Which method does diluted EPS use to account for potential dilutive securities?

Which method does diluted EPS use to account for potential dilutive securities?

• A. Treasury stock method
• B. Straight-line method
• C. Units of production
• D. Historical cost method

Answer: (A)

In diluted earnings per share, potential dilutive securities like stock options are accounted for using the treasury stock method. This method assumes the options are exercised, adding new shares to the count, but the cash proceeds from exercising those options are used to buy back common shares at the average market price. The net increase in shares—shares issued minus shares repurchased—expands the denominator of diluted EPS. If this potential dilution would not lower EPS (antidilutive), it is ignored. Other methods listed are unrelated to calculating diluted EPS.

In diluted earnings per share, potential dilutive securities like stock options are accounted for using the treasury stock method. This method assumes the options are exercised, adding new shares to the count, but the cash proceeds from exercising those options are used to buy back common shares at the average market price. The net increase in shares—shares issued minus shares repurchased—expands the denominator of diluted EPS. If this potential dilution would not lower EPS (antidilutive), it is ignored. Other methods listed are unrelated to calculating diluted EPS.