What formula is used to calculate Earnings Per Share (EPS)?

The formula for calculating Earnings Per Share (EPS) focuses on providing a measure of a company's profitability allocated to each outstanding share of common stock. The correct formula is derived from the company's net income, adjusted for preferred dividends, divided by the average number of common shares that are outstanding during a specific period. This approach ensures that the calculation reflects earnings that are actually available to common shareholders, as preferred dividends must be accounted for first since they represent a fixed payment obligation to preferred shareholders before common shareholders can realize any earnings.

Using net income minus preferred dividends allows for an accurate representation of earnings attributable solely to common shareholders. Dividing by the average number of common shares outstanding ensures that fluctuations in share count over the reporting period are appropriately considered, thereby providing a more accurate EPS figure.

This reasoned approach delineates why the selected response is not only accurate but essential in understanding how a company’s earnings are distributed among its common shareholders. Other options listed present variations that do not align with this definition of EPS, either by incorrectly including or excluding critical components.