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gacpa1234
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Posted: 30 Jun 2008 at 00:58 \| IP Logged

The question says that the preferred stock are cumulative, which means that dividends are owed to the shareholders every year, and if not paid, must be carried forward as a dividends in arrears balance. Since no dividends were paid in 19X3, the first $10,000 of the $16,000 dividends paid in 19X4 are technically making up for the dividends in arrears from 19X3 (25,000 shares x $10 per share x 4% cumulative dividend). The remaining $6,000 paid goes toward the preferred dividend for this year, and $4,000 dividend in arrears balance is carried forward to the next year.

When you calculate EPS, you subtract the cumulative preferred dividend as if if was paid, even if it was not. Each year, this company in essence incurs a $10,000 dividend liability for the preferred shareholders because the stock is cumulative. When the EPS was calculated for 19X3, $10,000 would have been subtracted from the numerator even though the dividends were not actually paid until the following year. That's why in 19X4 you only subtract $10,000, even though $16,000 was actually paid.

Hope that helps.

Would be CPA
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Posted: 30 Jun 2008 at 12:37 \| IP Logged

The concept here is very simple....Cash and Accrual.The $ 10,000 is the expense for the year and therefore deducted from the income to calculate EPS. Whereas $ 16,000 is the amount paid (Cash) has nothing to do with exp as it will apprear on the Cash flow statement, therefore not considered in the calculation.

Hope it will help to clarify.

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neott
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Posted: 25 Mar 2009 at 03:13 \| IP Logged

Thank you guys, nice and clear explanations.

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