Owner's Equity Paper

Essay by nuttybUniversity, Bachelor'sA, October 2007

download word file, 1 pages 3.8

Corporations have one solid advantage over proprietorships and partnerships, the ability to accumulate large amounts of capital by sale of stock.

Both paid-in capital and earned capital represent amounts of stockholders' equity. Paid-in capital is the total amount that results from the sale of stock to stockholders. Common stock and additional paid-in capital are two accounts commonly used for paid-in capital. Earned capital represents the amount that a company makes from profitable operations, and is disclosed in the retained earnings account on the balance sheet.

Because the sale of stock and the income resulting from operations are two drastically different ways ob building stockholders' equity these amounts are kept separate. This way anyone analyzing a company's financial statements know what equity was acquired through the sale of stock, and what equity was received from the operations of the business.

Both paid-in and earned capital tell an investor important things about a company, and are almost equally important.

I would say that earned capital would be a bit more important because the amount added to it represents the ability of the company to earn money from the operations of the business. Paid-in capital can mean a couple different things, a large amount of financing by issuing stock could mean that the company is not doing particularly well and has to issue stock to pay debts.

Dilutive securities are securities that can be converted to common stock by the holder. When holders of these securities choose to exercise this option the amount of earnings per share (EPS) is reduced (diluted), sometimes by a substantial amount. Because these dilutive securities can have such a substantial impact on the EPS of a company, as an investor I would be particularly interested in the diluted EPS of a company. Of course, I would also want...