1,242,500* = $2.72 per share
* Common shares issued and outstanding, 1/1 1,285,000
Common shares issued and outstanding, 12/31 1,200,000
Average common shares issued and outstanding 1,242,500
(Beginning + Ending/2) You also have the following information:
1. The company has no preferred shares.
2. The company has no options or warrants on the common shares.
3. The company has no convertible debt securities.
The common shares activities for the year include:
Date Description Number
January 1 Outstanding balance 1,285,000
October 1 Treasury stock acquired by Concept Financial 250,000
December 1 Shares reissued 165,000
December 31 Outstanding balance 1,200,000
Required
a. State whether or not you agree with the controller’s computation of EPS. Be sure to support why you agree or disagree with the computation If you don’t agree, correctly compute Concept Financial’s EPS.
b. Assume the same facts as the ones above except that the company now issues options to purchase 140,000 common stock at $10 per share. The options were issued and outstanding since January 1 but none has been exercised or canceled. The average market price of common stock for the year was $25 while the December 31 market price was $35. Compute Concept Financial’s EPS if the options are taken into consideration.
Hint: a is basic EPS while b is dilutive EPS.