Basic vs. Diluted EPS
Since some elements are paid out on an “after tax basis,” it affects the earnings per share that regular investors receive. As an example, if a company has outstanding convertible debt, it affects the earnings that ordinary investors get and could be “dilutive” in this example. Several elements have an impact. For example, with preferred shares:
basic EPS= (net income-preferred dividends) / weighted average number of common shares outstanding
You need to review this section to understand stock dividends, stock splits, convertible debt, convertible preferred stock, and stock options.
The complicated formula:
diluted eps= (net income – preferred dividends) + convertible preferred dividends + convertible debt interest (1-t)
weighted average shares+ shares from conversion of prefs+debt + shares issuable from stock options
Classification of Investments
When a company holds investments in forms of debt or equity, it needs to be determined how the investment is considered on the company’s financial statements:
–Held to maturity: Debt securities held with the intention of selling at maturity – reported on balance sheet at an amortized cost and only interests + realized gains & losses are part of the income statement
–Trading Securities: Debt securities held with the intention of near term profits – reported on balance sheet at faire value and all components are reported on the income statement (dividends, interest, realized, and unrealized)
–Available for sale: Neither expected to be sold in the short term or held until maturity = reported at fair value on the balance sheet and dividends, interests and realized gains, and losses are all part of the income statement.