In the Basic EPS calculation, which item is subtracted from net income to determine the numerator?

In the Basic EPS calculation, which item is subtracted from net income to determine the numerator?

• A. Interest expense
• B. Income taxes
• C. Preferred Dividends
• D. Depreciation expense

Answer: (C)

Basic EPS uses the earnings available to common shareholders. To get that amount, you start with net income and subtract any dividends that must be paid to preferred shareholders. Those preferred dividends aren’t available to common shareholders, so they reduce the amount of earnings that can be reported per common share. If there are no preferred shares, the numerator is simply net income. The other items listed are already reflected in net income or are addressed differently in EPS calculations. Interest expense, depreciation, and taxes all flow into net income, so they aren’t subtracted again to form the basic EPS numerator.

Basic EPS uses the earnings available to common shareholders. To get that amount, you start with net income and subtract any dividends that must be paid to preferred shareholders. Those preferred dividends aren’t available to common shareholders, so they reduce the amount of earnings that can be reported per common share. If there are no preferred shares, the numerator is simply net income.

The other items listed are already reflected in net income or are addressed differently in EPS calculations. Interest expense, depreciation, and taxes all flow into net income, so they aren’t subtracted again to form the basic EPS numerator.