Question

5l) How is basic earnings per share computed?

5m)Under what conditions must diluted earnings per share be computed? How is diluted earnings per share computed?

5n)What is the difference between net income and comprehensive income? List one way in which comprehensive income can be disclosed in the financial statements.

Answer 1

5l)

Basic earnings per share is calculated using the net income and weighted average number of common stock, that is income after interest and taxes or net income divided by the outstanding weighted average common stock, the resultant figure shows the earning or income per share.

5m)

Diluted earnings per share is calculated when there is conversion of preferred stock to common stock or issue of bonus stock,if there is an issue of bonus stock or conversion of preferred stock would increase the number of shares but it affect the value of the stock,as the net income remains same but the weighted average number shares be increased, hence there would be dilution in the value of the common stock.

Diluted earnings per share is calculated by using the net income and the weighted average number of common stock after conversion or bonus issue.

Net income dividend by the weighted average common stock including conversion of preferred stock and bonus issue.

5n)

Net income and comprehensive income difference is known as other comprehensive income.unrealized gains and losses on investments,foreign trade and pension liability adjustments are generally reported in the other comprehensive income.

income statement and retained earnings section of stockholders equity contains the net income but other comprehensive income is reported only in non comprehensive income section of stockholders equity and not shown in the income statement.