Question

All of the following statements are true regarding earnings per common share (EPS) except:

a. Corporations whose stock is publicly traded must report EPS on their income statements.
b. EPS is sometimes called basic earnings per share.
c. EPS is calculated as (Net Income − Preferred Dividends) / Average Number of Common Shares Outstanding.
d. EPS cannot be calculated if a company has no preferred stock.

Answer 1

d) EPS cannot be calculated if a company has no preferred stock.

Step-by-step explanation:

The above statement is untrue about E.P.S because the reason why 'Preferred dividend' (which is dividend on preference shares) is subtracted from Net Income, before being divided by the 'Average Number of Common Shares Outstanding' is for comparability.

Since the denominator is based on 'common shares' or 'ordinary shares', it makes sense not to include the part of income that has fallen to preferred shares.

As a matter of fact there are a lot of companies that do not have preferred stock and still report Earnings Per Share on their financial statements.

Finally, still on comparability; E.P.S helps to compare the performance of big companies that have preferred stock with small companies that do not have. Hence EPS can be calculated even when there is no preferred stock.