In short
The two-class method computes earnings per share when a company has participating securities, such as participating preferred stock. Undistributed earnings are allocated to each class as if all earnings had been distributed.
Key takeaways
- Earnings per share is then calculated separately for each class.
- Unvested share awards with nonforfeitable dividend rights are participating securities.
- Losses are allocated to participating securities only if they must share in losses.
Where it's tested
FAR: Equity & Earnings Per Share — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has net income of $600,000 and paid $50,000 in dividends on cumulative preferred stock during the year, none of which were declared. What amount should be used as the numerator for basic EPS?