Question

Exercise 16-15

Sheffield Inc. uses a calendar year for financial reporting. The company is authorized to issue 8,420,000 shares of $12 par common stock. At no time has Sheffield issued any potentially dilutive securities. Listed below is a summary of Sheffield’s common stock activities.

1.		Number of common shares issued and outstanding at December 31, 2015		2,010,000
2.		Shares issued as a result of a 12% stock dividend on September 30, 2016		241,200
3.		Shares issued for cash on March 31, 2017		2,060,000
		Number of common shares issued and outstanding at December 31, 2017		4,311,200
4.		A 2-for-1 stock split of Sheffield’s common stock took place on March 31, 2018

a.Compute the weighted-average number of common shares used in computing earnings per common share for 2016 on the 2017 comparative income statement.
b.Compute the weighted-average number of common shares used in computing earnings per common share for 2017 on the 2017 comparative income statement.
c.Compute the weighted-average number of common shares to be used in computing earnings per common share for 2017 on the 2018 comparative income statement.
d.Compute the weighted-average number of common shares to be used in computing earnings per common share for 2018 on the 2018 comparative income statement.

Answer 1

let's start by understanding what is the weighted average number of shares.

A company may issue additional shares causing a change in the total outstanding shares. This gives rise to the calculation of the weighted average for the outstanding shares, as it is important for the calculation of earning per share.

weighted avg. shares are calculated by taking the shares outstanding and multiplying by the portion of the period they are outstanding for.

thus weighted average shares = total outstanding shares * period covered by such shares

  

calculation for the same is given below.

a. Compute the weighted-average number of common shares used in computing earnings per common share for 2016 on the 2017 comparative income statement.

date/period	shares outstanding	period covered	weighted shares
1jan2016-30sep2016	2010000	9/12	1507500
31sep2016	adjustment for stock dividend @12%		180900
1jan2016-31sep2016	adjusted outstanding shares		1688400
1oct2016-31dec2016	2251200**	3/12	562800
weighted average number of shares used in computing EPS			2251200

** 2010000 + 241200 = 2251200.

b.Compute the weighted-average number of common shares used in computing earnings per common share for 2017 on the 2017 comparative income statement.

date/period	shares outstanding	period covered	weighted shares
1jan2017-31mar2017	2251200	3/12	562800
31mar2017-31dec2017	4311200**	9/12	3233400
1jan2017-31dec2017	adjusted outstanding shares		3796200
weighted average number of shares used in computing EPS			3796200

** it is given that outstanding shares on 31 dec 2017 are 4311200

c.Compute the weighted-average number of common shares to be used in computing earnings per common share for 2017 on the 2018 comparative income statement.

date/period	shares outstanding	period covered	weighted shares
1jan2017-dec2017	3796200	12/12	3796200
adjustment for stock split 2 for 1 i.e., 3796200 * 2			7592400
weighted average number of shares			7592400

stock split is retro effective. Hence we didn't have to calculate it for the period the stock split covered.

note : Stock split doesn't result in any new income generations. It just splits the shares and doesn't affect cash or other assets. Thus calculating it by retrospective effect doesn't change the actual data.

d.Compute the weighted-average number of common shares to be used in computing earnings per common share for 2018 on the 2018 comparative income statement.

date/period	shares outstanding	period covered	weighted shares
1jan2018-31mar2018	4311200	3/12	1077800
31mar2018	stock split		1077800*2
1jan2018 - 31mar2018	adjusted outstanding shares		2155600
1apr2018-31dec2016	8622400	9/12	6466800
weighted average number of shares used in computing EPS			8622400