What is Cumulative preferred stock?
In short
Cumulative preferred stock entitles its holders to receive any missed (in arrears) preferred dividends before common shareholders receive any dividends.
Key takeaways
- Dividends in arrears are not a liability until declared, but they are disclosed.
- For basic earnings per share, the current year's cumulative dividend is deducted whether or not declared.
- Noncumulative preferred dividends are deducted only if declared.
Where it's tested
FAR: Equity & Earnings Per Share — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has net income of $600,000 and paid $50,000 in dividends on cumulative preferred stock during the year, none of which were declared. What amount should be used as the numerator for basic EPS?