Q As an investor, why might you wary of using eps to assess the

performance of a company?

Answer:
Earnings per share (EPS) is the net profit or loss accruing to equity-holders per
outstanding share. It is a popular measure of the performance of a company and a
factor in the valuation of its shares. Companies disclose their EPS in their financial
statements.

Both the components that enter into the calculation of EPS -- earnings and the
number of outstanding shares -- require careful definition.'Earnings' for this purpose
is the amount over which equity-holders have a claim. Therefore, it is calculated by
deducting preference dividends and taxes attributable to them from the net profit
and loss (including extraordinary items) for the reporting period.As for the number of
shares, it may happen that the number of shares outstanding changes through buy-
backs or issues during the period for which earnings is reported.

In that case, EPS is calculated by taking a weighted average of the shares

outstanding, with the weight for each share being the proportion of the reporting
period for which it has been outstanding.Bonus issues, stock-splits and reverse stock-
splits (consolidation of shares) change the number of outstanding shares without
changing the resources available to the firm. Therefore, companies adjust the
number of equity shares outstanding for those periods for bonus issues, stock-splits
and reverse stock-splits while calculating the EPS.

Let us take an example. Suppose that for a firm, the net profit attributable to equity
share holders for 2005 was Rs 10,00,000 and the number of outstanding shares
50,000. The EPS for 2005 would then be Rs 20 in the financial statements of
2005.Suppose that in 2006, the net profit attributable to equity share holders was Rs.
15,00,000 and the number of shares outstanding at the beginning of the period was
50,000. On June 1, 2006, bonus shares were issued in the ratio of 1:1. After the issue
of bonus shares, the number of outstanding shares increased to (50,000×2), or
1,00,000.

In the financial statement for 2006, the EPS for 2005 would be readjusted to Rs 10
(Rs 10,00,000/1,00,000) to ensure comparability, even though it was reported at Rs
20 in financial statements for the year 2005.

Usually rights issues have a bonus element too, because shares are issued at a price
which is lower than the market price (fair value) prevailing at the time of the issue of
shares. Therefore, while computing EPS, the number of shares outstanding before
the rights issue also needs to be adjusted for the bonus element in the rights

1
issue.The measure of earnings per share that we have been discussing so far is
known as the 'Basic EPS.' While it adjusts for a change in the number of outstanding
shares during the reporting period, it does not take into account the possible dilution
of equity arising from instruments like convertible bonds or stock options which can
be converted into equity shares.

Dilution is a reduction in EPS or an increase in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are
exercised, or that ordinary shares are issued upon the satisfaction of specified
conditions. 'Diluted EPS' is a variant of the EPS which tries to adjust for this dilution
too. For the purpose of computing 'Diluted EPS,' an enterprise assumes that all
dilutive potential equity shares have been converted into equity shares at the
beginning of the period, or if issued later, the date of the issue of potential equity
shares.However, the conversion of potential equity instruments into equity shares
need not always lead to a dilution of equity. Anti-dilution is said to happen for
conversions which lead to an increase in EPS or a reduction in loss per share.For
these conversions, no adjustment to basic EPS for dilution is required.

EPS is not a good measure of performance because it does not consider the
opportunity cost of capital and can be manipulated by short-term actions.

Q:Compare and contrast the roles of the treasury and finance

departments with respect to a proposed investment.

Answer:
It isn’t uncommon for some business owners to distinguish the difference between
controller and treasurer. For one, they are both financial managers. However, their
skills sets and roles in an organization serves different purposes. Here is a quick
rundown of their roles, responsibilities, and differences to make it easier for you to
figure out which of the two professionals meet the specific needs of your business.

The Financial Controller

Focus: Inward Transactions, Past Business Activities, and Compliance

The Role:

In essence, a financial controller is the head accountant of the company. They

supervise other accountants and oversee the preparation of financial reports, such as
income statements and balance sheets.

Responsibilities:

2
In large organizations, the financial controller reports to the chief financial officer
(CFO). In smaller entities, however, the controller might be assigned as the head of
the finance department. Aside from preparing reports and overseeing the accounting
and auditing functions of a business, the controller job description entails monitoring
internal controls to lessen risks and create value within the organization. The
controller also takes part in analyzing financial data, as well as preparing budgets.
They are also in charge of your tax compliance and see to it that deadlines and
regulations are strictly followed.

Qualifications:

To fulfill the financial controller responsibilities, one must have a degree in

Accounting, Finance, Economics, or Business is most suitable for this position. A
financial controller is also required to be a licensed CPA, with an extensive
experience in accounting and finance jobs as they will be mainly responsible for
financial reporting, analysis, and robust internal finance functions.

The Treasurer

Focus: Outward Movers Looking Towards the Future of the Business

The Role:

The treasurer serves as the protector of a company’s value and finances from
financial risks that arises from business activities. Traditionally, a treasurer is under
the accounting department, but has now branched out into a new segment which is
known as the corporate treasury management.

Responsibilities:

The duties of a treasurer include interacting with shareholders, bankers, and current
and potential investors. They are primarily responsible for obtaining investment
capital and managing the cash flow of the business. They are in charge of obtaining
loans and credit from outside sources. They build and maintain healthy business
relationships with banks and raise equity capital. They are responsible for investing
company funds and communicating with shareholders. Treasury functions in a
company generally involve cash management and making sure that financial goals
are met.

Qualifications:

3
A degree in Accounting, Finance, Economics, or Business is most suitable for this
position. To fulfill the responsibilities of a treasurer, one must have a thorough
understanding of various segments of the business and an outstanding ability to
communicate with top management and various finance professionals

Q:Suggest ways in which ethical issues would influence the firm’s

financial policies in relation to the following:

• shareholders

• suppliers

• customers

• investment appraisal

• charity.

Answer:
Shareholders:

•Providing timely and accurate information to shareholders on the company’s histori

cal achievements and future prospects.

Suppliers:

• paying fair prices

• attempting to settle invoices promptly

• co-operating with suppliers to maintain and improve the quality of inputs

•not using or accepting bribery or excess hospitality as a means of securing contracts

with suppliers.

Customers:

• charging fair prices

• offering fair payment terms

• honouring quantity and settlement discounts

•ensuring sufficient quality control process are built in that goods are fit for purpose.

Investment appraisal:

4
• payment of fair wages

• upholding obligations to protect, preserve and improve the environment

•only trading (both purchases and sales) with countries and companies that themsel
ves have appropriate ethical frameworks.

Charity:

• Developing a policy on donations to educational and charitable institutions.