Owners' Equity Paper
September 5, 2011
University of Phoenix
Owners' Equity Paper
The investments of stockholders, corporations depend a lot on to fund their business operations. The company stands to gain and grow from selling their stock, when viewing each entity separately. The investor hopes to gain and earn a profit by investing in a company in hopes that their stock prices will go up. The company and the investor depend on each other. The more opportunity the company has to grow with the more people invests. Also the more opportunities for the company to grow, the happier they are able to make their investors, who in turn spend more money.
The owners’ equity discusses the importance that common stockholders and preferred stockholders require in a company. The stockholders are the entities who have paid-in capital to a company to offer the investment planned to be used for operations of the company. In the next paragraph it will be ...view middle of the document...
Paid-in capital is important to organizations, because investors need to be able to see that the company is able to meet obligations through operations alone, and their ability to pay dividends. Paid-in capital is money that the company has raised from equity rather than ongoing operations and is paid in addition to the par value of the stock. It includes what is paid for capital stock plus any additional paid-in capital. It is also what the business earns by issuance of stock. Earned capital tells an investor more about the condition of the company. Earned capital is the money that an organization has generated as a result of operations. New companies will usually hold onto this money as retained earnings to use for future growth.
From the investor’s point of view, it is important that a company earns income from operations better than the sale of stock. The quantity of received capital of a company report in their financial statements demonstrates to the stockholders the real cost of their assets. Although a company that constantly report paid-in capital in additional of earned capital, would not be seen as a good investment opportunity.
The diluted earnings per share demonstrate to the investor possible dilutive common shares that were unpaid during the certain period. The investor review the importance of diluted earnings per share by a calculation: the basic earnings per share – net income divided by the weighted-average shares unpaid, plus the earnings per share less any convertibles and impact of options, warrants, and other dilutive securities (Intermediate Accounting, 2007).
Paid-in capital is retained separate from earned capital to avoid misreading information where operational subsidies are created. Investors are most likely to be more concerned with a company earned capital in comparison to its paid-in capital. This is because the earned capital represents the earning abilities of the company. Diluted earnings explain the basic earnings per share calculations, including the influences that dilutive securities can have on retributions.
Donald, K. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting (12th ed.). Danvers, MA: Susan Elbe.