In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
A) Annual preferred dividend
B) Annual preferred dividend times (one minus the income tax rate)
C) Annual preferred dividend times the income tax rate
D) Annual preferred dividend divided by the income tax rate

Question

Quizplus · Accepted Answer

The annual preferred dividend should be added as an adjustment to the numerator (net earnings) when calculating earnings per share for cumulative preferred stock. This is because these dividends must be paid out before any dividends can be distributed to common shareholders, affecting the earnings available to them.

In Computing Earnings Per Share, the Equivalent Number of Shares