How is earnings per share (EPS) calculated?

Earnings per share (EPS) is defined as the portion of a company's profit allocated to each outstanding share of common stock. The calculation of EPS is crucial as it reflects the company’s profitability on a per-share basis, which is an essential metric for investors.

The correct formula for EPS is derived from net income minus any preferred dividends, divided by the average number of outstanding shares of common stock. This effectively shows how much of the net income attributable to common shareholders is available per share. Therefore, subtracting the dividends paid to preferred shareholders from net income ensures that the calculation only reflects earnings available to common shareholders.

This understanding is vital for analyzing a company's financial health and making informed investment decisions. The other options suggest incorrect components or methods for calculating EPS, which do not align with the established formula.