How is basic earnings per share (EPS) calculated on a per-share basis?

How is basic earnings per share (EPS) calculated on a per-share basis?

• A. EPS = (Net Income − Preferred Dividends) / Weighted-average number of common shares outstanding.
• B. EPS = Net Income / Shares outstanding
• C. EPS = Net Income − Preferred Dividends
• D. EPS = (Net Income + Preferred Dividends) / Weighted-average common shares.

Answer: (A)

Basic earnings per share shows how much net income is available to each common share after accounting for the portion that goes to preferred shareholders, and it uses a weighted average of shares outstanding because the share count can change over the period. The correct formula subtracts any preferred dividends from net income to determine the income available to common shareholders, then divides that amount by the weighted-average number of common shares outstanding during the period. This reflects both the priority of preferred dividends and the actual share count over time. Dividing net income by shares ignores preferred dividends; subtracting preferred dividends but not adjusting for the share count ignores timing; and adding preferred dividends in the numerator would overstate the amount available to common holders.

Basic earnings per share shows how much net income is available to each common share after accounting for the portion that goes to preferred shareholders, and it uses a weighted average of shares outstanding because the share count can change over the period.

The correct formula subtracts any preferred dividends from net income to determine the income available to common shareholders, then divides that amount by the weighted-average number of common shares outstanding during the period. This reflects both the priority of preferred dividends and the actual share count over time.

Dividing net income by shares ignores preferred dividends; subtracting preferred dividends but not adjusting for the share count ignores timing; and adding preferred dividends in the numerator would overstate the amount available to common holders.