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EPS.   Term Paper ID:28303 Click to get this paper

Essay Subject: Examines the accounting & finance concept of earnings per share; its history & evolution; applications & deficiencies.... More...

6 Pages / 1350 Words 12 sources, 26 Citations, APA Format $24.00 Return to List of Papers

Paper Abstract: Examines the accounting & finance concept of earnings per share; its history & evolution; applications & deficiencies. Paper Introduction: EPS: HISTORY, EVOLUTION, & APPLICATIONS Introduction The accounting and finance concept of earnings per share (EPS) is reviewed and examined. The history, evolution, and applications of the concept are addressed. History EPS was derived as a simple and seemingly straightforward measure that permitted investors to assess the financial performance of a firm in relation to both the firm’s own past performance and the performance of other firms. Within this simplified concept, all of the earnings of a firm that are available to common shareholders are divided by the number of shareholders to derive an EPS. Typically, the earnings available to common shareholders amount to net income less dividends on Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Forbes questioned the value of the EPS in 199 on the basis thatreported earnings by American corporations no longer were valid (Linden,199 ). 47).Ketz and Miller (2 ) stated that: we wonder whether everyone would be better off if EPS and other summary indicators were totally removed from financial reporting and left for individual analysts to compute according to their own needs. Amazon.com, as an example, reported three EPS figures for fiscal 1999performance. Management accounting professionals are recommending that strategicchoices no longer be based on the traditional accounting department's calculations of earning per share . According to research findings reported byNigrini (1998): Companies just don't want to report a loss . New York: Harper & Row, Publishers. managers" (Higgins, 1998, p.133). The use of weighted average shares is not prohibited, "eventhough the ubiquitous price to earnings ratio is based on the price ofcurrently outstanding shares" (Ketz & Miller, 2 , p. 43).In view of the deficiencies of the EPS both in concept and practice,however, the heavy reliance on EPS appears to be unwise. (1991, March). .if the numerator is bad and the denominator is hypothetical, how can anyone take this ratio seriously? Amazon also reported a pro-forma operating loss for 1999 of$67.3 million, or a loss of $ .42 per share. Discretionary choices among diverse methods of accountingfor inventory, depreciation and business combinations continued to beallowed. 15). 14).Ketz and Miller (2 ) expressed shock that the Panel on AuditEffectiveness "would attribute any credibility to EPS, much less thing thataudits can increase its 'exactness'" (p. (1998). Fera, N. Forbes,146(11), 1 6-1 8. J., Joehnk, M. This latter EPS eliminate allof the troublesome start-up expenses that the company is still amortizing("Which Number Is the Real McCoy?" 1999). Pringle, J. In turn, this signal is intended to lead to an increase in afirm's P/E ratio (Higgins, 1998, p. J. W. (1999, October 11). Higgins, R. 14). (1997, November). B. or return on equity . 16). The diluted EPS is to "warninvestors of reductions in the value of EPS" ("Earnings Per Share StandardIs Finalized," 1997, p. Journal of Accountancy, 181(2), 43-47. The treasury stock method is not prohibited. Applications EPS is a component of the price-earnings ratio (P/E). Putting a spin or R&D. Ketz & Miller (2 ) pointedout that SFAS 128, which replaced Accounting Principles Board Opinion(APBO) 15 as the regulation governing EPS determinations, failed toeliminate many substantial flaws. 6. Business Week,(365 ), 177. E. Analysis for financial management. So companies may stretch the rule to show a profit (p. Moukheiber, Z. Thus, change inEPS, whether through performance or management manipulation, influence afirm's P/E ratio (Higgins, 1998). AdministrativeScience quarterly, 36(1), 1-19. 15). . M., & Weintrop, J. Complete writeoffs of research and development costscontinue to be allowed. In 1999, the company repeated its criticisms along much the samelines (Moukheiber, 1999). References Blasch, D. 1). This seemingly straightforward measure, however, has never been asuncomplicated and unsusceptible to abuse and manipulation as it appears.First, the issuance of new shares or the repurchase of outstanding shareschanges EPS regardless of firm performance. 6). This mindset is one reason thatcreating new debt frequently is preferred over the issuing of new stock.Creating new debt can lead to an increase in EPS, while issuing new stocklikely will dilute EPS. 133). In this context, Puffer and Weintrop (1991) found that CEOturnover occurs when EPS measures "fall short of expectations" (p. Within this simplified concept, all of the earnings of a firmthat are available to common shareholders are divided by the number ofshareholders to derive an EPS. (1973, Spring). History EPS was derived as a simple and seemingly straightforward measure thatpermitted investors to assess the financial performance of a firm inrelation to both the firm's own past performance and the performance ofother firms. Ketz and Miller(2 ), reacted skeptically to a Public Oversight Board Panel on AuditEffectiveness statement to the effect that: "Analysts' EPS estimatesestablish expectations (sometimes to the penny) in the marketplace forcompanies to achieve. (1996, February). B. 2. W., & Ketz, J. The company also reported a pro-forma netloss of $82.8 million, or a loss of $ .51 per share. 15). D., & Pinches, G. Such managers tend to "translate a complicated world into the simplenotion that whatever increases EPS must be good and whatever reduces EPSmust be bad" (Higgins, 1998, p. 2 7). (1997, May). Evolution FASB tinkering with EPS intensified subsequent to 1994, when the FASBreached and agreement with the International Accounting Standards Committee(IASC) to coordinate changes to cause EPS measures to be comparable on aglobal basis. there is a huge stigma for unprofitability. C. Mergers frequently create increases in EPS, at leastin the short-term, as the total number of outstanding shares in thesurviving firm typically is smaller that the combined number of outstandingshares in the pre-merger firms (Gitman, Joehnk, & Pinches, 1995).Decisions by a firm to become more highly leveraged financially, as opposedto generating funds through the issuance of stock, also increase EPS(Gitman, Joehnk, & Pinches, 1995). Investors, creditors, analysts and others use the statistic to evaluate how successful an enterprise has been in attaining its profit goal. 3. Perhaps that would force managers to relate earnings to the resources under their control instead of comparing them to analysts' expectations (p. . Nigrini, M. Management Accounting (USA), 79(5), 47-51). 4. M., Kelliher, J., & Read, W. Journal ofAccountancy, 183(5), 16-17. Frequent dependence on "unverifiable predictions of futureevents, most notably useful lives for depreciation and amortization"continue to be allowed (Ketz & Miller, 2 , p. 14). Regardless of the importance placed on EPS by managers and financialanalysts, the measure is widely condemned is some circles. 14-15): 1. Rather than being a solid statistic, EPS is a monument to what happens when accountants are left alone without adult supervision (p. According to the FASB: "Constituents have long complainedthat several provisions of Accounting Principles Board Opinion no. One important reason for the fixation on EPS by American managers isthe relationship between a firm's EPS and chief executive officer (CEO)turnover. ., as these accrual-based accounting measures aren't always useful indicators of future growth or performance (Fera, 1997, p. (5th ed.).New York: Irwin/McGraw-Hill. Decisions, such as creating new debtrather than issuing new stock, that lead to an increase in a firm's EPS areintended to signal investors that a firm's "growth trajectory" isincreasing. Linden, D. Can audits ever expect to be this exact?" (p. (1999, February 8). Managerialfinance. Puffer, S. 15 (asamended and interpreted), especially as they pertain to calculating primaryEPS, are arbitrary and illogical" (Blasch, Kelliher, & Read, 1996, p. Earnings per share standard is finalized. Conclusion Blasch, Kelliher, and Read (1996) stated that: EPS generally is considered useful to those who make economic decisions. Second, decisions on theperiod in which expenses will be recognized allows management to manipulateEPS (Pringle, 1973). (3rd ed.). . These flaws were identified as follows(Ketz & Miller, 2 , pp. Financial Management, 2, 34-39. Gitman, L. Miller, P. Omission of stock option expense, unrealized gains andlosses on investments and pension fund assets, actuarial gains and losses,and changes in the value of financial instruments continues to be allowed. . This methodapplies "the hypothetical cash hypothetically obtained from hypotheticallyexercised options to hypothetically retire shares; when the dust clears, wenotice that these assumptions do nothing more than dilute the dilution ofdiluted EPS" (Ketz & Miller, 2 , p. The history, evolution, and applications of theconcept are addressed. The company reported an official annual loss of $138 million,or a loss of $ .86 per share. 7. 43).As a consequence of this collaborative effort, the IASC issue InternationalAccounting Standard (IAS) 33 and the FASB issues Statement of FinancialAccounting Standard (SFAS) 128 in 1997. Bigfoot, UFOs andEPS-what they have in common. EPS has evolved from a simple measure of performance, to a "fixation"on the part of "many managers, especially U.S. (2 , January 3). Financial statement users also use EPS data to assess earnings potential and prospects for future dividends (p. Lies of the bottom line. . (199 , November 12). E. J. Each standard defines a basic EPS(net profit or loss attributable to ordinary shareholders divided by thenumber of ordinary shares) and a diluted EPS. It is perhaps the most often cited and reported measure of an enterprise's performance. The FASBand the IASC redeliberate EPS. (1995). (1998, December 14). Regardless of the tinkering with EPSdeterminations by the Financial Accounting Standards Board (FASB), thepeople in the field noticed little difference. . 5. Using shareholder value to evaluatestrategic choices. A penny earned is a penny fudged?Business Week, (3589), 6. The pro-forma losswas supposed to reflect future value that was not reflected in the officialannual loss. 48).Rather, a reliance on shareholder value analysis (SVA) "is deemed as a morerealistic approach to determining corporate value" (Fera, 1997, p. Typically, the earnings available to commonshareholders amount to net income less dividends on preferred stock(Gitman, Joehnk, & Pinches, 1995). Ketz and Miller (2 ) summed up their case against the EPS in itspresent manifestation as follows: . The incompleteness of any income components based onhistorical costs is not addressed. Nigrini (1998) contends that investors are not receiving correctinformation concerning corporate earnings because "some companies may be'massaging' earnings" (p. Price-earnings ratios, earnings-per-share, and financial management. Forbes,155(6), 111. Corporate performanceand CEO turnover: the role of performance expectations. Accounting Today, 14(1), 14-17. 14). Which number is the real McCoy? EPS: History, Evolution, & Applications Introduction The accounting and finance concept of earnings per share (EPS) isreviewed and examined. 1). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.