How is Earnings Per Share (EPS) calculated?

Earnings Per Share (EPS) is a crucial financial metric used to measure a company's profitability on a per-share basis, particularly for common stockholders. The correct calculation involves taking the net income of the company, deducting any preferred dividends, and then dividing the result by the average number of common shares outstanding during the period.

This approach is essential because preferred dividends must be subtracted from net income to arrive at the earnings attributable specifically to common shareholders. This ensures that EPS reflects the earnings that are available to common stockholders after fulfilling the obligations to preferred shareholders, which do not share in the residual earnings that belong to common stockholders.

The other choices do not correctly represent the EPS calculation. For instance, subtracting total assets from net income does not relate to the notion of earnings per share, and simply dividing net income by common shares ignores the necessity of accounting for preferred dividends, which could misleadingly inflate the EPS figure. Lastly, adding preferred dividends back to net income does not align with the purpose of EPS, which is to represent earnings available specifically to common stockholders.