Build basic EPS and the two-class method

Linden Peak reports $8.4 million of net income and 3.2 million common shares at year-end. Dividing those amounts produces $2.625. It is not basic EPS until the numerator and every dated share interval are rebuilt.

Reconcile the numerator from attributable income

Start with the required continuing-operations or net-income amount attributable to the parent and adjust for items that determine income available to common shareholders. The file should separately identify:

• declared noncumulative preferred dividends;
• current-period cumulative preferred dividends, whether declared or not under the applicable route;
• redemption, induced-conversion, or down-round effects;
• participating-security allocations;
• noncontrolling interests and other attribution boundaries; and
• current versus pending PIK-dividend measurement when relevant.

Cash paid is not the numerator. Paying last year's cumulative arrearage this year does not deduct it from this year's income a second time.

Build a dated denominator calendar

Suppose adjusted common shares are:

Use the entity's supported day convention consistently. The issue enters when consideration and shares are recognized under the applicable facts. The repurchase leaves outstanding shares on its effective date. Do not average opening and ending shares unless the pattern makes that shortcut exactly equivalent and the schedule proves it.

A qualifying stock dividend or split retrospectively changes every interval and comparative period. Rebuild the table rather than multiplying the final answer, because option, conversion, and contingent terms may also change.

Identify participating securities before division

A security participates when its enforceable rights require allocation of dividends or undistributed earnings under Topic 260. Preferred shares, unvested restricted shares, and other awards may participate; their labels do not decide the result. Examine nonforfeitable dividend or dividend-equivalent rights and all allocation terms.

Under the two-class method:

1. allocate declared dividends to common and participating classes;
2. allocate undistributed earnings according to participation rights;
3. determine the common-class numerator; and
4. divide by weighted-average common shares.

For a simple uncapped equal-per-share participant:

undistributed earnings
  = income available to participating classes - distributed earnings

common allocation
  = undistributed earnings x weighted common units
    / total weighted participating units

Real instruments may have caps, preferences, losses, or different participation formulas. The calculator uses supplied rights; it cannot invent them.

Present the required per-share amounts consistently

Compute basic EPS for income from continuing operations and net income in the required scope, with other per-share amounts where applicable. Use the same weighted common-share denominator but the correct numerator for each statement component. Do not use comprehensive income as the basic numerator unless a specific requirement says so.

Open the diluted bridge only after basic closes

The basic file should tie attributable income, preferred and participating rights, dated common shares, retrospective adjustments, face presentation, and the equity register. Potential common shares do not enter the basic denominator merely because conversion is likely. They move to the next lesson's instrument-by-instrument counterfactual.