Which securities are excluded when calculating basic earnings per share (EPS)?

• A. Dilutive securities are excluded from basic EPS.
• B. Non-dilutive securities are excluded from basic EPS.
• C. All securities are included in basic EPS.
• D. Only preferred stock is excluded from basic EPS.

Answer: (D)

Basic earnings per share uses only the actual common shares that are outstanding during the period. The idea is to measure how much earnings each current share of common stock would get without counting securities that could later be converted into more shares and dilute that amount. So, securities that could dilute EPS are excluded from the basic EPS calculation. The numerator is net income minus any preferred dividends, and the denominator is the weighted-average number of common shares outstanding. Securities that would not dilute EPS if converted don’t affect basic EPS, but those that would dilute are reserved for the diluted EPS calculation. Therefore, it’s not just preferred stock that’s excluded; any potentially dilutive security, such as convertible debt or stock options, would be excluded from basic EPS.