What is earnings per share, and how is it computed? Why is EPS presented on the

Question

What is earnings per share, and how is it computed? Why is EPS presented on the income statement as opposed to all other financial statement ratios?

Explanation / Answer

The computation of basic earnings per share uses the following format: Net Income - Preferred Dividends ---------------------------------- = Basic Earnings Weighted Average Number of Shares Per Share Example: ABC has a current net income of $160,500 and must pay preferred dividends of $19,000. At the beginning of the year there were 120,000 common shares outstanding. On September 1, ABC reaquired 5,000 shares as Treasury Stock. > Step 1: Determine weighted average number of shares Jan 1 - Aug 31 : 120,000 shares x 8/12 year = 80,000 shares Sept 1 - Dec 31: 115,000 shares x 4/12 year = 38,333 shares -------------- Weighted average number of shares 118,333 > Step 2: Compute basic earnings per share 160,500 Net Income - 19,000 Preferred Dividends ----------------------------------------------- = 1.20 118,333 weighted average number of shares

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