Question

what does Non cumulative preferred stock do to basic eps

please explain

Answer 1

The preferred shares are of two kinds: cumulative and non-cumulative. For cumulative preferred shares, the entitlement of preferred shareholder’s need to be deducted regardless of whether these are paid or declared. The current period’s dividends must be only considered, excludes the dividend in arrears. For non-cumulative preferred shares, the dividends need to be deducted only when the dividend has been declared. For calculating the total number of common shares, the weighted average number of ordinary shares outstanding needs to be computed. A weighted average number would be applied rather than year-end number as number of common shares changes frequently throughout the year.

For example: Sony's net income for the year equals $$2,000,000; and on its noncumulative preferred stock it declares a dividend of $10,000, and the common shares outstanding are 10,000. Thus basic earnings per share:

[200,000 - 10,000] / 10,000 = $199.00