Question

In calculating earnings per share, companies deduct preferred dividends from net income if:

A. They are noncumulative though not declared.
B. The dividends are declared.
C. They are convertible preferred shares.
D. They are callable preferred shares

Answer 1

Answer: Option B

Explanation: Earnings per share is calculated by dividing net income available to common shareholders with the weighted average number of shares.

Deduction of preferred dividends from net income is done only when dividends are declared by the entity, otherwise not. Preference shareholders have priority over common shareholders in case of dividends, so it will result in reduction of earnings to common shareholders but only when the dividends are declared and distributed.