Chapter 14, Problem 15Q

To determine

Earnings Per Share (EPS): The part of profit earned by each share of the company is called as earning per share. It reveals the profitability of the company. To calculate earnings per share net income is divided by average number of outstanding shares.

Preferred stock: Preferred stock is a part of total share capital of the company. It is a class of title holders that carry some preference rights against dividend and returning of principal amount at the time of winding up of the company. These shareholders are paid fixed rate of dividend before any dividend is paid to common shareholders but they do not carry any voting rights.

To determine: The reason for subtracting preferred stock dividends from net income in computing earnings per share.