Which expression correctly represents basic earnings per share (EPS)?

Which expression correctly represents basic earnings per share (EPS)?

• 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)

The expression tested is about how much of a company’s earnings are available to each share of common stock. Basic EPS shows net income that actually belongs to common shareholders, so we subtract any preferred dividends from net income, since those dividends are paid to preferred holders first. Then we divide by the weighted-average number of common shares outstanding during the period to reflect changes in shares over time. So the correct form is (Net Income − Preferred Dividends) / Weighted-average number of common shares outstanding. This gives the earnings per common share for the period. Why the other forms don’t fit: simply dividing net income by shares ignores the preferred dividends and the need to weight shares over the period; subtracting preferred dividends without dividing by shares gives a total amount, not per share; and adding preferred dividends is conceptually wrong because it increases the numerator rather than representing earnings available to common shareholders.

The expression tested is about how much of a company’s earnings are available to each share of common stock. Basic EPS shows net income that actually belongs to common shareholders, so we subtract any preferred dividends from net income, since those dividends are paid to preferred holders first. Then we divide by the weighted-average number of common shares outstanding during the period to reflect changes in shares over time.

So the correct form is (Net Income − Preferred Dividends) / Weighted-average number of common shares outstanding. This gives the earnings per common share for the period.

Why the other forms don’t fit: simply dividing net income by shares ignores the preferred dividends and the need to weight shares over the period; subtracting preferred dividends without dividing by shares gives a total amount, not per share; and adding preferred dividends is conceptually wrong because it increases the numerator rather than representing earnings available to common shareholders.