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Mr.Naik, Financial Advisor
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Experience:  MBA Finance
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1. In computing the earnings per share of common stock, ...

Customer Question

1. In computing the earnings per share of common stock, noncumulative preferred dividends not declared should be

   A. deducted from the net income for the year.
    B. added to the net income for the year.
    C. ignored.
    D. deducted from the net income for the year, net of tax.
Submitted: 8 years ago.
Category: Finance
Expert:  Mr.Naik replied 8 years ago.
Your answer is c

If a corporation's capital structure consists only of common stock or includes no potentially dilutive convertible securities, options, warrants, or other rights that upon conversion or exercise could in the aggregate dilute earnings per common share, a single presentation, expressed in terms such as basic earnings per common share, is required to be disclosed on the face of the income statement for income from continuing operations and net income and is computed by dividing the income available to common stockholders by the weighted average number of common shares outstanding during the period

    1. Income Available to Common Stockholders--each element of income for which earnings per share presentation is required should be reduced by the current period dividend claim on cumulative preferred stock whether the dividend has been declared or not and by the current period dividend claim on noncumulative preferred stock only if the dividend has been declared

        a. Illustrations
            1) A corporation reported net income of $300,000 during the current year; the corporation had a weighted average number of common shares outstanding of 100,000 during the current year;the corporation had 1,000 shares of 8% cumulative preferred stock with a par value of $100 outstanding during the current year; the preferred stock dividend was declared

                    Earnings Per Share = (300,000 - 8% x 100 x 1,000) /
                                         100, 000 = 2.92
          
            2) A corporation reported net income of $300,000 during the
               current year; the corporation had a weighted average number of
               common shares outstanding of 100,000 during the current year;
               the corporation had 1,000 shares of 8% cumulative preferred
               stock with a par value of $100 outstanding during the current
               year; the preferred stock dividend was not declared
                    Earnings Per Share = (300,000 - 8% x 100 x 1,000) /
                                         100, 000 = 2.92
           
            3) A corporation reported net income of $300,000 during the
               current year; the corporation had a weighted average number of
               common shares outstanding of 100,000 during the current year;
               the corporation had 1,000 shares of 8% noncumulative preferred
               stock with a par value of $100 outstanding during the current
               year; the preferred stock dividend was declared
                    Earnings Per Share = (300,000 - 8% x 100 x 1,000) /
                                         100, 000 = 2.92
          
            4) A corporation reported net income of $300,000 during the
               current year; the corporation had a weighted average number of
               common shares outstanding of 100,000 during the current year;
               the corporation had 1,000 shares of 8% noncumulative preferred
               stock with a par value of $100 outstanding during the current
               year; the preferred stock dividend was not declared
                    Earnings Per Share = 300,000 / 100,000 = 3.00

    2. Weighted Average Number of Common Shares Outstanding--the number of
        common shares outstanding at the beginning of the period is increased
        or decreased by any common shares issued or retired during the period
        weighted by the fraction of the period in which they were outstanding
        a. Stock Dividends or Stock Splits--if a stock dividend or stock
            split occurs either during the current period or after the end of
            the current period but before the financial statements are issued,
            the computation of the weighted average number of common shares
            outstanding requires that the common shares outstanding before the
            occurrence of the stock dividend or stock split be restated to
            reflect the effects of the stock dividend or stock split
        b. Illustration--a corporation had 100,000 shares of common stock
            outstanding on January 1; the corporation issued 2,000 shares of
            common stock on April 1; the corporation issued a 5% stock
            dividend on the outstanding common shares on June 1; the
            corporation repurchased 3,000 shares of common stock on October 1;
            the corporation issued 6,000 shares of common stock on December 1
               Weighted Average Number of Common Shares Outstanding:
                    January 1    100,000 x 1.05 x 12 / 12 = 105,000
                    April 1        2,000 x 1.05 x 9 / 12 =   1,575
                    October 1     (3,000)       x 3 / 12 =    (750)
                    December 1     6,000        x 1 / 12 = ____500
                                         &nbs p;                  106,325

Mr.Naik, Financial Advisor
Category: Finance
Satisfied Customers: 32
Experience: MBA Finance
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