East Coast Yachts uses a small percentage of preferred stock as a source of financing. In calculating the ratios for the company, should preferred stock be included as part of the company’s total equity
To determine whether preferred stock should be included as part of the company's total equity when calculating financial ratios, we need to understand the nature of preferred stock.
Preferred stock represents ownership in a company, similar to common stock, but with some distinct characteristics. Unlike common stock, preferred stockholders generally do not have voting rights but are entitled to a fixed dividend payment before any dividends are paid to common stockholders. In the event of liquidation, preferred stockholders have priority over common stockholders in receiving payments.
When calculating financial ratios, the inclusion of preferred stock in total equity depends on how the preferred stock is classified on the balance sheet. In most cases, preferred stock is considered a part of total equity and should be included in the calculation of equity-based ratios.
However, in some situations, if the preferred stock is classified as a liability rather than part of equity, it should not be included in the calculation of ratios that involve equity. This can happen when preferred stock has certain characteristics that make it more debt-like, such as mandatory dividend payments or redemption features.
To determine how preferred stock is classified on the balance sheet, you can review the company's financial statements, specifically the notes to the financial statements or the equity section. These sections usually provide information on the classification and treatment of preferred stock.
In summary, preferred stock should generally be included in the calculation of ratios that involve equity unless it is classified as a liability. To be certain, it is important to carefully analyze the company's financial statements and consult any relevant accounting guidance or professional advice.