I have several accounting texts here and one shows the same formula as your original one:
EPS = Net Income - preferred dividends/weighted average common shares outstanding.
While my managerial accounting text shows:
EPS = Net Income/weighted average common shares outstanding,
And yet another explains it as:
EPS = Net Income Available to Common Stock/Average Number of Common Stock Outstanding.
It really depends on the company and their stock structure.
Here's more information from the site I linked to earlier:
http://www.principlesofaccount...pter%2015.htm#EARNINGS PER SHARE, PRICE EARNINGS RATIOS, BOOK VALUE PER SHARE, AND DIVIDEND RATES
"THE CONCEPT OF EARNINGS PER SHARE: How is one to meaningfully compare the net income of a large corporation that has tens of millions of shares outstanding to smaller companies that may have less than even one million shares out? The larger company is probably expected to produce a greater amount of income. But, the smaller company might be doing better per unit of ownership. To adjust for differences in size, public companies must supplement their income reports with a number that represents earnings on a per share basis. Earnings per share, or EPS, is easily the most widely followed and best understood performance measure in corporate reporting. It represents the amount of net income for each share of common stock. Corporate communications and news stories will typically focus on the EPS results, but care should be taken in drawing any definitive conclusions based on a single calculated value. Remember, lots of nonrecurring transactions and events can positively or negatively impact income and EPS; always look beyond the headlines.
BASIC EPS: Having now been introduced to EPS concepts, it is time to focus on the accounting calculation of this important number. Basic EPS may be thought of as a simple fraction with income in the numerator and the number of common shares in the denominator, as follows:
Income/Number of Common Shares Outstanding
Expanding this thought, consider that income is for a period of time (e.g., a quarter or year), and during that period of time, the number of shares might have increased or decreased because of share issuances and treasury stock transactions. Therefore, a more correct characterization of the Basic EPS calculation is:
Income/Weighted-Average Number of Common Shares Outstanding
Further, one must consider that some companies have both common and preferred shares. Remember that dividends on common and preferred stock are not expenses and do not reduce income. However, the preferred stock dividends do lay claim to some of the corporate income stream that would otherwise benefit common shares. Therefore, one more modification is needed to correctly portray the Basic EPS fraction:
Basic EPS = Income Available to Common/Weighted-Average Number of Common Shares Outstanding
This last modification to the Basic EPS calculation entails a reduction of income by the amount of preferred dividends for the period.
Dividends on common stock do not impact the EPS calculation.
Just wait...it gets better:
DILUTED EPS: For many companies, the Basic EPS is all that is required to be presented. But, other companies must report an additional Diluted EPS number. The Diluted EPS is applicable to companies that have more complex capital structures. Examples include companies that have issued stock options and warrants that entitle their holders to buy additional shares of common stock from the company, and convertible bonds and preferred stocks that are potentially to be exchanged for common shares. These financial instruments represent the possibility that more shares of common stock will be issued and are said to be potentially "dilutive" to the existing common shareholders.
Accounting rules dictate that companies with dilutive securities take the potential effect of dilution into consideration in calculating the auxiliary Diluted EPS number. When you see a company that discloses Diluted EPS, it means they have done a series of (rather complex) calculations based on assumptions that dilutive securities are converted into common stock. The hypothetical calculations are quite imaginative; even going so far as to provide guidelines about how money generated from assumed exercises of options and warrants is assumed to be "reinvested" by the company. There is plenty of room to quibble over the merits of the assumptions, but the key point is that Diluted EPS provides existing shareholders a measure of how the company's income is potentially to be shared with other interests. Dilutive effects should never be ignored in investment decision-making!
SUBDIVIDING EPS AMOUNTS: You now know that public companies are required to report EPS information, and you earlier learned that companies must present a fully developed income statement that segregates income from continuing operations from other components of income (e.g., discontinued operations, etc.). Putting these two facts together, you might assume that EPS information should parallel the detailed information shown on the income statement. And, that assumption is correct. Earnings per share information must be subdivided to reveal per share data about income from continuing operations, discontinued operations, extraordinary items, and net income.
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