Basic And Diluted Earnings Per Share
Learn the Basic And Diluted Earnings Per Share rule, work one CPA Exam example, avoid the common trap, and continue with free FAR questions.
The decision that earns the point
The Basic And Diluted Earnings Per Share decision
Basic EPS divides income available to common shareholders by weighted-average common shares. Diluted EPS starts with basic EPS and includes only potential common shares that reduce EPS or increase loss per share after applying the appropriate if-converted or treasury-stock treatment.
Exam use
FAR tasks can test the numerator, weighted shares, stock changes, convertible instruments, options, and antidilution.
Your scratch-paper plan
Solve it in three moves
- 1
Build basic EPS first
Adjust the numerator for preferred dividends and build weighted-average common shares from dated share changes.
- 2
Test each potential share
Calculate the incremental numerator and denominator effect for each convertible instrument, option, or warrant.
- 3
Exclude antidilution
Include potential common shares only when their effect is dilutive under the stated income or loss facts.
Worked problem
Work the facts before choosing the answer
Income available to common shareholders is $240,000 and weighted-average common shares are 120,000. A dilutive instrument would add $12,000 to income and 20,000 shares.
Show the work
Basic EPS is $2.00. The if-converted amount is $252,000 divided by 140,000 shares, or $1.80.
Answer
The instrument is dilutive in this illustration because including it reduces EPS from $2.00 to $1.80.
Do it now
Test the same decision with a fresh question
Start with free FAR practice. Create an account only when you want the 5-day no-card CPAPass trial and continued section practice.
The trap and the repair
Common trap
Using ending shares instead of weighted-average shares distorts basic EPS. Automatically including every convertible instrument ignores the antidilution test.
Repair
Finish basic EPS, calculate each incremental effect separately, and include instruments in the required order only when they dilute.
Your exam workflow
- Step 1Read the requirementIdentify what the task asks you to decide about basic and diluted earnings per share.
- Step 2Sort the factsAdjust the numerator for preferred dividends and build weighted-average common shares from dated share changes.
- Step 3Apply the ruleCalculate the incremental numerator and denominator effect for each convertible instrument, option, or warrant.
- Step 4Check the outputInclude potential common shares only when their effect is dilutive under the stated income or loss facts.
Keep the next step narrow
Quick questions
What is the shortest useful answer for basic and diluted earnings per share?
Basic EPS divides income available to common shareholders by weighted-average common shares. Diluted EPS starts with basic EPS and includes only potential common shares that reduce EPS or increase loss per share after applying the appropriate if-converted or treasury-stock treatment.
How can basic and diluted earnings per share appear on the CPA Exam?
FAR tasks can test the numerator, weighted shares, stock changes, convertible instruments, options, and antidilution. The exact task can change, so identify the governing facts before applying the rule.
What is the most common mistake with basic and diluted earnings per share?
Using ending shares instead of weighted-average shares distorts basic EPS. Automatically including every convertible instrument ignores the antidilution test. Finish basic EPS, calculate each incremental effect separately, and include instruments in the required order only when they dilute.
Where should I practice basic and diluted earnings per share?
Use /free-practice/far for section-aligned practice, then review /learn/concepts/weighted-average-contribution-margin when the miss comes from an adjacent rule rather than this topic itself.