Shares outstanding are reflected on the income statement in two line items:
Weighted average basic shares outstanding
Shares of common stock outstanding
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. |
Solution
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Number of Shares Outstanding Varies across Firms
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