2. Weighted-Average Common Shares Outstanding Information Provided: Common Shares Balance at the beginning of the year On July 1, the company sold an additional 5,000,000 shares 8,000,000 shares • Explain how weighted-average common shares outstanding is calculated. Explain why (walk through the calculation) the weighted-average common shares outstanding based on the information above is 9 million shares. Explain why preferred shares are excluded when determining weighted-average common shares outstanding. • Why are preferred dividends subtracted out of net income when determining EPS? • Why are preferred dividends only subtracted from income from continuing operations and not also subtracted out of income from discontinued operations?
Scenario: You were recently hired by a $35 million manufacturing company ($35 million in sales) as the company staff accountant. The controller (your boss) has asked you to explain several accounting practices to the two existing members of the accounting staff. The four areas the controller wants you to explain to the staff include,
- Closing entries
Retained Earnings Statement- Year-end Adjustments
- Weighted-Average Common Shares Outstanding
Note: The previous months financial statements (prepared just before you were hired) were incorrect. The Controller did not catch the errors before the incorrect financials were presented to the President. The Controller has become heavily involved in company operations (hoping to become the Chief Operating Officer) and does not have the time to carry out all the accounting responsibilities. It became clear last month that the company needed to hire an accountant with a four-year accounting degree (you).
Required: Prepare a clearly written set of instructions for each of the four areas the controller wants you to explain. The controller has provided some baseline information for you to incorporate into your instructions. You will be evaluated on how clear and complete the instructions are presented. The goal is for the accounting staff to fully understand the accounting (how and why) after reading your instructions.
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