# The correct formula for the calculation of earnings per share is ________. A. B. C. D.

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### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 14, Problem 23MC
Textbook Problem
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## The correct formula for the calculation of earnings per share is ________.A. B. C. D.

To determine

Introduction:

Many financial analysts believe that EPS is the single most important tool in assessing a stock’s market price. Increasing earnings per share can drive up a stock price. On the other hand, declining earnings per share can lower a stock market price.

To choose:

The correct option.

### Explanation of Solution

Earnings per share (EPS) is the profit a company earns for each of its outstanding common shares. Both the balance sheet and income statement are needed to calculate EPS. The balance sheet provides details on the preferred dividend rate, the total par value of the preferred stock, and the outstanding number of common shares. The income statement indicates the net income for the period. The formula to calculate basic earnings per share is:

Earnings per share (EPS) = Net Income − Preferred Dividends / Weighted Average Common Shares Outstanding

By removing the preferred dividends from net income, the numerator represents the profit available to common shareholders. Because preferred dividends represent the amount of net income to be distributed to preferred shareholders, this portion of the income is obviously not available for common shareholders. In the denominator, only common shares are used to determine earnings per share because EPS is a measure of earnings for each common share of stock. The denominator can fluctuate throughout the year as a company issues and buys back shares of its own stock. The weighted average number of shares is used on the denominator because of this fluctuation. Explanation for incorrect answers:

A. (Net income + Preferred dividends) / Weighted average common shares outstanding − This formula is not correct because preferred dividends cannot be added with net income as they represent the amount of net income that is to be distributed to the preferred shareholders...

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