Question

Fazzino Corporation had 400,000 shares of common stock outstanding for the first three months of the year. The company issued 80,000 additional shares on April 1, and another 120,000 shares on September 1. Fazzino reported a net income of $375,000 for the year ending December 31. Fazzino has no preferred stock.

A) Compute Fazzino’s weighted-average number of shares of common stock outstanding during the year.

B) Compute Fazzino’s earnings per share for the year.

C) Why is the weighted-average number of shares of common stock outstanding during a year used for earnings per share rather than the number of shares outstanding at the end of the year?

Answer 1

Answer

• All working forms part of the answer
• Requirement ‘a’

	No. of shares	Cumulative no. of shares	Period for which they remain outstanding	Weighted No. of shares outstanding
	[A]	[B = B + A]	[C = from issue date to next issue]	[D = B x C/12months]
Beginning balance	400,000	400,000	3 months [1 Jan to 31 Mar]	100,000
1st Issue on April 1	80,000	480,000	5 months [1 April to 31 Aug]	200,000
2nd Issue on 1 Sept	120,000	600,000	4 months [1 Sept to 31 Dec]	200,000
	Total Weighted Average no. of shares outstanding			500,000

• Requirement ‘b’

A	Net Income	$                                 375,000.00
B	Total Weighted Average no. of shares outstanding	500,000
C = A/B	Earnings per share	$                                              0.75 per share

• Requirement ‘c’

Weighted Average no. of shares of common stock outstanding is used for Earnings per share rather than no. of shares outstanding at the end of the year BECAUSE the Net Income is earned throughout the year and NOT at the year end. Earnings per share means that this amount per share have been earned throughout the year.

Beside, if no. of shares at year end will be taken, it will give wrong information and data can be manipulated to show higher or lower EPS,