8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
1/135
Cash Flow Analysis
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
2/135
Learning Objectives
Describe the nature and purpose of the Statement of Cash flows.
Define Cash and Cash Equivalents
Distinguish among operating, investing, and financing activities.
Describe the content and the form of Statement of Cash flows.
Compute and explain the differences between the direct andindirect method of determining the net cash flows provided byoperating activities
Prepare the statement of cash flows using both the visual inspectionmethod and worksheet method.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
3/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
4/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
5/135
Information obtained fromCash Flow Statement
The changes in net assets of an enterprise and its ability to affect theamounts and timing of cash flows in order to adopt to changincircumstances and opportunities
The ability of the enterprise to generate cash and cash equivalents andenables the users to develop models to assess and compare the presentvalue of the future cash flows of different enterprise
It enhances the comparability of the reporting of the operatinperformance by different enterprise because it eliminates the effects ofusing different accounting treatments for the same transactions andevents.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
6/135
Cash and Cash Equivalents
Cash comprises cash on hand and demand deposits
Cash equivalents is short term and highly liquid investment that arereadily convertible into cash and acquired three months or lessbefore the date of maturity
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
7/135
Classification of cash flow activities
OPERATING ACTIVITIES
Measuring the cash inflows and outflows caused by core businessoperations, the operations component of cash flow reflects howmuch cash is generated from a company's products or services.Generally, changes made in cash, accounts receivable, inventoryand accounts payable are reflected in cash from operations.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
8/135
Operations
Cash flows from operating activities are related to your principal lineof business and include the following:
Cash inflows
Cash receipts from sales or for the performance of services
Returns on interest earnings assets (interest)Returns on equity securities (dividends)
Receipts from contracts held for dealing and trading purposes
Tax refunds unless identified with financing and investing activities
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
9/135
Operations
Cash Outflows
Payments to suppliers and contractors
Payment for operating expenses (salaries, rent, insurance, etc.)
Payment for purchases from suppliers other than inventory(supplies)
Payment for lenders (interest)Tax payments
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
10/135
Investing
Changes in equipment, assets or investments relate to cash frominvesting. Usually cash changes from investing are a "cash out" itembecause cash is used to buy new equipment, buildings or short-termassets such as marketable securities. However, when a companydivests of an asset, the transaction is considered "cash in" fcalculating cash from investing.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
11/135
Investing
Cash inflowsProceeds from the sale of property, plant and equipment
Proceeds from the sale or redemption of investments
Collection of loans (principal) to others (other than advances and loansmade by a financial institution)
Cash outflowsPurchases of property, plant and equipment
Purchases of stock or other securities (other than cash equivalents)
Loans (principal) to others (other than advances and loans made by afinancial institution)
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
12/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
13/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
14/135
Non-cash transactions
Provides that investing and financing transactions that do not requireuse of cash and cash equivalents shall be excluded from statement ofcash flows.
a. Acquisition of asset either by assuming directly related liability by means of finance lease
b. Acquisition of asset by means of issuing share capital or bondpayable
c. Conversion of debt to equity
d. Conversion of preference share to ordinary share
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
15/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
16/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
17/135
Selected transactions of the Davis Company are listed below.
1. Common stock is sold for cash above par value.
2. Bonds payable are issued for cash at a discount.
3. Interest on a short-term note receivable is collected.4. Merchandise is sold to customers for cash.
5. Cash is paid to purchase inventory.
6. Equipment is purchased by signing a 3-year, 10% notepayable.
7. Cash dividends on common stock are declared and paid.
8. One hundred shares of XYZ common stock are purchased forcash.
9. Land is sold for cash at book value.
10. Bonds payable are converted into common stock.
Instructions
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
18/135
CONTENT AND FORM OF T
STATEMENT OF CASH FLO
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
19/135
A statement of cash flows for a period shall reportthe following:
A. Net cash provided or used by:Operating Activities
Investing Activities
Financing Activities
B. Net effect of those inflows and outflows on Cashand Cash Equivalents
NOTE: Noncash investing and financing transactions shall bedisclosed in the Notes to Financial Statements.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
20/135
REPORTING REQUIREM
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
21/135
Reporting Requirement #1
Report cash flows from operating activitiesusing either:
Direct Method
Indirect Method
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
22/135
Direct Method
In reporting the cash flows from operating activitiesenterprises are encouraged to report major classes of grossreceipts and gross cash payments and the net cash flowfrom operating activities.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
23/135
Under the direct method you would then report the following in the cashflows from operating activities section of the cash flow statement:
Cash Inflows from Operating Activities
Cash receipts from customersInterest and dividends collected
Other operating receipts
Cash Outflows for Operating ActivitiesCash payments to suppliers
Cash paid for operating expensesInterest paid
Other operating payments
Taxes paid
Equals net cash provided by (used in) operating activities
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
24/135
Cash receipts from customers:
Net sales per the income statement
Plus decrease in accounts receivable
Minus increase in accounts receivable
Plus increase in deferred revenue
Minus decrease in deferred revenue
Equals cash receipts from customers
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
25/135
Interest and Dividends CollectedInterest revenue and dividend income per income statement
Plus decrease in interest receivableMinus increase in interest receivable
Plus amortization of premium on investment in bonds
or
Minus amortization of discount on investment in bonds
Equals interest and dividends collected
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
26/135
Other operating receiptsOther revenues per income statement
Plus increase in unearned revenuesMinus decrease in unearned revenues
Minus gains on disposal of assets and liabilities
Minus investment income (equity method)
Equals cash inflows from other operating receipts
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
27/135
Cash payments to suppliers:
Cost of goods sold
Plus increase inventoryMinus decrease inventory
Plus decrease in accounts payable
Minus increase in accounts payable
Equals cash payments for inventory
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
28/135
Cash paid for operating expenses:
Operating expenses per income statement
Minus depreciation expenses, depletion andamortization
Plus increase in prepaid expenses
Minus decrease in prepaid expenses
Plus decrease in accrued expensesMinus increase in accrued expenses
Equals cash paid for operating expenses
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
29/135
Interest paid:Interest expense per the income statement
Plus decrease in interest payableMinus increase in interest payable
Plus amortization of premium on bonds payable
or
Minus amortization of discount on bonds payableEquals interest paid
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
30/135
Other operating payments:
Other expenses per income statement
Minus losses on disposal of assets and liabilitiesMinus investment loss (equity method)
Equals other operating payments
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
31/135
Tax Expense:Tax expense per the income statement
Plus decrease in taxes payableMinus increase in taxes payable
Plus decrease in deferred tax liability
or
Minus increase in deferred tax liabilityEquals taxes paid
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
32/135
Indirect Method
In preparing the cash flows from operatingactivities section under the indirect method, youstart with net income per the income statement,reverse out entries to income and expenseaccounts that do not involve a cash movement,and show the change in net working capital.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
33/135
Net income after taxes
PLUS
A decrease in current assets would be shown as a positive figure, because other current assets wereconverted into cash.
An increase in current liabilities (excluding short-term debt which would be reported in the financingactivities section) would be shown as a positive figure since more liabilities mean that less cash wasspent.
Depreciation, depletion and amortization expense
Amortization of discount on bonds payable
Amortization of premium on investment in bondsIncreased in deferred income taxes
Loss (net) on disposal of assets or liabilities
Investment loss under the equity method
Interest expense
Income taxes
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
34/135
MINUSAn increase in current assets (excluding cash and cash equivalents)
would be shown as a negative figure because cash was spent orconverted into other current assets, thereby reducing the cash balance.
A decrease in current liabilities would be shown as a negative figure,because cash was spent in order to reduce liabilities.
Amortization of premium on bond payable
Amortization of discount on investment in bonds
Decrease in deferred income taxes
Gain (net) on disposal of assets or liabilities
Investment income under the equity method
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
35/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
36/135
Reporting Requirement #2
Report separately major classes of receiptsand payments arising from investing andfinancing activities
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
37/135
Reporting Requirement #3
Cash flows arising from the following operating,investing or financing activities may be reported on a
net basis:Cash receipts and payments on behalf of customers when thecash flows reflect the activities of the customer rather than those
of the entityCash receipts and payments for items in which the turnover isquick, the amounts are large and the maturities are short
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
38/135
Reporting Requirement #4
Cash flows arising from each of the followingactivities of a financial institution may be reported on
a net basis:Cash receipts and payments for the acceptance and repaymentof deposits with a fixed maturity date
Placement of deposits with and withdrawal of deposits from otherfinancial institutions
Cash advances and loans made to customers and the repaymentof those advances and loans
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
39/135
Reporting Requirement #5
Cash flows arising from transactions in aforeign currency that should be recordedin an entitys functional currency
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
40/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
41/135
Reporting Requirement #7
Cash flows arising from taxes on incomeshall be separately disclosed and shall beclassified as cash flows from operatingactivities.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
42/135
PROCEDURES IN PEPARIN
STATEMENT OF CASH FL
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
43/135
2 Common Procedures
VISUAL INSPECTION METHOD
WORKSHEET METHOD
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
44/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
45/135
Steps in Visual Inspection Method
Step 1. Prepare the heading of the SCFStep 2. Determine the net chance in cash that occurredduring the period
Step 3. Determine the companys NI to be listfirst item in CF from operating activities section
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
46/135
Steps in Visual Inspection Method
Step 4. Determine the changes and of each BS accountStep 5. If no cash flow occurred, determine whether the increase ordecrease in each balance is due to non cash IS item.
Step 6. Complete the various sections of SCF.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
47/135
Steps in Visual Inspection Method
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
48/135
Steps in Visual Inspection Method
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
49/135
WORKSHEET METHOD
Commonly used in practice because analysis of even the mostcomplex set of Financial Statements may be documented in arelatively concise working paper.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
50/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
51/135
Steps in Worksheet Method
Step 4. Make a final worksheet entry to record the netchange in cash.
Step 5. Prepare SCF and accompanying schedule.
f
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
52/135
Example of Worksheet Method
l f k h h d
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
53/135
Example of Worksheet Method
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
54/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
55/135
METHOD USED TO ANALY
STATEMENT OF CASH FLO
STEPS USED TO ANALYZE
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
56/135
STEPS USED TO ANALYZESTATEMENT OF CASH FLOW
Scan the big pictureCheck the power of the Cash Flow engine
Determine the Positive and Negative outcome
Integration
St 1 S th bi i t
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
57/135
Step 1: Scan the big picture
Place your company in context in terms of its age, industry and size.Flip through the annual report and other accounting records todetermine how management believes the year progressed.
Look at Net Income. Does it show income or losses over the pasfew years?
Step 2: Check the power of the
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
58/135
Step 2: Check the power of theCash Flow engine
Check if CF from operating activities is greater than zero. Checkwhether it is growing or shrinking.
Examine the operating working capital accounts. Inventoriesreceivables, and accounts payable usually grow in expandingcompanies.
Step 3: Determine the Positive and
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
59/135
Step 3: Determine the Positive andNegative outcome
Check CF from Investing activities, whether the company generating cash in its investing activities.
Check the entire package to determine the good or bad outcomesof CF in Financing Activities.
Step 4: Integration
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
60/135
Step 4: Integration
Putting the piece altogether.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
61/135
The advantages of cash flow
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
62/135
The advantages of cash flowaccounting
Survival in business depends on the ability to cashCash flow is more comprehensive than profitdependent on accounting conventions and conceptCreditors are more interested in an entitysrepay them than in its profitability
The advantages of cash flow
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
63/135
The advantages of cash flowaccounting :
Cash flow reporting provides a better means of comparing theresults of different companies than traditional profit reporting
Cash flow reporting satisfies the needs of all users better
Cash flow forecasts are easier to prepare, as well as more useful theprofit forecasts
Chapter 7
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
64/135
Chapter 7
Gross Profit VariationAnalysis and
Earnings Per ShareDetermination
Objective of gross profit variation
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
65/135
Objective of gross profit variationanalysis
Explain the objective of Gross Profit variation Analysis
State and Explain the factors affecting the change in gross profit
Describe and apply the techniques in G/P Variation Analysis
Analyze the change in Gross Profit of a company
Single product line
Multiple product line
state the procedures in the computation of basic and diluted earnings pershare
Compute the BPS and DPS in accordance with PAS 33 Earnings Per Share
What affects Gross Profit
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
66/135
What affects Gross Profitdetermination?
VolumeSelling priCost
Sales mix
Volume Factor
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
67/135
Change insales volumand its affeon sales, cosales and grprofit
Volume Factor
Selling Price Factor
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
68/135
Se g ce acto
Change in uselling priceits effect onsales and gr
profit
Cost Factor
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
69/135
Change in cost and effect on cosales and
profit
Techniques in analyzingG P fit V i ti
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
70/135
Gross Profit Variation A firm that manufactures or buy
and sell only one product;
A firm that manufactures or buys
and sell two or more products withunequal gross margin
Sell only One Product
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
71/135
y
Formula:Volume/Quantity factor:
Sales this year at last years price xx
Less: Sales Last year xx
Increase (Decrease) in Sales xx
Multiply by: G/P Margin Last Year x%
Increase(Decrease) in G/P xx
Sell only One Product
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
72/135
y
Formula:Price factor:
Sales this Year xx
Less: Sales this Year at last years Price xx
Increase(Decrease) in G/P xx
Sell only One Product
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
73/135
y
Cost factor:Formula:
Cost of Sales this Year xx
Less: cost of Sales this Year at last years Cost xx
Increase(Decrease) in G/P xx
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
74/135
Sell Multiple Products
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
75/135
Cost factor:
Formula:
Cost of Sales this Year xx
Less: Cost of Sales of different products
this Year at last years Cost xx
Increase(Decrease) in G/P xx
Sell Multiple Products
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
76/135
Formula:
Volume/Quantity factor:
Sales this year(units) xx
Less: Sales Last year(units) xx
Increase (Decrease) in Total Quantity xx
Multiply by: Average G/P Margin
Last Year x%
Increase(Decrease) in G/P xx
Sell Multiple Products
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
77/135
Sales mix factor
Formula
Average G/P per unit at last Years Price xx
Less: Average G/P per Unit last Year xx
Increase(Decrease) in ave. G/P per unit xx
Multiplies By: Total Quantity Sold This Year xx
Increase(Decrease) in Gross Profit xx
Sample Problem:
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
78/135
2013 2012
Sales 15,000 10,000
Cost of sales 10,000 6,000
Gross profit 5,000 4,000
Additional information:
Units sold 500 400
Selling price 30 25Cost per unit 20 15
Gross profit rate 50% 40%
S l P bl
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
79/135
2013 2012
Sales 15,000 10,000
Cost of sales 10,000 6,000
Gross profit 5,000 4,000
Questions:
Selling price increase by 25%
Quantity increase by 10%
Cost per unit increased by 10%
Sample Problem:
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
80/135
Earnings Per ShareDetermination
Earnings Per Share Determination
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
81/135
Basic Earnings Per Share
Diluted Earnings Per Share
Earnings Per Share
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
82/135
PAS 33 prescribes the principles for the determination andpresentation of EPS for enterprises whose ordinary shpotential ordinary share are publicly traded and byenterprises that are in the process of issuing ordinary share orpotential ordinary shares in public securities market or anyenterprise which discloses earnings per share.
Earnings Per Share (Presentation)
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
83/135
Face of the Incomestatement
Continuing Operation Discontinued Operation
Either on the Face of the incomeStatement or notes to FS
EPS (Presentation)
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
84/135
Notes to FS
Consolidated FS
Face of the SeparateIncome Statement
Separate FS
Uses of Earnings Per Share
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
85/135
Determinant of Market PriceMeasure of Performance
Basic Earnings Per Share
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
86/135
The Basic Equation :
Net Income(Loss) attributable to OSWeighted-Average
Common Shares OutstandingThe Complications :
Issuance or reacquisition of common stock Stock dividends or stock splits
Guidelines to be observed in applyingth f l
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
87/135
the formula
For the purpose of calculating basic earningsper share, the net income or loss for the periodattributable to ordinary shareholders should bethe net income or loss for the period after
deducting preferred dividends.
Guidelines to be observed in applyingthe formula
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
88/135
the formula
The amount of preferred dividends that isdeducted from the net income for the period
Noncumulative preference share
Cumulative preference share
Basic Earnings Per Share(Illustration 1)
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
89/135
Preference share capital, P100 par, 10% cumulativeP1,000,000
Ordinary Share capital, P100 par, 50000 sharesP5,000,000
Income From Continuing Operation P1,500,000
Income From Discontinued Operation P 500,000
Compute for BEPS.
Computation of BEPS
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
90/135
Income From Continuing Operation P1,500,00Preference dividends for current year P 100,00Income to ordinary share P1,400,00
BEPS
Income From Continuing Operation P28Income from Discontinued Operation P10Net income P38
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
91/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
92/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
93/135
Basic Earnings Per Share
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
94/135
Shares Outstanding January 1: 10,000New Shares Issued May 1: 5,000
Shares Repurchased November 1: 2,000
Weighted-Average Number of Shares
Jan. 1 to May 1 10,000 x 4/12 = 3,333
May 1 to Nov. 1 15,000 x 6/12 = 7,500
Nov. 1 to Dec. 31 13,000 x 2/12 = 2,167
Dec. 31 Weighted-average shares 13,000
Guidelines to be observed in applyingthe formula
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
95/135
the formulaThe weighted average number of ordinaryshares outstanding during the period and for allperiods presented should be adjusted forevents, other that the conversion of potentialordinary shares, that have changed the numberof ordinary shares outstanding, without a
corresponding change in resources.
Illustration 4 comparative incomestatement
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
96/135
statementNet income 2011 7,200,0
Net income 2012 6,000,0Ordinary shares Outstanding on Jan.1,2011 200,000
On Oct 1, 2012 entity implemented bonus issue in the ratioof two ordinary shares for each original ordinary share.
Compute for BEPS.
Computation
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
97/135
Ordinary share Outs.-Jan.1,2011 200,000Bonus Issue on October1, 2012 400,000Total ordinary shares Outs. 600,000
BEPS2011(7,200,000/600,000) 122012(6,000,000/600,000) 10
Guidelines to be observed in applyingthe formula
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
98/135
the formula
Stock dividend and Share Split
Stock Dividends and Stock Splitsh d
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
99/135
Shares outstanding January 1.. 2,600
Shares issued for exercise
of options on February 1. 400Shares issued for 10% stock
dividend on May 1.. 300
Shares sold for cash on September 1.. 1,200
Shares repurchased on November 1 400Shares issued for 3-for-1 stock split
on December 15 8,200
Stock Dividends and Stock Splits
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
100/135
1/1 to 2/1 2,6002/1 Option 4002/1 to 5/1 3,000
No. of Stock Stock Portion of WeightedDate Shares Dividend Split Year Average
Stock Dividends and Stock Splits
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
101/135
No. of Stock Stock Portion of WeightedDate Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.10 2/1 Option 4002/1 to 5/1 3,000 x 1.105/1 Dividend 3005/1 to 9/1 3,300
Stock Dividends and Stock Splits
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
102/135
No. of Stock Stock Portion of WeightedDate Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.102/1 Option 4002/1 to 5/1 3,000 x 1.105/1 Dividend 3005/1 to 9/1 3,3009/1 Sale 1,200
9/1 to 11/1 4,500
Stock Dividends and Stock Splits
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
103/135
No. of Stock Stock Portion of WeightedDate Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.102/1 Option 4002/1 to 5/1 3,000 x 1.105/1 Dividend 3005/1 to 9/1 3,3009/1 Sale 1,200
9/1 to 11/1 4,50011/1 Purchase (400)11/1 to 12/1 4,100
Stock Dividends and Stock Splits
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
104/135
No. of Stock Stock Portion of WeightedDate Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.102/1 Option 4002/1 to 5/1 3,000 x 1.105/1 Dividend 3005/1 to 9/1 3,3009/1 Sale 1,200
9/1 to 11/1 4,50011/1 Purchase (400)11/1 to 12/1 4,10012/1 Split 8,20012/1 to 12/31 12,300
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
105/135
Stock Dividends andStock Splits
All stock splits and stock dividends must
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
106/135
All stock splits and stock dividends mustbe incorporated into the computation of
weighted average shares outstanding.
This must done for all periodspresented in the financialstatements.
Current EPS figures may have tochanged in the future as a result ostock splits or dividends.
Guidelines to be observed in applyingthe formula
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
107/135
Rights Issue
Fair value per share immediately priorto the exercise of rights
Theoretical ex-rights fair value per share
Illustration 5 Compute for BEPSNet Income
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
108/135
2011 P1,375,000
2012 P1,762,000
Ordinary Outs. prior to rights issue 50,0
Rights issue during 2011-one new ordinary share for each 5outs. Or a total of 10,0
Date of exercise April 1, 2012MV of share Right-on P110
Exercise or subscription price P50
Theoretical Market value of share Ex-right
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
109/135
MV of Ordinary shares outstanding(50,000xP110) 5,500,00
Proceeds from Exercise of rights(10,000xP50) 500,0
Total
Theoretical Market value of share Ex-right
(6,000,000/60,000)
Computation for Adjustment Factor
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
110/135
Adjustment factor: 1.10Fair value per share immediatelyprior to the exercise of rights
______________________________________________Theoretical ex-rights fair value per share
110100
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
111/135
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
112/135
Computation for Basic Loss per share
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
113/135
Net loss (5,
Preference Share capital,100 par, 10% cumulative,20,000 shares convertible into 40,000 ordinaryshares P2,
Ordinary Share capital, 100 par, 100,000 shares
P10,0Compute for Basic loss per share.
Computation
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
114/135
Net Loss (5,
Preference dividend(2Mx10%) (200000
Total Loss to OS (5,2
Ordinary share outstanding 100,0
Basic Loss Per Share
Diluted Earnings Per Share
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
115/135
Net income attributable to OS as adjustedWeighted average number of OS and PD
Three Major Types of Potential OrdinaryShares
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
116/135
Convertible Bond Payable
Convertible Preference ShareShare option and Warrant
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
117/135
Simple and Complex Capital Structures
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
118/135
Considers onlycommon shares issuedandoutstanding.
Basic
Simple and Complex Capital Structures
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
119/135
Considers onlycommon shares issuedand
outstanding.
Basic
Reflects the maximumpotential dilution frompossible stock converthat would have
decreased EPS.
Diluted
Capital Structures
Simple Capital Structure- Complex Capital Structu
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
120/135
p pThe corporation has only
common and nonconvertiblepreferred stock and has noconvertible securities, stockoptions, warrants, or other
rights outstanding.
p pcorporation has one or
instruments outstandincould result in issuancadditional common shFor example, a firm wpotential for per share
Diluted Earnings per Share- Options,Warrants, and Rights
Dilution occurs if inclusion of a potentially dilutive securityd h b i EPS i h b i l h
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
121/135
reduces the basic EPS or increases the basic loss per share.
Proceeds from conversion are assumed to be used forpurchase of treasury stock at current market price.Treasury stock is assumed to be reissued to option or warrantholders.Any additional shares issued, over treasury stock, are addedto weighted - average shares outstanding. Exercise is assumed to occur on the first day of the yearunless issue date is later.
Guidelines to be observed in applyingthe formula
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
122/135
1. Adjustments may include on an after-tax basis the ff:
a. Dividends on dilutive potential ordinary share.b. Interest recognized in the period for the dilutive
potential
c. Any other changes in income or expenses thatwould result from the conversion of dilutive potentiaOS.
Illustration
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
123/135
An entity had the following securities outstanding on January 1,2011:10% convertible bonds payable, each P1000 bond convertibleinto 10 OS 4,Ordinary share capital, P100 par, 250,000 shares authorized,100,000 shares issued 1Net Income 5,Income Tax Rate
Compute for BEPS and DEPS.
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
124/135
Diluted Earnings Per share
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
125/135
Net Income 5,000,000
Interest expense 400,000Income tax (120,000) 280,000Adjusted net income 5,280,000OS actually outstanding100,000
Assumed Issued OS 40,000 140,000DEPS 3
Guidelines to be observed in applyingthe formula
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
126/135
Dilutive potential ordinary shares should deemed
to have been converted into ordinary shares atthe beginning of the period, if later, the date ofissue of the potential ordinary shares.
Guidelines to be observed in applyingthe formula
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
127/135
For the purpose of computing diluted earnings
per share, an enterprise should assume theexercise of dilutive options and other dilutivepotential common shares of the enterprise.
Options and Share warrants
Illustration
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
128/135
Net Income 5,000
Ordinary share capital,100 par, 100,000 shares10,0
Employee share option:Option shares 30,0Fair value of each share option 20Option price 13Average market price 2
Computation
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
129/135
BEPS(5M/100,000shares) 50
DEPS:Net income 5,000,000Option shares 30,000Total option price 150Proceeds from assumed exercise 4,500,000
Average market price 250Assumed treasury shares 18,000
Computation
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
130/135
Ordinary Share 100,000
Incremental OS:Option shares 30,000
Assumed TS (18,000) 12,000
Total ordinary shares 112,000
DEPS(5M/112,000) 44.64
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
131/135
Multiple Potential Ordinary Share(illustration)
An entity provide the following data for the current year.
Income from continuing operation 5,000,000
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
132/135
Income from continuing operation 5,000,000
Loss from discontinued operation (1,000,000)
Ordinary share Actually outstanding 500,000
Option shares 50,000
Option Price(including FV of stock option of P10) 60
Average market Price 75
Preference share capital, P100 par 5,000,000
Bond payable 5,000,000Income Tax rate 30%
The preference share capital is 5% cumulative and convertible into 25,000 ordinaryshares
The bond payable has nominal rate of 10% and convertible into 40,000 OS.
BEPS
f
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
133/135
Income from continuing operation 5,000,000
Preference dividends (250,000)Income to OS 4,750,000OS actually outstanding 500,000BEPS 9
BEPS for discontinued operation (2.00)
DEPS
INCOME ORDINARY SHARE
Basic EPS 4,750,000 500,000 9.50
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
134/135
Options 0 10,000
Diluted EPS 4,750,000 510,000 9.31Convertible bond 350,000 40,000
Diluted EPS 5,100,000 550,000 9.27
Convertible PS 250,000 25,000
Diluted EPS 5,350,000 575,000 9.30
8/12/2019 Cash Flow Analysis, Gross Profit Analysis, Basic Earnings Per Share and Diluted Earnings Per Share
135/135
THANK YOU!