# You have some funds that you would like to invest and you are relying heavily on the EPS calculation to help you make your decision. Initially you are baffled about why preferred dividends are subtracted in the numerator and why a weighted average is used in the denominator, so you do some research and reflection and come to understand why. Your friend is interested in hearing about your thought process. How would you explain to your friend why it’s important to subtract preferred dividends and to use weighted averages?

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### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

#### Solutions

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FindFindarrow_forward

### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 14, Problem 12PB
Textbook Problem
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## You have some funds that you would like to invest and you are relying heavily on the EPS calculation to help you make your decision. Initially you are baffled about why preferred dividends are subtracted in the numerator and why a weighted average is used in the denominator, so you do some research and reflection and come to understand why. Your friend is interested in hearing about your thought process. How would you explain to your friend why it’s important to subtract preferred dividends and to use weighted averages?

To determine

Introduction:

EPS refers to the profits earned by an entity for every share which is outstanding. Market price for a class of stock may increase if EPS is increasing, and it may reduce if EPS is declining.

To explain:

The importance of subtraction of preferrence dividend and use of weighted averages while calculating EPS.

### Explanation of Solution

EPS is calculated using given formula:

Earning Per Share=Net IncomePreference DividendWeighted Average Common Shares Outstanding

EPS is one of the method to measure an entity’s profit

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