To Missminimac:

Per Becker:

Diluted EPS is calculated taking into consideration any security (Convertible Preferred Stock, Convertible Bonds, Stock Options or Warrant, or contingent issuance of stock) that can be converted into common stock. 

Any conversion, exercise, or contingent issuance that has an antidilutive effect, ie, increases EPS or decreases loss per share is not included in the calculation.

Formula being:

(Income available to common stockholders <Don't minus preferred div paid> + interest on conversion of bonds <net of tax, pay attention to bond date>)/(WASCO CS shares + CS shares <Assuming all dilutive securities are converted to common stock>)

It could be time consuming but might weigh heavier than other mcqs and if it appears in SIMS, you know , we might want to buy time to finish them confidently.

As for conceptual questions, no shortcut, practice makes perfect.

http://cpareview4free.com/exams.cfm?name=browse&cat=314

Please practise the above link

ALSO, Options and Warrants are accounted for using the Treasury Stock Method. An assumption is made that the options and/or warrants are exercised and that the proceeds from the exercise are sued to buy back shares for the treasury.  the INCREMENTAL SHARES (difference between shares "SOLD" and the shares "REACQUIRED") are added to the denominator <The number or expression written below the line in a fraction; en.wiktionary.org/wiki/denominator>).

http://en.wikipedia.org/wiki/Diluted_EPS

Diluted earnings per share is an attempt to portray a �0�9worse case scenario�0�0�0�3the possible impact on earnings per share if all convertible items were to become common stock. Some convertibles, though, can actually cause the reported figure to increase. Those convertibles are referred to as �0�9anti-dilutive�0�0 and are omitted in computing diluted earnings per share so that the worse case scenario can be achieved.

Such as,

The Johnson Company is computing diluted earnings per share for the current year. The company has convertible bonds outstanding that have been judged as being anti-dilutive.

==

The Pfeiffer Corporation reports net income in the current year of $800,000. Pfeiffer had a nonconvertible preferred stock paying $70,000 in cash dividends. Another $2.00 per share in dividends was paid to the common stockholders. There are 190,000 shares of this common stock outstanding throughout the year. In addition, the company has 20,000 stock options outstanding. For $2, each option can be converted into one share of common stock. The average price of the stock during the year was $8. The company has an effective tax income rate of 20 percent. What is Pfeiffer's diluted earnings per share (rounded)?

Answer:

Congrats, you've got question 2 correct!

The correct answer was B.

Basic earnings per share for this company is $730,000 (net income of $800,000 less the $70,000 in preferred stock dividends) divided by the 190,000 shares of common stock or $3.84 per share (rounded). To convert that figure into diluted earnings per share, the assumption must be made that the stock options are converted into shares of common stock. That adds 20,000 shares to the number of common shares. However, for this conversion to have occurred, cash of $40,000 ($2 per option times 20,000 options) would have been received. That money could have been used by the company in dozens of different ways: buying inventory, funding research and development, paying off interest bearing debt, and the like. So that all companies carry out this computation in a similar fashion, the assumption must be made that this money would have been used to buy shares of the company�0�8s own stock at its average price for the year. Based on this assumption, the company would have acquired 5,000 shares of treasury stock ($40,000 cash divided by an average price of $8 per share). Diluted earnings per share is the $730,000 in income from basic earnings per share divided by 205,000 shares or $3.56 per share (rounded). The 205,000 shares comes from the 190,000 shares outstanding for the year plus the 20,000 shares from the assumed conversion of the stock options less 5,000 shares reacquired (like for treasury stock) using the cash that would have been generated from the stock options.