Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability. Despite the number of advantages related to earning per share reporting there are several limitations associated with earning per share reporting.
The following are limitation of reporting earning per share:
- Inflation is not considered.
- Historical cost information from the financial statements is used so the productive value is low
- The choice of accounting policies affects EPS of an entity
- Window dressing of financial statements raises earnings unnecessarily to deceive shareholders
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