Preferred dividends are subtracted from earnings when computing basic earnings per share whether or not the dividends are declared or paid if the preferred stock is:
A) Callable.
B) Convertible.
C) Participating.
D) Cumulative.

Question

Quizplus · Accepted Answer

Preferred stockholders with cumulative preferred stock have the right to receive their missed dividend payments before common stockholders can receive any dividend payments. Thus, the company needs to set aside the required amount of funds to pay the cumulative dividends. As a result, preferred dividends are subtracted from earnings only if the preferred stock is cumulative.

Preferred Dividends Are Subtracted from Earnings When Computing Basic Earnings