ACCA Strategic Business Reporting (SBR) Practice Exam

According to IAS 33, how is earnings per share calculated?

1. Earnings/Total shares issued x 100

2. Earnings/Weighted average number of shares x 100

3. Net income/Weighted average shares x 100

4. Total earnings/Total shares x 100

The correct answer is: Earnings/Weighted average number of shares x 100

Earnings per share (EPS) is a key financial metric used to assess a company's profitability on a per-share basis, and it is critical for investors to understand how much income is attributed to each share of stock. According to IAS 33, the calculation of EPS requires using the weighted average number of shares outstanding during the reporting period rather than simply the total number of shares issued. Using the weighted average number of shares accounts for any changes in the number of shares over time, such as new shares being issued or shares being repurchased. This provides a more accurate reflection of the earnings attributable to shareholders. Thus, the formula for EPS is determined by dividing the net income (or earnings) by the weighted average number of shares outstanding. In this context, while terms like 'earnings' or 'total earnings' might seem similar, specifically identifying 'weighted average number of shares' ensures that the EPS calculation accurately reflects fluctuations in share count and avoids misleading figures caused by variations in the number of shares throughout the period. Therefore, dividing net income by the weighted average number of shares reflects an accurate earnings per share calculation according to the standards set by IAS 33.