Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Earnings Per Share (EPS)

Financial Accounting

14. Financial Statement Analysis

Ratios: Earnings Per Share (EPS)

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Multiple Choice

Which of the following formulas is used to compute basic earnings per share (EPS)?

Basic EPS = \frac{\text{Net Income}}{\text{Number of Preferred Shares}}

Basic EPS = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Number of Common Shares Outstanding}}

Basic EPS = \frac{\text{Net Income} + \text{Preferred Dividends}}{\text{Weighted Average Number of Common Shares Outstanding}}

Basic EPS = \frac{\text{Net Income}}{\text{Total Assets}}

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Verified step by step guidance

Understand the concept of Basic Earnings Per Share (EPS): EPS is a financial metric used to measure the profitability of a company on a per-share basis. It is calculated by dividing the earnings available to common shareholders by the weighted average number of common shares outstanding during the period.

Identify the correct formula for Basic EPS: The formula is Basic EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding. This formula ensures that the earnings available to common shareholders are used, excluding any dividends paid to preferred shareholders.

Clarify why Preferred Dividends are subtracted: Preferred dividends are payments made to preferred shareholders and are not available to common shareholders. Subtracting them ensures that the calculation reflects the earnings attributable only to common shareholders.

Understand the Weighted Average Number of Common Shares Outstanding: This figure accounts for changes in the number of shares during the period, such as stock issuances or buybacks, to provide an accurate representation of shares over time.

Review the incorrect formulas provided: The other formulas either incorrectly include preferred dividends, use total assets instead of shares, or focus on preferred shares rather than common shares. These do not align with the definition of Basic EPS.