Owners' Equity Paper Essay

Running head: OWNERS’ EQUITY PAPER Owners’ Equity Paper Michelle McDaniel University of Phoenix Owners’ Equity Paper Introduction Investors have to keep a close eye on many different parts of their investments. First, keeping the paid-in capital separate from the capital earned. Paid-in capital is the total amount of stock purchased by the shareholders. Where earned capital is the profit earned from operations. Second, the investor needs to keep track of the capital earned this creates dividends to be paid in the long run.

Paid-in capital does not apply to the investor just the firm in which the stock is held. Finally, diluted earnings per a share are a better representation of the actual profit the investor can earn. The earnings per a share are firm’s general earnings without taking in to account the convertibles, warrants and stock options. Why is it important to keep paid-in capital separate from earned capital? Paid –in capital is grand total of the paid in on the capital stock. This is the amount provide by the stockholders to the business or corporation.

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Earned capital is accumulated from profitable operations this contains all the undistributed income in which remains invested in the business or corporation. The reason is keeping paid-in capital and earned capital separate is so important is because they are two entirely different financial items. The paid in capital is a key item to the firm but does not have much meaning to the investor. Earned capital is both important to the investor and the firm because earned capital is the representation of the earnings based of business operations. As an investor, paid-in capital or earned capital more important?

Earned capital is more important to an investor because it indicates the company is profitability, not just able to attract additional income from owners and investors. Paid in capital is just the total investment into the company it does not represent the profitable earnings to the shareholder. The investor will pick companies that have high earned capital to generate more profit from the investment. Paid-in capital will not give this information to the customer at most it will show the total amount others have invested in the particular firm but no information on the actually profitability.

As an investor, are basic or diluted earnings per share more important? Earnings per a share, represents the income earned per each share of common stock. Diluted earnings per a share include common stock, preferred stock, unexercised stock options, unexercised warrants, and some convertible debt. In companies with a large amount of convertibles, warrants and stock options. As an investor diluted earnings per share are usually a more accurate measure of the company’s real earning power than earnings per share. Therefore, the diluted earnings are a better representation of the firms earning power to the investor.

Conclusion In closing, an investor has to keep track of several different components of their investments. Beginning with keeping paid-in capital separate from the capital earned. Earned capital is the profit a firm earns based off operations. The total amount of stock purchased by the shareholders is paid-in capital. Next, capital earned creates dividends to be paid to investor which makes it extremely important for the investor to track. Paid-in capital is firms’ in total stock this is provided to the firm by the investor; therefore, paid-in capital does not apply to the individual investor.

Finally, best representation of the actual profit the investor can earn is diluted earnings per a share. The basic earnings per a share are firm’s general earnings without taking in to account the convertibles, warrants and stock options. References Kieso, D. E. , Weygandt, J. J. , & Warfiled, T. D. (2007). Intermediate Accounting (12th ed. ). Danvers, MA: John Wiley & Sons Inc. . Ventureline . (1996). Accounting Glossary . Retrieved from http://www. business. com/directory/accounting/reference/dictionaries_and_glossaries/ Owners Equity

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