CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingHard
A publicly traded company, Delta Corp., is preparing its financial statements for the year ended December 31, Year 1. Delta Corp. has 1,000,000 shares of common stock outstanding throughout the year. On July 1, Year 1, Delta Corp. issued 100,000 shares of 5% cumulative preferred stock, $100 par value. The preferred stock is non-convertible. Net income for Year 1 was $2,500,000. What is Delta Corp.'s basic earnings per share (EPS) for Year 1?
- A$2.00
- B$2.50
- C$1.50
- D$1.95
Show answer & explanationAnswer & explanation
Correct answer: A. $2.00
Basic EPS is calculated as (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding. Cumulative preferred dividends must be deducted from net income, whether declared or not, for the full period they were outstanding. Here, the preferred stock was outstanding for half the year.
Why the other options are wrong
- B. This incorrectly assumes no preferred dividends are deducted.
- C. This implies a much higher dividend deduction or a different share count.
- D. This is a plausible distractor if a different dividend amount or share count was used.
Basic Earnings Per Share (EPS)
A financial metric that measures the portion of a company's net income allocated to each outstanding share of common stock.
- Calculated as (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding.
- Cumulative preferred dividends are deducted whether declared or not.
- Non-cumulative preferred dividends are deducted only if declared.
Memory trick: EPS: Income After Preferred, Divided by Common.