Which TWO of the following do NOT need to be removed from an entity’s net profit in a statement of profit or loss in order to calculate the earnings figure to be used in the earnings per share calculation? A Redeemable preference share dividends B Irredeemable preference share dividends C Profit attributable to the non‐controlling interest D An error in expenses discovered after the financial statements have been authorised for issue E Ordinary dividends
Question
Which TWO of the following do NOT need to be removed from an entity’s net profit in a statement of profit or loss in order to calculate the earnings figure to be used in the earnings per share calculation? A Redeemable preference share dividends B Irredeemable preference share dividends C Profit attributable to the non‐controlling interest D An error in expenses discovered after the financial statements have been authorised for issue E Ordinary dividends
Solution
The two items that do not need to be removed from an entity's net profit in a statement of profit or loss in order to calculate the earnings figure to be used in the earnings per share calculation are:
B) Irredeemable preference share dividends D) An error in expenses discovered after the financial statements have been authorised for issue
Explanation:
A) Redeemable preference share dividends - These are considered a cost of financing and therefore should be deducted from net profit to arrive at the earnings figure.
B) Irredeemable preference share dividends - These are considered a distribution of profit, not a cost of financing. Therefore, they do not need to be deducted from net profit to calculate the earnings figure.
C) Profit attributable to the non‐controlling interest - This is a share of profit that belongs to minority shareholders and should be deducted from net profit to calculate the earnings figure.
D) An error in expenses discovered after the financial statements have been authorised for issue - This is an adjustment to prior period financial statements, not a current period expense. Therefore, it does not need to be deducted from net profit to calculate the earnings figure.
E) Ordinary dividends - These are a distribution of profit and should be deducted from net profit to calculate the earnings figure.
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