What is the formula for basic earnings per share?

The formula for basic earnings per share (EPS) is calculated by taking the net income of the company and subtracting any preferred dividends, then dividing this amount by the average number of common shares outstanding during the period. This is represented as:

[

\text{EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Average Number of Common Shares Outstanding}}

]

This calculation is important because it provides a measure of the earnings attributable to each share of common stock, which is a key indicator for investors. The subtraction of preferred dividends is essential since those dividends must be paid out before any earnings are allocated to common shareholders.

Using all common shares outstanding in the denominator gives a more accurate view of earnings per share for common equity holders, avoiding any misleading figures that could arise from including preferred shares in the calculation. Thus, option B rightly states the necessary components and sequence for accurately calculating basic earnings per share.