Many commentators believe that the trend of earnings per share (EPS) is a more reliableindicator of underlying performance than the trend of the net profit for the year. Which of thefollowing statements supports this view?A Net profit can be manipulated by the choice of accounting policies but EPS cannot bemanipulated in this way.B EPS takes into account the additional resources made available to earn profit when newshares are issued for cash, whereas net profit does not.C The disclosure of a diluted EPS figure is a forecast of the trend of profit for future periods.D The comparative EPS is restated where a change in accounting policy affects the previousyear’s profits.
Question
Many commentators believe that the trend of earnings per share (EPS) is a more reliableindicator of underlying performance than the trend of the net profit for the year. Which of thefollowing statements supports this view?A Net profit can be manipulated by the choice of accounting policies but EPS cannot bemanipulated in this way.B EPS takes into account the additional resources made available to earn profit when newshares are issued for cash, whereas net profit does not.C The disclosure of a diluted EPS figure is a forecast of the trend of profit for future periods.D The comparative EPS is restated where a change in accounting policy affects the previousyear’s profits.
Solution 1
The statement that supports the view that the trend of earnings per share (EPS) is a more reliable indicator of underlying performance than the trend of the net profit for the year is:
B. EPS takes into account the additional resources made available to earn profit when new shares are issued for cash, whereas net profit does not.
This statement supports the view because EPS is a per share measure of a company's profitability. It takes into account the number of shares outstanding, which can change over time due to actions like issuing new shares for cash. Net profit, on the other hand, is a total amount and does not take into account the number of shares outstanding. Therefore, EPS can provide a more accurate picture of a company's profitability on a per share basis, which can be a more reliable indicator of its underlying performance.
Solution 2
The statement that supports the view that the trend of earnings per share (EPS) is a more reliable indicator of underlying performance than the trend of the net profit for the year is:
B. EPS takes into account the additional resources made available to earn profit when new shares are issued for cash, whereas net profit does not.
This statement supports the view because EPS is a per share measure of a company's profitability, taking into account the number of shares outstanding. This means it reflects the additional resources (i.e., capital from issuing new shares) that a company has to generate profits. On the other hand, net profit is a total figure that does not consider the number of shares outstanding, and therefore does not reflect these additional resources. This makes EPS a more nuanced and potentially more reliable indicator of a company's underlying performance.
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