When computing earnings per share, the numerator includes net income minus any dividends paid to common stockholders.

Question

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Here's the formula for basic EPS:
Basic EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding
The reason preferred dividends are subtracted is that earnings per share is a measure of the portion of a company's profit that is allocated to each outstanding share of common stock. Since preferred dividends are typically a fixed amount that must be paid out before any dividends can be paid to common shareholders, they are removed from net income in the EPS calculation to reflect the earnings available to common shareholders.
Common stock dividends do not affect the basic EPS calculation because these dividends are not an obligation and are decided upon by the company's board of directors after the net income is reported. However, common stock dividends are relevant when calculating diluted EPS if there are potential shares that could be converted to common stock, such as convertible preferred shares or convertible bonds. In such cases, the calculation of diluted EPS would consider the impact of potential conversion on both the numerator (net income adjusted for any changes in interest, preferred dividends, or other factors) and the denominator (the number of shares adjusted for the potential conversion of other securities into common stock).
When computing earnings per share (EPS), the numerator indeed involves net income, but the treatment of dividends depends on the type of stock they are paid on. Specifically, when calculating basic EPS, the numerator is net income minus any dividends declared on preferred stock, not common stock dividends.

When Computing Earnings Per Share, the Numerator Includes Net Income