Representation of Shares Outstanding in the Income Statement

Shares outstanding are reflected on the income statement in two line items:

  1. Weighted average basic shares outstanding

    • Shares of common stock outstanding

  2. Weighted average diluted shares outstanding

    • Shares of common stock outstanding plus: potential shares that may result from the conversion of other securities into common stock, and thus dilute the share base (increase the number of shares outstanding).

    • Securities that can be converted into common stock include:

      • Stock options and warrants (the right to buy shares at predetermined price)

      • Convertible preferred stock

      • Convertible debt

Since the total number of shares outstanding fluctuates as shares from other securities are converted or the company repurchases shares, companies usually show the number of shares outstanding on the income statement as weighted average of the amount of shares outstanding during the period of the income statement (quarter or year).

What Is the Relevance of Shares Outstanding?

While the absolute level of a company’s profitability (net income) is important, its per-share amount is a useful indication of the profit available per unit of ownership.


17. Shares Outstanding
Exercise
Q1:At year-end 2007, basic shares outstanding were 145 million. During 2008, the following things happened:
January 26, 2008: Company repurchased 2 million shares.
March 21, 2008: Options were converted into 5 million common shares.

Calculate 2008 weighted average shares outstanding and the 2008 year-end shares outstanding.

17. Shares Outstanding
Solution
1.Calculate 2008 weighted average shares outstanding:
Start of 2008: 145 million shares for 25 days (until January 26, 2008)
2 million share repurchase: 143 million shares for 54 days (January 26–March 21, 2008)
5 million option-to-stock conversion: 148 million shares for 285 days (March 21–December 31, 2008) (145 × 25) + (143 × 54) + (148 × 285) = 146.65 million shares 365 days

2.Calculate 2008 year-end shares outstanding:
148 million shares

Number of Shares Outstanding Varies across Firms

  • During its 2004 fiscal year, Microsoft had diluted weighted average shares outstanding of almost 10.9 billion.

  • During 2004, Exxon Mobil had diluted weighted average shares outstanding of over 6.5 billion.

  • In 2004, McDonald’s had diluted weighted average shares outstanding of almost 1,274 million.

  • In 2004, Amazon.com had diluted weighted average shares outstanding of almost 425 million.


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