Analysis of Financial Statement Lectures

8/6/2019 Analysis of Financial Statement Lectures

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Analysis of Financial Statement

Lecture # 01

By: Faisal Dhedhi



Teaching & Testing Methodology

� Grading Basis

Q uizzes: 15% (3 Q uizzes of Equal Points)

Assignments: 5% (4 Assignments of Equal Points)

Project: 15%

Mid-term Exam: 25%

Final Exam: 40%

� Q uiz & Exams Testing Style

Various Forms of Objective Q uestions

Every Topic is IMPORTANT



The Accounting Cycle

Journal Entry

Ledger Posting

Trial BalanceAdjusted Trial Balance

Periodical Adjustments

Financial Statements

Accounting

Cycle





Financial statement analysis framework

Consist of six steps:

1) Sate the objective and context: Determine what questions the analysis seeks toanswer, the form in which this information needs to be presented, and what

resources and how much time are available to perform the analysis.

2) Gather Data: Acquire the companys financial statements and other relevant data on

its industry and the economy. Ask questions of the companys management, suppliers

and customers and visit company sites.

3) Process the data: Make any appropriate adjustments to the financial statements,calculate ratios. Prepare exhibits such as graphs and common-size balance sheet.

4) Analyze and interpret the data: Use the data to answer the questions stated in the

first step. Decide what conclusions or recommendations the information supports.

5) Report the conclusion or recommendations: Prepare a report and communicate it to

its intended audience. Be sure the report and its dissemination comply with the code

and standards that relate to investments analysis and recommendations.6) Update the analysis: Repeat these steps periodically and change the conclusions or

recommendations when necessary.



Business Environment, Accounting and Financial Statements

Business Environment

Labor Markets

Capital Markets

Product Markets:

Suppliers

Customers

Competitors

Business Regulations

Business Strategy

Scope of Business: Degree of Diversification

Type of Diversification

Competitive Positioning:

Cost Leadership

Differentiation

Key Success Factors & Risks

Accounting Environment

Capital Market Structure

Contracting & Governance

Accounting Conventions &

Regulations

Tax & Financial AccountingLinkage

Independent Auditing

Legal System for Accounting

Disputes

Accounting Strategy

Choice of:

Accounting Policies

Accounting Estimates

Reporting Formats

Supplementary Disclosures

Business Activities

Operating

Investment

Financing

Accounting System

Measure & Report

Economic

Consequences of

Business Activities

Financial Statements



Basic Accounting Methods� Cash-basis accounting This method consists of recognizing revenue

(income) and expenses when payments are made (checks issued) or cash isreceived (deposited in the bank).

� Accrual accounting This method consists of recognizing revenue in the

accounting period in which it is earned (revenue is recognized when the

company provides a product or service to a customer, regardless of when

the company gets paid). Expenses are recorded when they are incurredinstead of when they are paid.

� Benefits of Cash Accounting: It is easy to use and implement because the

company records income only when it gets paid and records expenses only

when it pays them.

� Benefits of Cash Accounting: If accepted by the IRS (limited cases only), the

company is taxed when it has money in the bank.

� Benefits of Cash Accounting: On average, fewer transactions will be

recorded (bookkeeping).





Cash Basis Accounting

Taken as is, the financial statements in Figure 6.1 below indicate that XYZ Corporation is not

doing well, with a net loss of $43,200, and may not be a good investment opportunity.

Figure 6.1: XYZ Corporation's Financial Statements using Cash Basis Accounting



Accrual Basis Accounting:

Armed with some additional information, let's see what the income statement

would look like if the accrual-basis accounting method was used.

Additional Information:

A1. June 12, 2005 The company received a rush order for $80,000 of wood

panels. The order was delivered to the customer five days later. The customer was

given 30 days to pay. (With the cash-basis method, sales are not recorded in the

income statement and not recorded in accounts receivables: no cash, no record).

A2. June 13, 2003 The company received $60,000 worth of wood panels toreplenish their inventory, and $40,000 was related to the rush order.The company

paid the invoice in full to take advantage of a 2% early-payment discount. (With

the cash-basis method, this is recorded in full on the income statement, and there

is no record of inventory on hand).

A3. June 1, 2005 The company launched an advertising campaign that will run

until the end of August. The total cost of the advertising campaign was $15,000and was paid on June 1, 2005.



XYZ Corporation's Restated Financial Statements using Accrual Basis Accounting



Income statement basics

� Multi-Step Income Statement

A multi-step income statement is a condensed statement of income as opposed to

a single-step format, which is the more detailed format. Both single and multi-stepformats conform to GAAP standards. Both yield the same net income figure



� Sales These are defined as total sales (revenues) during the accounting period.

Remember these sales are net of returns, allowances and discounts

� Cost of goods sold (COGS) These are all the direct costs related to the product or

rendered service sold and recorded during the accounting period. (Reminder:

matching principle.)

� Operating expenses These include all other expenses that are not included in

COGS but are related to the operation of the business during the specified

accounting period.T

his account is most commonly referred to as "SG&A" (salesgeneral and administrative) and includes expenses such as selling, marketing,

administrative salaries, sales salaries, maintenance, administrative office expenses

(rent, computers, accounting fees, legal fees), research and development (R&D),

depreciation and amortization, etc.

� Other revenues & expenses These are all non-operating expenses such as interest

earned on cash or interest paid on loans.� Income taxes This account is a provision for income taxes for reporting purposes.



Income statement Components:

� Operating income from continuing operations This comprises all revenues net of

returns, allowances and discounts, less the cost and expenses related to the

generation of these revenues. The costs deducted from revenues are typically the

COGS and SG&A expenses.

� Recurring income before interest and taxes from continuing operations This

component includes, in addition to operating income from continuing operations,

all other income, such as investment income from unconsolidated subsidiaries

and/or other investments and gains (or losses) from the sale of assets. To be

included in this category, these items must be recurring in nature. This component

is generally considered to be the best predictor of future earning. That said, it does

assume that noncash expenses such as depreciation and amortization are a good

indicator of future capital expenditures. Since this component does not take into

account the capital structure of the company (use of debt), it is also used to value

similar companies.

� Recurring (pre-tax) income from continuing operations This component takes the

company's financial structure into consideration as it deducts interest expenses.



Income statement Components:

� Pre-tax earning from continuing operations This component considers all unusual

or infrequent items. Included in this category are items that are either unusual or

infrequent in nature but cannot be both. Examples are an employee-separationcost, plant shutdown, impairments, write-offs, write-downs, integration expenses,

etc.

� Net income from continuing operations This component takes into account the

impact of taxes from continuing operations.

Non-Recurring Items

Discontinued operations, extraordinary items and accounting changes are

all reported as separate items in the income statement. They are all

reported net of taxes and below the tax line, and are not included in

income from continuing operations. In some cases, earlier income

statements and balance sheets have to be adjusted to reflect changes.



� Income (or expense) from discontinued operations This component is

related to income (or expense) generated due to the shutdown of one or more

divisions or operations (plants). These events need to be isolated so they do

not inflate or deflate the company's future earning potential. This type of nonrecurring occurrence also has a nonrecurring tax implication and, as a result

of the tax implication, should not be included in the income tax expense used

to calculate net income from continuing operations. That is why this income (or

expense) is always reported net of taxes. The same is true for extraordinary

items and cumulative effect of accounting changes (see below).

� Extraordinary items - This component relates to items that are both unusual

and infrequent in nature. That means it is a one-time gain or loss that is not

expected to occur in the future. An example is environmental remediation.

� Cumulative effect of accounting changes - This item is generally related to

changes in accounting policies or estimations. In most cases, these are non

cash-related expenses but could have an effect on taxes.



Prior Period Adjustments

These adjustments are related to accounting errors. These errors are typically

reported in the net income but in some cases are made directly to retained

earnings. (These can be found in changes in retained earnings.) These errors are

disclosed as footnotes explaining the nature of the error and its effect on net

income.



Balance Sheet basics

Balance Sheet Categories

The balance sheet provides information on what the company owns (its assets),

what it owes (its liabilities) and the value of the business to its stockholders

(the shareholders' equity) as of a specific date.

Total Assets = Total Liabilities + Shareholders' Equity

� Assets are economic resources that are expected to produce economic benefits

for their owner.� Liabilities are obligations the company has to outside parties. Liabilities

represent others' rights to the company's money or services. Examples include

bank loans, debts to suppliers and debts to employees.

� Shareholders' equity is the value of a business to its owners after all of its

obligations have been met. This net worth belongs to the owners.

Shareholders' equity generally reflects the amount of capital the owners have

invested, plus any profits generated that were subsequently reinvested in the

company.







� Investments These are investments that management does not expect to sell within

the year. These investments can include bonds, common stock, long-term notes,

investments in tangible fixed assets not currently used in operations (such as land held

for speculation) and investments set aside in special funds, such as sinking funds,pension funds and plan-expansion funds. These long-term investments are reported at

their historical cost or market value on the balance sheet.

� Fixed assets These are durable physical properties used in operations that have a

useful life longer than one year. This includes:

± Machinery and equipment This category represents the total machinery,

equipment and furniture used in the company's operations. These assets arereported at their historical cost less accumulated depreciation.

± Buildings (plants) These are buildings that the company uses for its operations.

These assets are depreciated and are reported at historical cost less accumulated

depreciation.

± Land The land owned by the company on which the company's buildings or plants

are sitting on. Land is valued at historical cost and is not depreciable under U.S.GAAP

� Other assets This is a special classification for unusual items that cannot be included in

one of the other asset categories. Examples include deferred charges (long-term prepaid

expenses), non-current receivables and advances to subsidiaries.





� Accrued liabilities (accrued expenses) - These liabilities arise because an expense

occurs in a period prior to the related cash payment. This accounting term is usually

used as an all-encompassing term that includes customer prepayments, dividends

payables and wages payables, among others.� Notes payable (short-term loans) This is an amount that the company owes to a

creditor, and it usually carries an interest expense.

� Unearned revenues (customer prepayments) These are payments received by

customers for products and services the company has not delivered or started to

incur any cost for its delivery.

� Dividends payable This occurs as a company declares a dividend but has not of

yet paid it out to its owners.

Current portion of long-term debt - The currently maturing portion of the long-

term debt is classified as a current liability. Theoretically, any related premium or

discount should also be reclassified as a current liability.

� Current portion of capital-lease obligation This is the portion of a long-term

capital lease that is due within the next year.



4. Long-term Liabilities These are obligations that are reasonably expected to be liquidated

at some date beyond one year or one operating cycle. Long-term obligations are

reported as the present value of all future cash payments. Usually included are:

� Notes payables This is an amount the company owes to a creditor, which usually cariesan interest expense.

� Long-term debt (bonds payable) This is long-term debt net of current portion.

� Deferred income tax liability GAAP allows management to use different accounting

principles and/or methods for reporting purposes than it uses for corporate tax fillings

(IRS). Deferred tax liabilities are taxes due in the future (future cash outflow for taxes

payable) on income that has already been recognized for the books. In effect, althoughthe company has already recognized the income on its books, the IRS lets it pay the taxes

later (due to the timing difference). If a company's tax expense is greater than its tax

payable, then the company has created a future tax liability (the inverse would be

accounted for as a deferred tax asset).



Share holders Equity basics:

� Components of Shareholders Equity

Also known as equity and net worth, the shareholders equity refers to the

shareholders ownership interest in a company.Usually included are:

� Preferred stock This is the investment by preferred stockholders, which have

priority over common shareholders and receive a dividend that has priority over

any distribution made to common shareholders. This is usually recorded at par

value.

� Additional paid-up capital (contributed capital) This is capital received from

investors for stock; it is equal to capital stock plus paid-in capital. It is also called

contributed capital.

Common stock This is the investment by stockholders, and it is valued at par or

stated value.

� Retained earnings This is the total net income (or loss) less the amount

distributed to the shareholders in the form of a dividend since the companys

initiation.

� Other items This is an all-inclusive account that may include valuation allowance

and cumulative translation allowance (CTA), among others. Valuation allowance

pertains to noncurrent investments resulting from selective recognition of market

value changes.





Stockholders Equity Statement

Instead of presenting a detailed stockholders equity section in the balance

sheet and a retained earnings statement, many companies prepare a

stockholders equity statement.

This statement shows the changes in each type of stockholders equity

account and the total stockholders equity during the accounting period.

This statement usually includes:

� Preferred stock

� Common stock

� Issue of par value stock

� Additional paid-in capital

� Treasury stock repurchase

� Retained earning















1. Cash Flow from Operating Activities (CFO)

CFO is cash flow that arises from normal operations such as revenues and cash

operating expenses net of taxes.

2. Cash Flow from Investing Activities (CFI)CFI is cash flow that arises from investment activities such as the acquisition or

disposition of current and fixed assets.

3. Cash flow from financing activities (CFF)

CFF is cash flow that arises from raising (or decreasing) cash through the issuance

(or retraction) of additional shares, short-term or long-term debt for the company's

operations.

The statement of cash flow can be presented by means of two ways:

The indirect method

The direct method

The Indirect Method

The indirect method is preferred by most firms because it shows a reconciliation from reported net income to cash provided by operations.









� Financial Statement Footnotes

These footnotes are additional information provided to the reader in an effort to

further explain what is displayed on the consolidated financial statements.

Generally accepted accounting principles (GAAP) and the SEC require thesefootnotes. The information contained in these footnotes help the reader

understand the amounts, timing and uncertainty of the estimates reported in the

consolidated financial statements.

Included in the footnotes are the following:

� Balance sheet and income statement breakdown of items such as:

± The revenues-recognition method used

± Depreciation methods and rates

� Balance sheet and income statement breakdown of items such as:

± Marketable securities

± Significant customers (percentage of customers that represent a significant

portion of revenues) ± Sales per regions

± Inventory

± Fixed assets and Liabilities (including depreciation, inventory, accounts

receivable, income taxes, credit facility and long-term debt, pension liabilities

or assets, contingent losses (lawsuits), hedging policy, stock option plans



Audit: An audit is a process for testing the accuracy and completeness of information

presented in an organization's financial statements. This testing process enables an

independent Certified Public Accountant (CPA) to issue what is referred to as "an

opinion" on how fairly a company's financial statements represent its financial positionand whether it has complied with generally accepted accounting principles.

� The audit report is addressed to the board of directors as the trustees of the

organization. The report usually includes the following:

� a cover letter, signed by the auditor, stating the opinion.

� the financial statements, including the balance sheet, income statement and statement

of cash flows� notes to the financial statements

� In addition to the materials included in the audit report, the auditor often prepares

what is called a "management letter" or "management report" to the board of directors.

This report cites areas in the organization's internal accounting control system that the

auditor evaluates as weak.

What Does the Auditor Do?The auditor will request information from individuals and institutions to confirm:

� bank balances

� contribution amounts

� conditions and restrictions

� contractual obligations



Auditor ResponsibilityAuditors are not expected to guarantee that 100% of the transactions are recorded

correctly. They are required only to express an opinion as to whether the financial

statements, taken as a whole, give a fair representation of the organization'sfinancial picture. In addition, audits are not intended to discover embezzlements or

other illegal acts. Therefore, a "clean" or unqualified opinion should not be

interpreted as assurance that such problems do not exist.

The QualifiedOpinionAn unqualified opinion indicates that the auditor believes the statements are free

from material omissions and errors. A qualified opinion is issued when theaccountant believes the financial statements are, in a limited way, not in

accordance with generally accepted accounting principles. A qualified option may

be issued if the auditor has concerns about the going-concern assumption of the

company, the valuation of certain items on the balance sheet or some unreported

pending contingent liabilities.

Proxy Statement: are issued to share holders when there are matters that require ashareholder vote. These statements which are also filed with the SEC and available

about the election of different sources.



Objectives of Financial ReportingObjectives of financial reporting identified in SFAC 1 are to do the following:

� They are to provide information that is useful to present and potential investors

and creditors and other users in making rational investment, credit, and similardecisions. (Note the FASB's emphasis on investors and creditors as primary users.

However, this does not exclude other interested parties.)

� They are to provide information to help present and potential investors and

creditors and other users in assessing the amounts, timing and uncertainty of

prospective cash receipts from dividends or interest and the proceeds from the

sale, redemption or maturity of securities or loans. (Emphasize the difference

between the cash basis and the accrual basis of accounting.)

� They are to provide information about the economic resources of an enterprise,

the claims on those resources and the effects of transactions, events andcircumstances that change its resources and claims to those resources.



Accounting Qualities:

1) Primary qualities of useful accounting information:

- Relevance - Accounting information is relevant if it is capable of making a

difference in a decision.Relevant information has:

(a) Predictive value

(b) Feedback value

(c) Timeliness

- Reliability - Accounting information is reliable to the extent that users can

depend on it to represent the economic conditions or events that it purports torepresent.

Reliable information has:

(a) Verifiability

(b) Representational faithfulness

(c) Neutrality

2) Secondary qualities of useful accounting information:Comparability - Accounting information that has been measured and reported in

a similar manner for different enterprises is considered comparable.

Consistency - Accounting information is consistent when an entity applies the

same accounting treatment to similar accountable events from period to period.











Internal Liquidity Ratios

1. Current Ratio: This ratio is a measure of the ability of a firm to meet its short-

term obligations. In general, a ratio of 2 to 3 is usually considered good. Too small a

ratio indicates that there is some potential difficulty in covering obligations. A highratio may indicate that the firm has too many assets tied up in current assets and is

not making efficient use to them.

Current ratio = current assets / current liabilities

2. Quick Ratio

The quick (or acid-test) ratio is a more stringent measure of liquidity. Only liquid

assets are taken into account. Inventory and other assets are excluded, as they may

be difficult to dispose of

Quick ratio = (cash+ marketable securities + accounts receivables)

current liabilities

3. Cash Ratio

The cash ratio reveals how must cash and marketable securities the company has

on hand to pay off its current obligations.

Cash ratio = (cash + marketable securities)/current liabilities

4. Cash Flow from Operations Ratio

Poor receivables or inventory-turnover limits can dilute the information provided

by the current and quick ratios. This ratio provides a better indicator of a

company's ability to pay its short-term liabilities with the cash it produces from

current operations.



Cash flow from operations ratio = cash flow from operations

current liability

Efficiency / Turnover Ratios

5. Receivable Turnover RatioThis ratio provides an indicator of the effectiveness of a company's credit policy.

The high receivable turnover will indicate that the company collects its dues from

its customers quickly. If this ratio is too high compared to the industry, this may

indicate that the company does not offer its clients a long enough credit facility,

and as a result may be losing sales. A decreasing receivable-turnover ratio may

indicate that the company is having difficulties collecting cash from customers, andmay be a sign that sales are perhaps overstated.

Receivable turnover = net annual sales / average receivables

Where:

Average receivables = (previously reported account receivable + current account

receivables)/2

6. Average Number of Days Receivables Outstanding (Average Collection Period)This ratio provides the same information as receivable turnover except that it

indicates it as number of days.

Average number of days receivables outstanding = 365 days_

receivables turnover









2. Operating Profit Margin

This ratio indicates the profitability of current operations. This ratio does not take into account

the company's capital and tax structure.

Operating profit margin = operating income/net sales

3. Per-Tax Margin (EBT margin)

This ratio indicates the profitability of Company's operations. This ratio does not take into

account the company's tax structure.

Pre-tax margin = Earning before tax/sales

4. Net Margin (Profit Margin)

This ratio indicates the profitability of a company's operations.

Net margin = net income/sales

5. Contribution Margin

This ratio indicates how much each sale contributes to fixed expenditures.

Contribution margin = contribution / sales

Where: Contributions = sales - variable cost



Return on Investment Ratios

1. Return on Assets (ROA)

This ratio measures the operating effi

cacy of a

company without regards to finan

cialstructure

Return on assets = (net income + after-tax cost of interest)

average total assets

OR

Return on assets = earnings before interest and taxes

average total assets

2. Return on Common Equity (ROCE)

This ratio measures the return accruing to common stockholders and excludes preferred

stockholders.

Return on common equity = (net income preferred dividends)

average common equity

3. Return on Total Equity (ROE)

This is a more general form of ROCE and includes preferred stockholders.

Return on total equity = net income/average total equity



Operating Efficiency Ratios

1. Total Asset Turnover

This ratio measures a company's ability to generate sales given its investment in total assets.

A ratio of 3 will mean that for every dollar invested in total assets, the company will generate

3 dollars in revenues. Capital-intensive businesses will have a lower total asset turnover than

non-capital-intensive businesses.

Total asset turnover = net sales / average total assets

2. Fixed-Asset Turnover

This ratio is similar to total asset turnover; the difference is that only fixed assets are taken

into account.

Fixed-asset turnover = net sales / average net fixed assets

3. Equity Turnover

This ratio measures a company's ability to generate sales given its investment in total equity

(common shareholders and preferred stockholders). A ratio of 3 will mean that for every

dollar invested in total equity, the company will generate 3 dollars in revenues.

Equity turnover = net sales / average total equity



FINANCIAL RISK RATIOS

Financial Risk This is risk related to the company's financial structure.

Analysis of a Company's Use of Debt

1.Debt to Total CapitalThis measures the proportion of debt used given the total capital structure of the company. A

large debt-to-capital ratio indicates that equity holders are making extensive use of debt,

making the overall business riskier.

Debt to capital = total debt / total capital

Where:

Total debt = current + long-term debt

Total capital = total debt + stockholders' equity

2. Debt to Equity

This ratio is similar to debt to capital.

Debt to equity = total debt / total equity

Analysis of the Interest Coverage Ratio

3. Times Interest Earned (Interest Coverage ratio)

This ratio indicates the degree of protection available to creditors by measuring the extent to

which earnings available for interest covers required interest payments.

Times interest earned = earnings before interest and tax

interest expense





DuPont SystemA system of analysis has been developed that focuses the attention on all three criticalelements of the financial condition of a company: the operating management,management of assets and the capital structure. This analysis technique is called the

"DuPont Formula". The DuPont Formula shows the interrelationship between keyfinancial ratios. It can be presented in several ways.The first is:

Return on equity (ROE) = net income / total equity

If we multiply ROE by sales, we get:

Return on equity = (net income / sales) * (sales / total equity)Said differently:

ROE = net profit margin * return on equity

The second is:

Return on equity (ROE) = net income / total equity

If in a second instance we multiply ROE by assets, we get:ROE = (net income / sales) * (sales / assets) * (assets / equity)Said differently:ROE = net profit margin * asset turnover * equity multiplier



Uses of the DuPont Equation

By using the DuPont equation, an analyst can easily determine what

processes the company does well and what processes can be improved.Furthermore, ROE represents the profitability of funds invested by the

owners of the firm.

All firms should attempt to make ROE as high as possible over the long

term. However, analysts should be aware that ROE can be high for the

wrong reasons. For example, when ROE is high because the equitymultiplier is high, this means that high returns are really coming from

overuse of debt, which can spell trouble.

If two companies have the same ROE, but the first is well managed (high

net-profit margin) and managed assets efficiently (high asset turnover) but

has a low equity multiplier compared to the other company, then an

investor is better off investing in the first company, because the capital

structure can be changed easily (increase use of debt), but changing

management is difficult.

More Useful DuPont Formula Manipulations

ROE = (net income / sales) * (sales / assets) * (assets / equity)



Limitations of Financial Ratios

There are some important limitations of financial ratios that analysts should be conscious

of:

� Many large firms operate different divisions in different industries. For these companies it is

difficult to find a meaningful set of industry-average ratios.

� Inflation may have badly distorted a company's balance sheet. In this case, profits will also

be affected. Thus a ratio analysis of one company over time or a comparative analysis of

companies of different ages must be interpreted with judgment.

� Seasonal factors can also distort ratio analysis. Understanding seasonal factors that affect a

business can reduce the chance of misinterpretation. For example, a retailer's inventory

may be high in the summer in preparation for the back-to-school season. As a result, the

company's accounts payable will be high and its ROA low.

� Different accounting practices can distort comparisons even within the same company

(leasing versus buying equipment, LIFO versus FIFO, etc.).

� It is difficult to generalize about whether a ratio is good or not. A high cash ratio in a

historically classified growth company may be interpreted as a good sign, but could also be

seen as a sign that the company is no longer a growth company and should command lowervaluations.

� A company may have some good and some bad ratios, making it difficult to tell if it's a good

or weak company.



Basic Earnings Per Share

EPS is simply the net income that is attributable to common shareholders divided by the number of shares

outstanding. If a company has a complex capital structure, it means that a portion of their dilutive

securities may be converted to equity at some point in time. Since EPS basic does not take into

account these dilutive securities, EPS basic will always be greater than EPS fully diluted.Basic Earnings Per Share (EPS)

EPS basic does not consider potential dilutive securities. A company with a simple capital structure

will calculate only a basic EPS, which is defined as:

Basic EPS = (net income preferred dividends)_____

weighted average number of shares outstanding

- Dividends declared to common stockholders are not subtracted from ESP as they belong tocommon stockholders.

- Preferred stock dividends are the current year's dividend only.

(a) If none are declared, then calculate an amount equal to what the current dividend would

have been.

(b) Don't include dividends in arrears.

(c) If a net loss occurs, add the preferred dividend.

- EPS is calculated for each component of income: income from continuing operations, income

before extraordinary items or changes in accounting principle, and net income.

Calculating the Weighted Average Number of Shares Outstanding

The weighted average number of shares outstanding (WASO) is:

The # of shares outstanding during each month, weighted by the # of months those shares were

outstanding.











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