When computing diluted earnings per share, a company may use the if-converted method and the treasury stock method.
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Required:
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Describe when and why a company would use each method.
What will be an ideal response?
These methods are used to determine if an outstanding issue can be potentially dilutive. That means that the increase in common stock associated with the issue would cause the result from the earnings per share computation to decrease for net income and increase for net loss when compared with the basic earnings per share calculation. The if-converted method is used with convertible securities, such as convertible bonds or convertible preferred stock. The treasury stock method is used with share options and warrants.
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