Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 12 Special Income and Investment Reporting Issues 543

Corporations whose stock is traded in a public market must report earnings per

common share on their income statements.^7 If no preferred stock is outstanding, the

earnings per common share is calculated as follows:

Earnings per Common Share =

Net Income

Number of Common Shares Outstanding

When the number of common shares outstanding has changed during the period,

a weighted average number of shares outstanding is used. If a company has preferred

stock outstanding, the net income must be reduced by the amount of any preferred

dividends, as shown below.

Earnings per Common Share =

Net IncomePreferred Stock Dividends

Number of Common Shares Outstanding

Comparing the earnings per share of two or more years, based on only the net in-

comes of those years, could be misleading. For example, assume that Jones Corporation,

whose partial income statement was presented in Exhibit 1, reported $700,000 net income

for 2006. Also assume that no extraordinary or other unusual items were reported in 2006.

Jones has no preferred stock outstanding and has 200,000 common shares outstanding in

2006 and 2007. The earnings per common share is $3.50 ($700,000/200,000 shares) for 2006

and $4.16 ($832,000/200,000 shares) for 2007. Comparing the two earnings per share

amounts suggests that operations have improved. However, the 2007 earnings per share

number that is comparable to the $3.50 is $3.45, which is the income from continuing

operations of $690,000 divided by 200,000 shares. The latter amount indicates a slight

downturn in normal earnings.

When unusual items reported belowincome from continuing operations exist, earn-

ings per common share should be reported for those items. To illustrate, a partial income

statement for Jones Corporation, showing earnings per common share, is shown in

Exhibit 2. In this income statement, Jones reports all the earnings per common share

amounts on the face of the income statement. However, only earnings per share amounts

Earnings per common share:

Income from continuing operations $3.45

Loss on discontinued operations 0.50

Income before extraordinary items and cumulative effect

of a change in accounting principle $2.95

Extraordinary item:

Gain on condemnation of land, net of applicable income

tax of $65,000 0.75

Cumulative effect on prior years of changing to a different

depreciation method 0.46

Net income $4.16

Jones Corporation

Income Statement

For the Year Ended December 31, 2007

Exhibit 2

Income Statement with
Earnings per Share

7 Statement of Financial Accounting Standards No. 128, “Earnings per Share” (Norwalk, CT: Financial

Accounting Standards Board, 1997).