Owners’ Equity Paper
In answering the following questions there was a struggle to distinguish paid-in capital and earned capital. When it comes to basic or diluted earnings per share while the issue can become a little confusing, it was simple to distinguish between the two. The following questions will be answered, explain why it is important to keep paid-in capital separate from earned capital, explain why paid-in capital or earned capital is more important to an investor, and finally as an investor, are basic or diluted earnings per share more important?
Why is it important to keep paid-in capital separate from earned capital? Paid-in capital is when a company issues stock to investors, in return the company receives capital. According to Paid in Capital vs. Earned Capital (1997-20012), “Earned capital is also called retained earnings, earned capital is the portion of net income that companies choose not to distribute as dividends.” Paid-in capital represents the shareholders investments, and earned capital comes from profits made by the company’s operations. Keeping these two capitals separate is important to show profitability from company operations. A company can have a profitable year because of investments from stockholders, but can be in the negative from operations. By separating them it gives investors a true picture of how the company is actually doing.
As an investor, is paid-in capital or earned capital more important? Whether a company has the ability to generate a constant profitability weighs heavily on whether an investor will invest money into a company. Keeping in mind earned capital comes from profit made by operations, an investor will look towards this information to determine if a company has the ability to generate profit. The earned capital is also used to pay dividends in cash as well as stock. Paid-in capital is only excess over the par value which is fixed and does not contribute to the dividends paid to investors. This...
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