A company has cumulative preferred stock. When computing earnings per share, the current year's dividends not declared on the preferred stock should be:
A) Deducted from earnings for the year.
B) Deducted, net of tax effect, from earnings for the year.
C) Added to earnings for the year.
D) Ignored.

Question

Quizplus · Accepted Answer

Cumulative preferred stock dividends, whether declared or not, must be deducted from the company's earnings for the year when computing earnings per share. This is because these dividends accumulate over time until they are paid, and they have priority over common stock dividends.

A Company Has Cumulative Preferred Stock