Upon watching the 16.02 - Earnings Per Share: Diluted - Lesson 1 video, you'll begin to conceptually understand diluted earnings per share (EPS) from the perspective of adjustments necessary to the basic EPS calculation. Roger Philipp, CPA, first explains what is meant by the terms antidilutive and dilutive securities and the if-converted method. Then he covers the effects of accounting for potentially dilutive securities on both the numerator and the denominator of the diluted EPS fraction.
Finally, he explains why preferred dividends from convertible preferred stock must be added, not net of tax, to net income and why bond interest expense from convertible bonds must be added, net of tax, to net income. The number of shares of common stock the potentially dilutive securities could be converted into must be added to the weighted average common shares outstanding from the basic EPS denominator.
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Video Transcript Sneak Peek:
Okay, now let's talk about what we call "Diluted Earnings per Share". Now this is diluted because it's a complex capital structure. Remember over here we had basic, basic said, "Assume there's nothing potentially diluted.” Here, in a complex capital structure, it's anyone who could convert, we assume they do so. It doesn't mean they actually did but it says, "Anyone who could convert and it's economically advantageous."
What does economically advantageous mean? It means that it is dilutive and the word dilutive is very important. Dilutive means that everyone's earnings per share goes down. If you gave money and earnings per share went up, that's antidilutive. We don't assume you're a moron unless you really are right?