Owner's Equity

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It is important to keep paid-in capital separate from earned capital because they are completely different numbers. The stockholders’ equity section of a corporation’s balance sheet includes paid-in capital and retained earnings. The distinction between paid-in capital and retained earnings is important from a legal and an economic point of view. Paid-in capital is the amount paid in to the corporation by stockholders in exchange for shares of ownership. Retained earnings are earned capital held for future use in the business. The primary objectives in accounting for the issuance of common stock are to (1) identify the specific sources of paid-in capital and (2) maintain the distinction between paid-in capital and retained earnings. Investors often use the dividend per share as a measure to determine the real value of a share. Proponents of this school of thought argue that the earning per share is of no real value to anyone but those who can determine the policies of a company. The income of an investor is the dividend that he receives. It is therefore submitted that the value of a share should be a multiple of the dividend paid on that share. (Petroff) The paid-in capital section of a balance sheet provides information on the type of shares issued, and whether or not any premiums or a discount was present. Also reported are the number of shares authorized and the number of shares issued. There are many acceptable variations in reporting shareholders' equity on the balance sheet. Premium paid-in capital accounts may be combined into a single heading called additional paid-in capital or listed separately. Any significant changes that occur to the paid-in capital section of the balance sheet should be disclosed in financial statements. (Petroff) Wall Street came up with two sets of earnings per share numbers: basic EPS and diluted EPS. The basic figure is the total earnings per share based on the number of shares outstanding at the time. The diluted EPS figure...
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