When several types of potential common shares exist, the one that enters the computation of diluted EPS first is the one with the:
A) Highest incremental effect.
B) Higher numerator.
C) Median incremental effect.
D) Lowest incremental effect.

Question

Quizplus · Accepted Answer

The one with the lowest incremental effect enters the computation of diluted EPS first because it has the most dilutive effect, which means it would decrease earnings per share the most if exercised or converted into common stock. Diluted EPS calculations aim to show the worst-case scenario for earnings per share if all convertible securities were converted to common stock.

When Several Types of Potential Common Shares Exist, the One