Communication_Paper

Running head: OWNER’S EQUITY PAPER Owner’s Equity Paper Lisa Cook University of Phoenix ACC/423 March 18, 2010 Owner’s Equity Paper Analyzing owner’s equity an analyst has to take into consideration the many aspects of stockholders’ equity and the different levels of operation through shareholders and stockholders equity in the company. Three important questions discussed in this analysis are; why is it important to keep paid-in capital separate from earned capital' As an investor, is paid-in capital or earned capital more important' As an investor, are basic or diluted earnings per share more important' When one think of owner’s equity (in various types of business) it focuses on what type of business is being formed and to what extent ownership can grow by investing into that entity. Owner’s equity “in a corporation is defined as stockholders’ equity, shareholders’ equity, or corporate capital” (D.E. Kieso; J.J. Weygandt; T.D. Warfield, 2007, p. 728). The owner’s equity is the owner’s ownership in a business or the amount of assets owned. Owner’s equity is increased by owner’s capital contributions and profits from the business. Paid-in capital that may also be referred to as contributed capital or capital surplus, “is the capital a company receives from investors on top of the par value of the stock” (Business finance, 2009). Earned capital is accumulated by the companies profit from its operations. Earned capital is opposite from paid in capital. Earned capital is specifically for the net income of business. Why is it important to keep paid-in capital separate from earned capital' Paid-in capital needs to be separate from earned capital to show amounts stated for investors needs. Combining paid-in and earned capital will result in an overstatement of net income that may also cause the financial statements to be invalid. Paid in capital is derived from investors and earned capital from earnings. The importance in paid-in capital and earned capital, which is more important to investors' To investor paid-in capital show a huge amount of financing the company has per issuing stocks or paying for debts through issuing stocks. Personally an investor may believe that the earned capital is what is more important to him or her because it strictly focuses on the earnings a company receives from its operations and shows indication that the company can be profitable. Earnings per shares (EPS) are one aspect of comparing companies but will not give the financial analyst or owner a market value of that said company. Basic vs. diluted earnings per share, which is more important to an investor' “The basic EPS is the total earnings per share based on the number of shares outstanding at the time. The diluted EPS figure reveals the earnings per-share a business would have generated if all stock options, warrants, convertibles, and other potential sources of dilution that were currently exercisable were invoked and the additional share printed resulting in an increase in the total shares outstanding. Diluted earnings per share, or diluted EPS as it is often called, is a more accurate version of how much profit is left for you, the owner, for every share of stock you have in a company” (Kennon, 2010). If a company shows a large amount of financial instruments in the outstanding factor, “then diluted earnings per share provide a better measurement of the earnings that should be allocated to each share of stock. The diluted earnings per share calculation include stock options, warrants and convertible debt. Typically, companies report both basic earnings per share and diluted earnings per share” (Your dictionary, 2003). In conclusion the analysis discussed a brief definition of owner’s equity; the importance of keeping paid-in capital separate from earned capital and why it is required; paid-in capital versus earned capital; the importance of paid-in capital and earned capital for potential investors; basic versus diluted earnings per share and which is more important to a potential investor. Owner’s equity is derivate from a corporate form of organization that involves issuance of stocks and earnings per share. The analyst assessed this analysis with appropriate information required for potential or existing investors of an organization. References BusinessFinance.com. (2009). Paid in capital. Retrieved March 16, 2010, from http://www.businessfinance.com/paid-in-capital.htm D.E. Kieso; J.J. Weygandt; T.D. Warfield. (2007). Intermediate Accounting (12th ed.). Hoboken, NJ: Wiley. Kennon, J. (2010). Basic vs. diluted earnings per share – basic eps – diluted eps. Retrieved March 16, 2010, from http://www.beginnersinvest.about.com/od/incomestatmentanalysis/a/basic-eps-diluted-eps.htm' Yourdictionary.com. (2003). Basic earnings per share definition- finance. Retrieved March 16, 2010, from http://www.yourdictionary.com/finance/basic-earnings-per-share