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 is the equation used to determine Earnings Per Share (EPS)?

EPS = \frac{\text{Net Income} + \text{Preferred Dividends}}{\text{Total Equity}}

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

EPS = \frac{\text{Gross Profit}}{\text{Weighted Average Common Shares Outstanding}}

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

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Verified step by step guidance

Step 1: Understand the concept of Earnings Per Share (EPS). EPS is a financial metric used to measure the profitability of a company on a per-share basis. It indicates how much profit is allocated to each outstanding share of common stock.

Step 2: Identify the correct formula for EPS. The formula is: EPS = (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding. This formula accounts for the income available to common shareholders after deducting preferred dividends.

Step 3: Break down the components of the formula: (a) Net Income is the total profit of the company after all expenses, taxes, and costs have been deducted. (b) Preferred Dividends are payments made to preferred shareholders, which must be subtracted because they are not available to common shareholders. (c) Weighted Average Common Shares Outstanding represents the average number of common shares outstanding during the reporting period, adjusted for any changes in share count.

Step 4: Compare the given options to the correct formula. The correct formula is EPS = (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding. The other options provided in the problem are incorrect because they either include irrelevant components (e.g., Total Equity or Total Assets) or use Gross Profit instead of Net Income.

Step 5: Conclude that the correct formula for EPS is EPS = (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding, as it accurately reflects the earnings available to common shareholders on a per-share basis.