How to Calculate Gross Profit Shares

Earnings per share includes profit earned in the current period.

Gross profit is the amount of revenue left after subtracting cost of goods sold or cost of providing services. Gross profit is not calculated as a per share amount; profit or income associated with shares is known as earnings per share (EPS). The equation used to calculate basic earnings per share involves taking the amount of income available to common shareholders and dividing by the weighted average number of common shares outstanding (WACSO).

Instructions

1. Calculate net income available to common shareholders. The net income available to common shareholders is the net income for the period minus preferred dividends. The amount for preferred dividends must include dividends declared/paid on two types of preferred stock -- cumulative and noncumulative. For noncumulative preferred stock, dividends not declared/paid do not accumulate to future periods. For cumulative preferred stock, dividends not declared/paid accumulate to future periods and must be paid before dividends can be paid to common shareholders. The result is the numerator of the EPS equation.

2. Adjust the number of shares involved in calculating WACSO. Shares that are sold or repurchased by the company must be prorated based on the amount of time they are outstanding (or not outstanding) during the period. Note that when shares are repurchased by a company they are no longer considered outstanding. When shares need to be prorated based on time, multiply the shares by the number of months outstanding (or not outstanding) divided by the total months in the year. For example, 100 shares are sold on April 1; the number of shares outstanding is calculated by taking 100 and multiplying by 9/12.

3. Calculate the WACSO. Start with the number of shares outstanding at the beginning of the accounting period. Add the number of shares sold during the period, prorated based on the amount of time the shares are outstanding. Subtract the number of shares repurchased (treasury stock) during the period, prorated based on the amount of time the shares are not outstanding. Add stock dividends and stock splits and subtract reverse stock splits for the period (treat as if these occurred at the beginning of the period). The result is the denominator of the EPS equation.

4. Calculate EPS. Take the net income available to common shareholders and divide by WACSO. The total is the earnings per share for the period.

References

• "Financial: CPA Exam Review"; DeVry/Becker Educational Development Corp.; 2009