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 statements about the Earnings Per Share (EPS) ratio is correct?

EPS is calculated by dividing total assets by the number of shares outstanding.

EPS is only relevant for companies that do not pay dividends.

EPS measures the amount of net income earned per share of common stock outstanding.

EPS is used to measure a company's liquidity position.

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Verified step by step guidance

Step 1: Understand the concept of Earnings Per Share (EPS). EPS is a financial metric that measures the amount of net income earned per share of common stock outstanding. It is a key indicator of a company's profitability and is widely used by investors to assess the performance of a company.

Step 2: Recall the formula for calculating EPS. The formula is: EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding. This formula highlights that EPS is based on net income and the number of common shares outstanding, not total assets or liquidity.

Step 3: Analyze the given statements. The first statement incorrectly suggests that EPS is calculated by dividing total assets by the number of shares outstanding, which is not true. The second statement incorrectly implies that EPS is only relevant for companies that do not pay dividends, which is also false.

Step 4: Evaluate the third statement. The third statement correctly defines EPS as a measure of the amount of net income earned per share of common stock outstanding. This aligns with the formula and the purpose of EPS.

Step 5: Consider the fourth statement. The fourth statement incorrectly associates EPS with measuring a company's liquidity position. Liquidity is typically assessed using ratios like the current ratio or quick ratio, not EPS.