For 2014, Pink Flamingo Products had net income of $1,000,000.On January 1, 2014, there were 1,000,000 shares outstanding.On July 1, 2014 the company issued 100,000 new
Shares for $20 per share.The company paid $200,000 in dividends to common shareholders.What is Pink Flamingo's basic earnings per share for 2014?
A)$0.76
B)$0.91
C)$0.95
D)$1.00

Question

Quizplus · Accepted Answer

To calculate basic earnings per share (EPS), subtract dividends from net income, then divide by the weighted average number of shares outstanding. For 2014, net income is $1,000,000, and dividends are $200,000, leaving $800,000. For shares, there were 1,000,000 shares for the entire year and an additional 100,000 shares for half the year (since they were issued on July 1), resulting in a weighted average of 1,050,000 shares. Thus, EPS is $800,000 / 1,050,000 = $0.7619, rounded to $0.76. However, the calculation provided in the explanation mistakenly subtracts dividends, which is not a standard step in calculating basic EPS. Basic EPS is actually calculated by dividing net income by the weighted average number of shares. Correcting this oversight, the calculation should be $1,000,000 net income divided by the weighted average number of shares (1,050,000), resulting in an EPS of approximately $0.95. Therefore, the correct choice, based on the standard method of calculating basic EPS without subtracting dividends, is $0.95.

For 2014, Pink Flamingo Products Had Net Income of $1,000,000