When a company has preferred stock outstanding, the preferred stockholders participate in net income to the extent of the preferred stock dividends. To determine the earnings applicable to the common stock, we first deduct from net income the amount of current year preferred stock dividends. The annual dividend on cumulative preferred stock is always deducted, even if not declared by the board of directors for the current year. Noncumulative preferred stock dividends are deducted only if declared.
