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Owners Equity Paper

Essay by review  •  March 18, 2011  •  Term Paper  •  420 Words (2 Pages)  •  950 Views

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Owners’ Equity Paper

This paper will address three questions. The first is “Why is it important to keep paid-in capital separate from earned capital?” The second question is “As an investor, is paid-in capital or earned capital more important?” The third question answered will be “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 the amount of money that is received from investors in exchange for stock. Earned capital is the amount of money that is generated by the profitable operations of the company. (Investorwords, n.d.) It is important to keep paid-in capital separate from earned capital because paid-in capital is not a true reflection of a company’s performance. Net income is the source of earned capital. If the two types of capital were not kept separate, the net income would be overstated and show that the company is more profitable than it really is.

As an investor, is paid-in capital or earned capital more important?

As an investor, earned capital is more important when attempting to figure out how profitable the company is because paid-in capital is money that has been exchanged for stock; this amount has nothing to do with how profitable the company’s operations are.

As an investor, are basic or diluted earnings per share more important?

Basic earnings per share are earrings per share of common stock. “Earnings per share is calculated by dividing net income available for the common shareholders by the weighted average number of shares outstanding” (Kieso, Weygant, & Warfield, 2004). Diluted earnings per share are “earnings per share including common stock, preferred stock, unexercised stock options unexercised warrants and some convertible debt” (Investorwords, n.d.). Diluted earnings per share are figured by subtracting the impact of convertibles and the impact of options, warrants and other dilutive securities from basic earnings per share. To the investor, diluted earnings per share are more important because earnings per share are generally a more accurate measure of a company’s true earning

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