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Definition: Basic earnings per share is a financial ratio that measures net income earned by or available to each common stockholder. The basic earnings per share ratio is often called earnings per share, EPS, and net income per share.

What Does Basic EPS Mean?

Basic earnings per share is calculated by subtracting the preferred dividends from net income and dividing that by the average number of common stock shares outstanding during the year.

Basic Earnings Per Share Equation Example

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Preferred dividends have to be taken out of net income because this money is not available to common stock holders. Preferred shareholders often have rights to dividends before common stockholders, so this money must be set-aside for preferred shareholders. Preferred stock can be issued as noncumulative and cumulative preferred stock. If noncumulative preferred shares are issued, only the preferred dividends that are actually declared must be subtracted from net income.

Cumulative preferred shares are more inclusive. If cumulative preferred shares are issued, all preferred dividends whether declared or not must be subtracted from net income to establish the earnings available to common shareholders.

The  weighted average method  is used to compute the number of common stock shares outstanding during the year. The weighted average method for counting common stock outstanding is the same often used from counting and valuating inventory.

Example

For instance, assume Big Bad Band, Inc. has net income for the year of $$2,000,000, declares a $10,000 dividend on its noncumulative preferred stock, and has 10,000 common shares outstanding. The basic earnings per share of Big Bad Band, Inc. would look like this.

Basic Earnings Per Share Calculation Example

Download this  accounting example  in excel.


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