| Course | ACC 423 Intermediate Financial Accounting III (ACC/423) |
|---|---|
| Week | 1 |
| Paper type | Dilutive securities and EPS paper |
| Length | about 1,004 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 423 Week 1
Why Diluted Earnings per Share Left Out the Convertible Bonds: Basic and Diluted EPS, the Treasury Stock Method and an Antidilution Test at a Composite Medical Device Maker
[Student Name]
University of Phoenix
ACC/423: Intermediate Financial Accounting III
Week 1 Assignment
[Instructor Name]
[Date]
The company and all figures are composites written for a model paper; accounting rules and research findings come from the sources listed.
A composite medical device company designs and manufactures infusion pumps and monitoring equipment for hospitals. It pays engineers partly with stock options and financed a new clean-room facility three years ago with $50 million of convertible bonds. Its net income for the year was $24 million. Investors will compare the company's earnings per share with competitors and with analysts' forecasts. Earnings per share looks like a simple division, but the denominator has to answer a hard question: how many shares might share these earnings? This paper computes basic and diluted EPS and explains each step.
Weighted-Average Shares Outstanding
The company began the year with 20.0 million common shares. On April 1, it issued 2.4 million shares in a public offering. On October 1, it repurchased 800,000 shares. Shares are weighted by the portion of the year they were outstanding. The opening shares count for the full year, 20.0 million. The April shares were outstanding for nine months, adding 2.4 million times 9/12, or 1.8 million. The repurchased shares were not outstanding for the last three months, reducing the weighted average by 800,000 times 3/12, or 200,000. The weighted-average number of shares is 21.6 million.
Had the company declared a stock dividend or split during the year, the change would have been applied retroactively to all shares from the start of the year, since it changes the number of shares without bringing in new resources (Financial Accounting Standards Board, 1997).
Basic EPS
The company has no preferred stock, so income available to common shareholders is net income of $24.0 million. Basic EPS is $24.0 million divided by 21.6 million, about $1.11.
The Options
Employees hold 1.5 million vested options with an exercise price of $30. The average market price of the stock during the year was $40. Under the treasury stock method, the company assumes the options were exercised at the start of the year, bringing in $45 million, and that the proceeds were used to buy back shares at the average price of $40, which would purchase 1,125,000 shares. The net increase is 375,000 shares. Options have no effect on the numerator. Because options are dilutive only when the average price exceeds the exercise price, these options clearly dilute.
The options also produced an expense during their vesting period. Under current standards, the grant-date fair value of options is recognized as compensation cost over the service period, which is already reflected in the $24 million of net income.
The Convertible Bonds
The $50 million of 4% bonds can be converted at the holder's option into 25 shares per $1,000 bond, 1.25 million shares in total. Under current standards, most convertible debt is recorded as a single liability without separating a conversion feature, and the if-converted method is required for diluted EPS (Financial Accounting Standards Board, 2020).
The if-converted method assumes the bonds were converted at the start of the year. The company would not have paid $2.0 million of interest, and at a 25% tax rate, net income would have been $1.5 million higher. The numerator increases by $1.5 million and the denominator by 1.25 million shares. The per-share effect of the bonds is $1.5 million divided by 1.25 million shares, or $1.20.
Ranking and the Antidilution Test
Potential common shares must be considered in order, from the most dilutive to the least, and any that would increase EPS are excluded. The options add shares with no income effect, so their per-share effect is zero, the most dilutive possible. The bonds' per-share effect is $1.20.
Including the options first, EPS becomes $24.0 million divided by 21.975 million shares, about $1.09. The bonds' incremental effect of $1.20 is higher than $1.09, so including them would raise EPS to $25.5 million divided by 23.225 million shares, about $1.10. Because the bonds increase EPS, they are antidilutive and are excluded. Diluted EPS is $1.09.
Why the Bonds Do Not Dilute
The bonds are antidilutive because their after-tax interest cost per potential share, $1.20, is higher than the company's earnings per share. Converting them would add more income per new share than the existing shares earn. If the company's earnings grew, the bonds could become dilutive in future years, so the test must be repeated each period. The notes will still disclose the bonds and the 1.25 million shares that could be issued, so investors know they exist. An analyst who expects earnings to grow sharply can compute the fully converted share count and judge the risk of future dilution. If the stock price rises above the conversion price of $40 a share, holders may convert, and the company would then have 1.25 million more shares outstanding whether or not they dilute this year's figure.
Presentation
The company presents basic EPS of $1.11 and diluted EPS of $1.09 on the face of its income statement, with a reconciliation in the notes of the numerators and denominators and a list of securities excluded as antidilutive.
Why the Figure Matters
Graham et al. (2005) found that executives considered earnings per share the most important metric reported to outsiders and that many would give up value to meet an EPS target. Bens et al. (2003) found evidence that companies repurchased shares to offset the dilution from employee stock options, which connects the October buyback to the options. The company's October repurchase, for example, reduced the weighted-average denominator, though it was made mainly because the board considered the share price low. Weygandt et al. (2021) stress that EPS is only meaningful alongside the income statement it summarizes.
Conclusion
The medical device maker's basic EPS was $1.11 and its diluted EPS was $1.09. The options were dilutive and were included through the treasury stock method. The convertible bonds, although they could add 1.25 million shares, were antidilutive at this level of earnings and were excluded, a result reached only by ranking and testing each security.
References
Bens, D. A., Nagar, V., Skinner, D. J., & Wong, M. H. F. (2003). Employee stock options, EPS dilution, and stock repurchases. Journal of Accounting and Economics, 36(1-3), 51-90. https://doi.org/10.1016/j.jacceco.2003.10.006
Financial Accounting Standards Board. (1997). Earnings per share (Statement of Financial Accounting Standards No. 128).
Financial Accounting Standards Board. (2020). Debt, debt with conversion and other options (Subtopic 470-20) and derivatives and hedging, contracts in entity's own equity (Subtopic 815-40): Accounting for convertible instruments and contracts in an entity's own equity (Accounting Standards Update No. 2020-06).
Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
What the ACC 423 Week 1 instructions ask
ACC 423 Week 1 typically asks students to account for dilutive securities and compute earnings per share. Typical requirements include recording convertible debt or preferred stock and stock warrants, explaining how stock options are measured and expensed and computing weighted-average shares outstanding with adjustments for issuances, repurchases, stock dividends and splits. Students then compute basic EPS and diluted EPS using the treasury stock method for options and warrants and the if-converted method for convertible securities, testing each for antidilution. Some prompts ask for presentation and disclosure or a discussion of why investors watch diluted EPS. Each calculation should be shown and then explained in words, with the EPS standard and the textbook cited in APA form.
How this ACC 423 Week 1 example is built
A medical device maker fits the week because growing technology companies rely on stock options to pay engineers and often borrow through convertible bonds, which gives the EPS calculation both kinds of potential common shares. The paper computes weighted-average shares with a timeline, then basic EPS. Options are handled with the treasury stock method using the year's average market price. The convertible bonds are converted in theory, adding back after-tax interest and adding the shares. The key step is ranking the two securities and testing each in order, which reveals that the bonds would raise EPS and must be excluded. The paper closes with presentation and why managers care about the figure.
ACC 423 Week 1 grading rubric: where the points go
The EPS rubric usually rewards correct weighting of shares, correct application of the treasury stock and if-converted methods and a correct antidilution test. Faculty check that issued and repurchased shares are weighted by the fraction of the year outstanding, that stock dividends and splits are applied retroactively, that options add only the net shares after assumed repurchase at the average price and that convertible debt adds back after-tax interest. Securities must be tested in order from most to least dilutive, and any that increase EPS must be excluded. Presentation of both figures on the income statement and an explanation of their meaning complete the analysis, with APA citations closing out the grade.
ACC 423 Week 1 help: mistakes to avoid
A common ACC 423 Week 1 error is adding every potential share to the denominator without checking whether it dilutes. Compute each security's incremental EPS and include it only if it lowers the figure. Another is using the year-end price rather than the average market price in the treasury stock method. Students also forget the tax effect when adding back interest on convertible bonds; add after-tax interest. When shares are issued or repurchased during the year, weight them by months outstanding. Apply stock dividends and splits retroactively to the start of the year. Present both basic and diluted EPS on the income statement. Finally, explain what the difference between the two tells an investor.
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ACC 423 Week 1 questions, answered
What does ACC/423 Week 1 usually cover?
It usually covers dilutive securities, such as convertible bonds, convertible preferred stock, options and warrants, and the calculation of basic and diluted earnings per share.
Where can I find a free ACC 423 Week 1 sample paper?
The medical device maker example on this page works basic and diluted EPS step by step, including the antidilution test, with notes in the margin. Send the numbers from your own problem and we will draft the first paper for you free.
What is the treasury stock method?
It assumes options and warrants are exercised and the proceeds used to buy back shares at the average market price; the net new shares are added to the denominator of diluted EPS.
What is the if-converted method?
It assumes convertible securities were converted at the start of the year, adding the shares to the denominator and adding back after-tax interest or preferred dividends to the numerator.
What does antidilutive mean?
A security is antidilutive if assuming its conversion or exercise would increase EPS or reduce a loss per share; such securities are excluded from diluted EPS.
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