When computing earnings per share on common stock,dividends on cumulative,nonconvertible preferred stock should be
A) deducted from net income only if the dividends were declared or paid in the current period.
B) deducted from net income regardless of whether the dividends were not paid or declared in the period.
C) deducted from net income only if net income is greater than the dividends.
D) ignored.

Question

Quizplus · Accepted Answer

Dividends on cumulative, nonconvertible preferred stock should be deducted from net income regardless of whether the dividends were declared or paid in the period. This is because, in the case of cumulative preferred stock, dividends accumulate if not paid out, and they must be paid before any dividends can be distributed to common shareholders. This affects the earnings available to common shareholders, which is why it's deducted in the computation of earnings per share (EPS) for common stock.

When Computing Earnings Per Share on Common Stock,dividends on Cumulative,nonconvertible