The profit figure that most investors and Wall Street types care about most is called earnings per share, or EPS. It takes a company's net income (the absolute bottom-line number) and divides that by the number of shares the company has outstanding. It brings the profit figure down to the level of the shareholder.
The math is fairly simple: net income divided by the number of shares. However, the calculation can become intricate, mostly because the number of shares isn't always a straightforward figure.
You've got the number of shares that are out in the world. That number is easy enough to deduce. But you've also got things like employee stock options and warrants held by investors. These shares aren't out there yet, but they could be at any time. They are there, but...not there.
Enter the treasury stock method. This technique for calculating the number of shares used in the EPS equation takes into account the new shares that could come into existence through the options and warrants that haven't been exercised yet.
Once these shares are added into the total, they become the divisor in the earnings per share equation. The number that results is known as "diluted EPS." It represents the EPS figure as it would stand if everything were exercised and everyone's ownership stake was as diluted as it could be under the current obligations.
Related or Semi-related Video
Cost Accounting: What are the Ethics of ...0 Views
and finance Allah shmoop What are the ethics of cost
accounting All right Feel you're a street side grift or
running a three card monte scam You make your living
fleecing tourists of small amounts of money You know $20
here $20 there Well if something goes wrong in a
mark figures out your scam Well it's pretty easy to
run away You could just slip down the alley and
you know disappear into the city Well it's not so
easy for an accountant A dishonest accountant cannot retreat into
a hideout in an abandoned building And meanwhile a dishonest
accountant has control over way more than 20 bucks here
in 20 bucks There he has the ability to cause
much more damage where there are millions or even billions
of dollars at stake Will company finances represent a key
pillar of the global economic system and their reporting has
to be honest without trust in those numbers you know
toe accurately reflect reality While the whole system would grind
to a halt accurate financial results help managers make informed
decisions the financial details let them know how best to
use capital in what products they should be focusing on
toe optimize returned to their owners or shareholders will Meanwhile
accurate books let investors know whether the company represents a
good place to put their money or not While keeping
to the straight and narrow is important for an accountant
there are temptations to bend the rules Like you know
presenting results that improve on reality can help the company
raise cheap capital because of a higher stock price And
they're selling fewer shares to raise more money or something
like that or on the other side of the spectrum
Being overly conservative you could notionally fix the books to
mask profits and help firms avoid hefty tax bills You
got tired of your small time scams you know grifting
and all that and you went to accounting school Now
you're head of the accounting department at Snapshot Ink a
company that makes handcuffs Well the firm has been losing
money and is getting to the point where it might
soon run out of cash in order to save the
money Your CEO wants to bring in new investors and
raise some money He asks you Teo you know fix
the books so that it's easier to convince people to
part with their money and invest in this company That's
really not going bankrupt As a former con artist you're
happy that help him out so you fudge the numbers
will First you create a brand new company cuff maker
L l see you make yourself CEO You're also the
only employee You transfer ownership of all the machinery that
makes the coffee to the new company snap shut then
leases the machinery back from Cuff Maker But it's a
sweetheart deal a dollar a month rental fee All that
appreciation for the machines appears on cuff makers Books Yeah
it's grossly unprofitable After all it only has $12 of
annual revenue and about $1,000,000 in depreciation recorded every year
But you don't try to sell investors on cuff maker
You're looking to bring in investors for the original company
With all the appreciation of snapshots finances well it suddenly
looks way more profitable That expense vanishes Meanwhile you make
a move to boost revenue Well here's how the typical
sales cycle for snapshot works You receive orders from law
enforcement agencies It typically takes you about 30 days to
fill these orders You send the handcuffs to the customers
along with a bill for the coffee They usually send
you a check 30 days after that Well your policy
until now has been to record the revenue you receive
Once you receive the check the money comes in You
recorded on your financial statements all over there but you
make a change in policy From now on you're going
to record the revenue as soon as you receive the
order Will The order form comes in for $20,000 in
you know replacement handcuffs for the Chicago Police Department Usually
you wouldn't record that revenue for about 60 days 30
days to fill the order and then 30 days after
that you know for them to pay Net 30 But
as soon as the order comes in now you put
$20,000 into the revenue column on your financial statements right
You haven't actually received any money You probably won't receive
any for a couple of months you know assuming the
CPD pays on time and Illinois doesn't go bankrupt first
but you add 20 grand to your revenue line anyway
Well the new policy boost your revenue figures suddenly for
awhile boost won't last in a couple months Things will
even out Your top line figure will be back to
normal But for now you have some revenue coming in
under the old policy I'II checks you're receiving from previous
orders and you have some new revenue being booked under
the new policy AII fresh orders that are arriving now
your shady accounting changes leave you with higher looking revenue
for now at least temporarily And they leave you with
lower expenses because you offloaded all that depreciation onto a
shell company Yes Welcome to the world of non ethical
cost accounting In the new set of finances Snap Shut
runs a profit Yeah with pretty healthy profit margins Who
will based on those fraudulent financials and investor than hands
over $10,000,000 But in real life the company is still
losing money Snapshot quickly burns through that $10,000,000 investor gets
impatient about returns and well the book's still show a
thriving business But guess what Things start to seem you
know fishy Well the investor demands an outside auditor Come
in and look at your numbers And well guess what
The auditors discovered the fraud Now the company is going
bankrupt anyway The investors lost his additional $10,000,000 that he
just put in based on your numbers and you and
your CEO are going to jail the biggest real life
accounting fraud scandal in history Let's modern history involved in
Iran and energy trading company that for a time was
one of the biggest corporations in the United States At
the end of 2000 the company was worth something like
$100,000,000,000 or at least close to that But its valuation
was based on completely fraudulent accounting And while the company
ostensibly built its energy trading business a group of company
executives used tricky accounting And while they hid massive losses
at the firm the fraud allowed them to get rich
on bonuses and stock options that they were granted The
scandal was eventually exposed in two thousand one when the
executives were unable to mask the losses any longer and
they well basically just ran out of cash They attempted
a massive right down but it wasn't good enough to
save the company and Ron filed for banker in December
of two thousand one and at the time it represented
the largest bankruptcy in US history Well guess why records
are meant to be broken right So that record was
quickly eclipsed by another company brought down by accounting fraud
WorldCom It's faulty accounting Put it under In two thousand
two it replaced in Iran as the biggest all time
loser So bottom line if you have a con artist
Street best to stay out of accounting you gotta stick
to the three card money thing where you won't endanger
multibillion dollar corporations and it'll be way easier to stay 00:06:34.717 --> [endTime] out of those snapshot handcuffs
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