Earnings per share (EPS) is calculated as net income divided by the number of outstanding shares of a firm's common stock. Which of the following best represents the formula for basic EPS?

• A. EPS = \frac{Net\ Income}{Weighted\ Average\ Common\ Shares\ Outstanding}
• B. EPS = \frac{Net\ Income}{Total\ Liabilities}
• C. EPS = \frac{Net\ Income}{Preferred\ Shares\ Outstanding}
• D. EPS = \frac{Net\ Income}{Total\ Assets}

Answer: (A)

Verified step by step guidance

1. Understand the concept of Earnings Per Share (EPS): EPS is a financial metric used to measure the profitability of a company on a per-share basis. It is calculated by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period.
2. Identify the correct formula for basic EPS: The formula for basic EPS is EPS = \frac{Net\ Income}{Weighted\ Average\ Common\ Shares\ Outstanding}. This formula focuses on the net income available to common shareholders and excludes preferred shares or other liabilities.
3. Eliminate incorrect options: Review the other options provided in the problem. EPS is not calculated using total liabilities, preferred shares outstanding, or total assets. These metrics are unrelated to the calculation of EPS.
4. Understand the components of the formula: Net income refers to the company's total profit after all expenses, taxes, and costs have been deducted. Weighted average common shares outstanding accounts for changes in the number of shares during the reporting period, ensuring accuracy in the calculation.
5. Apply the formula in practice: To calculate EPS, divide the net income by the weighted average number of common shares outstanding. This provides a measure of how much profit is earned per share of common stock.