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{Gross Profit}}{\text{Net Sales}}

EPS = \frac{\text{Net Sales}}{\text{Average Total Assets}}

EPS = \frac{\text{Total Assets}}{\text{Total Liabilities}}

EPS = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Number of 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 is particularly useful for comparing the performance of companies within the same industry.

Step 2: Identify the components of the EPS formula. The formula for EPS is: EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding. Each component has a specific meaning: Net Income represents the company's total profit, Preferred Dividends are dividends paid to preferred shareholders, and Weighted Average Number of Common Shares Outstanding refers to the average number of common shares available during the reporting period.

Step 3: Recognize why preferred dividends are subtracted. Preferred dividends are subtracted because EPS is meant to measure the earnings available to common shareholders, not preferred shareholders.

Step 4: Understand the importance of the weighted average number of shares. The weighted average is used instead of a simple average because the number of shares outstanding can change during the reporting period due to stock issuance, buybacks, or other corporate actions.

Step 5: Compare the given options to the correct formula. The correct formula for EPS is EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding, which is distinct from the other options provided in the problem.