Which of the following best describes how Earnings Per Share (EPS) is calculated?

• A. Subtracting dividends paid from total revenue.
• B. Multiplying net income by the number of common shares outstanding.
• C. Dividing total assets by total liabilities.
• D. Dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.

Answer: (D)

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 indicates how much profit is allocated to each outstanding share of common stock.
2. Identify the formula for EPS: The formula is EPS = (Net Income Available to Common Shareholders) / (Weighted Average Number of Common Shares Outstanding).
3. Clarify the components of the formula: Net Income Available to Common Shareholders is the company's net income after deducting any preferred dividends. The Weighted Average Number of Common Shares Outstanding accounts for changes in the number of shares during the period.
4. Explain the calculation process: To calculate EPS, first determine the net income available to common shareholders by subtracting preferred dividends (if any) from the total net income. Then, calculate the weighted average number of common shares outstanding during the period, considering any changes in share count.
5. Apply the formula: Divide the net income available to common shareholders by the weighted average number of common shares outstanding to arrive at the EPS value.