Earnings Per Share (EPS)

Concept

Basic EPS

Basic EPS = (Net Income − Preferred Dividends) / Weighted Average Common Shares Outstanding. This is one of the most important ratios in financial analysis and is required to be reported on the income statement.

Example

Calculation

Net income = $500,000. Preferred dividends = $20,000. Weighted average shares = 100,000. Basic EPS = ($500,000 − $20,000) / 100,000 = $4.80 per share.

Concept

Diluted EPS

Diluted EPS assumes that all potentially dilutive securities (stock options, convertible bonds, convertible preferred) are converted into common stock. Diluted EPS is always ≤ Basic EPS. It provides a 'worst case' earnings per share figure.

Key Point

CPA Exam Tip

The exam tests weighted average shares extensively. If shares are issued mid-year, weight them by the fraction of the year outstanding. Stock dividends and splits are treated as if they occurred at the beginning of the period.

Dividends & Retained Earnings

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