In calculating earnings per share, which figure is used as the numerator?

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Prepare for the QFA Investments Exam 1. Study with flashcards and multiple-choice questions with detailed explanations. Enhance your understanding and succeed on your exam!

Multiple Choice

In calculating earnings per share, which figure is used as the numerator?

Explanation:
Earnings per share measures how much profit is available to each share of common stock, so the numerator must reflect profits after all expenses, including taxes. Net income after tax represents the earnings that actually belong to shareholders (and, if there are preferred dividends, those are subtracted to arrive at earnings available to common shareholders). The other figures—income before tax, gross profit, or operating income—omit taxes or other deductions and therefore do not represent distributable profits to shareholders.

Earnings per share measures how much profit is available to each share of common stock, so the numerator must reflect profits after all expenses, including taxes. Net income after tax represents the earnings that actually belong to shareholders (and, if there are preferred dividends, those are subtracted to arrive at earnings available to common shareholders). The other figures—income before tax, gross profit, or operating income—omit taxes or other deductions and therefore do not represent distributable profits to shareholders.

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