Preferred stock can affect the calculation of basic earnings per share (EPS) because preferred dividends are subtracted from net income when calculating earnings per share. But CONVERTIBLE preferred stock can also affect DILUTED earnings per share if those convertible preferred shares are convertible into common shares.

To calculate diluted earnings per share when there are convertible preferred shares outstanding, you need to do two things:

(1) Don't subtract preferred dividends for the convertible preferred shares from net income in the numerator of the diluted EPS equation (with diluted EPS, you're assuming the preferred shareholders would have converted their shares to common shares, and thus the company wouldn't have had to pay preferred dividends)

(2) Add the number of common shares that the preferred shareholders will be receiving (with diluted EPS, you assume the preferred shareholders would have converted their preferred shares to common shares at the beginning of the period, and that the company issued new common shares to satisfy the conversion)
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