In calculating diluted earnings per share, the equivalent number of convertible preferred shares is added as an adjustment to the denominator. If the preferred shares are cumulative, which amount should then be added as an adjustment to the numerator?

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If the preferred shares are cumulative, the annual preferred dividend should be added as an adjustment to the numerator in calculating diluted earnings per share. This is because preferred shareholders have the right to receive their dividends before common shareholders, and if the company fails to pay the dividends one year, the dividends accumulate and must be paid before any dividends can be paid to common shareholders. Therefore, the annual preferred dividend is a contractual obligation and should be accounted for in the diluted earnings per share calculation.

In Calculating Diluted Earnings Per Share, the Equivalent Number of Convertible