In this video, we cover diluted earnings p[er share as covered on the CPA exam and in an intermediate accounting course.
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Diluted Earnings Per Share (EPS) is a financial metric that shows the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Convertible securities include outstanding convertible preferred shares, convertible debentures, stock options, and warrants. The purpose of calculating diluted EPS is to provide a worstcase scenario, showing how the company's earnings per share could be affected if all securities that could potentially be converted into common stock were indeed converted.

The formula to calculate Diluted EPS is as follows:

Diluted EPS = Net Income − Preferred Dividends/
Weighted Average Shares + Conversion of Convertible Securities
Diluted EPS= Weighted Average Shares +Conversion of Convertible Securities
Net Income−Preferred Dividends
​

Where:

Net Income is the total earnings of the company.
Preferred Dividends are dividends that must be subtracted from net income if the preferred shares are not convertible into common shares, as they are only available to common shareholders.
Weighted Average Shares is the number of shares outstanding during the period, adjusted for any stock splits or share issuances.
Conversion of Convertible Securities refers to the additional common shares that would be on the market if convertible securities were converted into common stock.
Diluted EPS is considered a more conservative metric than basic EPS because it takes into account the potential decrease in earnings per share that would occur if all convertible securities were converted. This metric is particularly important for companies with a significant amount of convertible securities, as it provides a clearer picture of the company's earnings relative to its shares. It helps investors understand the potential dilution of shares and its impact on earnings, allowing for better investment decisions.



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