Answer
If the Newman company had preferred stock outstanding, the numerator should have been: Net income – (less) preferred dividends. The denominator should also have been the weighted average number of common shares outstanding during the accounting period if the company had any common stock transactions.
Work Step by Step
The numerator should include earnings available only to common shareholders; thus: Net income – preferred dividends. On the other hand, since the numerator characterizes the results for the entire accounting period, the denominator should mirror the weighted average number of common shares outstanding during the accounting period, not the shares outstanding at a single point.
