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The Daily Technical #87: How would a $100 inventory write-down impact the three financial statements?

How to answer "How would a share repurchase impact earnings per share (EPS)?"

January 09, 2025

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OVERVIEW OF YESTERDAY’S QUESTION
How would a share repurchase impact earnings per share (EPS)?

The impact on EPS following a share repurchase is a reduced share count, which increases EPS.

However, there would be an impact on net income, assuming the share repurchase was funded using excess cash. The interest income that would have otherwise been generated on that cash is no longer available, causing net income and EPS to decrease.

But the impact would be minor since the returns on excess cash are low, and would not offset the positive impact the repurchase had on EPS from the reduced share count.

Common Mistakes

  1. Overlooking the reduction in share count. A key aspect of share repurchases is the decrease in outstanding shares, boosting EPS.

  2. Neglecting how using cash for repurchase affects net income due to lost interest income. Clearly explain this ripple effect, even if the impact is minor, to show comprehensive analysis.

TL;DR

  • Share repurchase reduces share count, increasing EPS.

  • Use of excess cash for buyback lowers net income due to lost interest which slightly decreases EPS.

  • This EPS decrease is offset by share count reduction.

TODAY’S QUESTION
How would a $100 inventory write-down impact the three financial statements?

Type your answer here. Within 60 seconds you’ll have custom feedback in your inbox.

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