Earnings Per Share Computation CPA Exam Simulation
How do you compute earnings per share (EPS)? This CPA Exam simulation walks through a full EPS calculation — deducting cumulative preferred dividends, computing the weighted average number of common shares outstanding, and adjusting retroactively for stock splits and stock dividends — built for FAR CPA Exam candidates, CMA students, and accounting students studying intermediate accounting.
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Video Timeline & Key Concepts:
0:00 — Introduction
1:47 — Deducting cumulative preferred dividends from net income
4:18 — Weighted average common shares: new issuances and treasury stock
9:17 — Retroactively applying stock splits and stock dividends
11:22 — Putting the EPS formula together
Frequently Asked Questions:
How is basic earnings per share calculated?
Basic EPS equals income available to common shareholders divided by the weighted average number of common shares outstanding. Income available to common is net income minus preferred dividends.
Why are preferred dividends subtracted from net income?
Preferred shareholders have a priority claim on earnings, so their dividends are subtracted first to isolate the income that actually belongs to common shareholders. For cumulative preferred stock, the current year dividend is deducted whether or not it is declared.
How is the weighted average number of shares determined?
Each block of shares is weighted by the fraction of the year it was outstanding. New shares issued during the year are added for the portion of the year they exist, and treasury shares reacquired are removed for the remaining portion of the year.
How do stock splits and stock dividends affect EPS?
Stock splits and stock dividends are applied retroactively to the beginning of the year and to all prior share transactions. This restates the share count so EPS is comparable across periods and is not distorted by the split.
Why does a treasury stock purchase reduce the share count?
When a company reacquires its own shares as treasury stock, those shares are no longer outstanding. They are removed from the weighted average for the portion of the year after the repurchase, which lowers the denominator in the EPS calculation.
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