Earnings Per Share: A Flow Approach to Teaching Concepts and Procedures: A Comment.

Abstract In the January, 1977, issue of "The Accounting Review," detailed flow charts to assist in the computation of earnings per share (EPS) was presented. Intent was to provide an organized and understandable approach for teaching a complicated topic to students who often become hopelessly confused by the many details and computations required. The purpose of the present note is to point out that an important potential complication concerning the modified treasury stock method of handling options and warrants has been ignored, and its omission may lead to erroneous EPS calculations. The complication involves the use of the 20 percent test, and which options and warrants should be considered in making this test. The first test specifies that all options and warrants are to be combined and the total tested to see if the shares that could be issued through exercise exceed 20 percent of the shares outstanding. When the shares that would be issued through the exercise of all options and warrants do not exceed 20 percent of the outstanding shares, the regular treasury stock method is applicable, and each series of warrants and options would be considered individually for its dilutive effect.