How do you calculate Earnings Per Share (EPS)? This CPA exam (FAR) and Intermediate Accounting lecture explains EPS — the most widely quoted profitability ratio — covering simple vs. complex capital structures, the basic EPS formula, the weighted average number of shares, and adjustments for stock dividends and stock splits. Ideal for CPA candidates and accounting students studying earnings per share and dilutive securities.

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Video Timeline & Key Concepts:
0:00 Definition and importance of EPS and its role in the P/E ratio
4:35 Simple vs. complex capital structures: when diluted EPS is required
7:55 Basic EPS formula: (net income minus preferred dividends) divided by weighted average shares
10:06 Weighted average shares: prorating shares issued or repurchased during the year
12:34 Complex adjustments: retrospectively adjusting for stock dividends and stock splits

Frequently Asked Questions:

What is Earnings Per Share (EPS)?

Earnings Per Share is the portion of a company's profit allocated to each share of common stock. It is one of the most widely used profitability ratios for comparing performance across companies and periods and is a key input into the price-to-earnings (P/E) ratio.

What is the basic EPS formula?

Basic EPS equals net income minus preferred dividends, divided by the weighted average number of common shares outstanding. If preferred dividends are cumulative, they are subtracted from net income whether or not they were declared during the year.

What is the difference between a simple and complex capital structure?

A simple capital structure has no potentially dilutive securities, so only basic EPS is reported. A complex capital structure includes instruments such as convertible bonds, stock options, or warrants that could increase the share count, so the company must also compute and report diluted EPS.

Why are shares weighted by time?

Because a company may issue or repurchase shares throughout the year, the denominator uses a weighted average that prorates each block of shares by the fraction of the year it was outstanding. This gives a fair measure of the shares available to earn income during the period.

How do stock dividends and stock splits affect EPS?

Stock dividends and stock splits change the number of shares without changing the underlying resources of the company. They are applied retrospectively to the weighted average share count, adjusting all periods presented so EPS remains comparable across years.

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