CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsHard
A company reports a net income of $500,000. It has 100,000 shares of common stock outstanding for the entire year. Additionally, it has 20,000 shares of 5% cumulative preferred stock, $100 par value, outstanding for the entire year. No dividends were declared on preferred stock in the current year. What is the basic earnings per share (EPS) for the company?
- A$3.00
- B$5.00
- C$4.50
- D$4.00
Show answer & explanationAnswer & explanation
Correct answer: D. $4.00
Basic EPS is calculated as (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding. For cumulative preferred stock, preferred dividends are subtracted whether declared or not. Preferred dividends = 20,000 shares * $100 par * 5% = $100,000. Basic EPS = ($500,000 - $100,000) / 100,000 shares = $400,000 / 100,000 shares = $4.00.
Why the other options are wrong
- A. This is an incorrect calculation, possibly subtracting too much or using a wrong share count.
- B. This incorrectly calculates EPS without subtracting preferred dividends ($500,000 / 100,000).
- C. This is an incorrect calculation, possibly due to partial preferred dividend subtraction.
Basic Earnings Per Share (EPS)
Basic EPS measures the portion of a company's net income allocated to each outstanding share of common stock, reflecting profitability on a per-share basis.
- Formula: (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding.
- For cumulative preferred stock, dividends are subtracted even if not declared.
- For non-cumulative preferred stock, dividends are subtracted only if declared.
Memory trick: EPS: How much EARNINGS per SHARE, BASIC or DILUTED, matters to investors.