Final answer:
In the calculation of earnings per share, preferred stock dividends are subtracted from net income to determine the profit available for common shareholders.
Step-by-step explanation:
In the calculation of earnings per share (EPS), preferred stock dividends are subtracted from net income. This is because EPS represents the portion of a company's profit allocated to each outstanding share of common stock, giving investors an idea of the company's profitability on a per-share basis. Since preferred shareholders have a priority claim on the company's earnings through their dividends, these dividends must be removed from net income before calculating the EPS for common shareholders.