Earnings per share is computed as net income:
A) Minus preferred dividends divided by the ending common shares outstanding
B) Minus preferred dividends divided by the weighted average of common shares outstanding
C) Divided by the weighted average of common shares outstanding
D) Divided by the ending common shares outstanding

Question

Quizplus · Accepted Answer

Earnings per share (EPS) is calculated by dividing the net income available to common shareholders by the weighted average number of common shares outstanding during the period. Preferred dividends must be subtracted from net income because they represent a fixed obligation to preferred shareholders that must be paid before any earnings can be distributed to common shareholders. The ending common shares outstanding may not accurately reflect the number of shares outstanding throughout the entire period, which is why the weighted average is used instead.

Earnings Per Share Is Computed as Net Income