Which of the following is the equation used to determine Earnings Per Share (EPS)?

• A. EPS = \frac{\text{Total Assets}}{\text{Total Liabilities}}
• B. EPS = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Number of Common Shares Outstanding}}
• C. EPS = \frac{\text{Net Sales}}{\text{Average Total Assets}}
• D. EPS = \frac{\text{Gross Profit}}{\text{Net Sales}}

Answer: (B)

Verified step by step guidance

1. Step 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 attributable to each share of common stock.
2. Step 2: Recall the formula for EPS. The correct formula is: EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding.
3. Step 3: Break down the components of the formula: (a) Net Income is the company's total profit after all expenses, taxes, and costs have been deducted. (b) Preferred Dividends are the dividends paid to preferred shareholders, which are subtracted because EPS focuses on common shareholders. (c) Weighted Average Number of Common Shares Outstanding accounts for changes in the number of shares during the period.
4. Step 4: Compare the given options to the correct formula. Eliminate incorrect options by checking if they match the components of the EPS formula. For example, options involving Total Assets, Total Liabilities, Net Sales, or Gross Profit are unrelated to EPS.
5. Step 5: Select the correct option: EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding, as it aligns with the standard definition and calculation of EPS.