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Fazzino Corporation had 400,000 shares of common stock outstanding for the first

ID: 2339700 • Letter: F

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?

Explanation / Answer

Answer

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

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

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,

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