Which of the following items are subtracted from net sales when determining earnings available to common shareholders?

• A. Preferred dividends and income tax expense
• B. Sales returns and allowances
• C. Cost of goods sold and operating expenses
• D. Accounts receivable and inventory

Answer: (A)

Verified step by step guidance

1. Understand the concept of 'earnings available to common shareholders': This refers to the amount of profit left after deducting all expenses, taxes, and preferred dividends from net sales. It is the portion of earnings that is available for distribution to common shareholders.
2. Identify the components that are subtracted from net sales: Net sales is the revenue generated after accounting for sales returns and allowances. From this, various expenses are subtracted to calculate earnings available to common shareholders.
3. Preferred dividends: These are payments made to preferred shareholders before any earnings are distributed to common shareholders. Subtract preferred dividends from net sales as part of the calculation.
4. Income tax expense: Taxes owed by the company are subtracted from net sales to determine the earnings available to shareholders. This is a mandatory deduction.
5. Sales returns and allowances: These are reductions in revenue due to returned goods or allowances granted to customers. They are subtracted from gross sales to arrive at net sales, which is the starting point for calculating earnings available to common shareholders.