Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

Diluted earnings per share (EPS) is an important measure used to assess a company's profitability on a per-share basis, factoring in the potential effects of dilutive securities. The correct answer highlights that diluted EPS considers all potential dilutive shares in its calculation. This includes shares that could arise from convertible securities, stock options, and warrants, which may be exercised or converted into common shares.

By including these potential shares, diluted EPS offers a more conservative view of a company’s earnings, reflecting the possibility that the number of outstanding shares could increase, thereby reducing earnings per share. This gives investors a clearer understanding of the company's earnings performance should all potentially issuable shares be converted into common stock.

Choices that focus solely on common shares or basic earnings per share do not reflect this comprehensive view. Similarly, focusing on extra earnings from dilutive securities doesn't address the fundamental aspect of counting all potential ordinary shares in circulation, which is central to the concept of diluted EPS.