Explain Why Is It Important To Keep Paid-In Capital Separate From Earned Capital?
Introduction Owners' equity has been a subject that I have only touched on throughout the last few months of my intermediate accounting classes. It is my intentions to answer the questions that best that I can but I will have to rely heavily on our text to provide the answers.
Why is it important to keep paid-in capital separate from earned capital? It is important to distinguish between paid-in capital and earned capital in order to understand why the two should be kept separate. Paid-in capital, which is also referred to as contributed capital, "Is the total amount paid in on capital stock." This is money received from investors to purchase stock in the company. Earned capital is not monies received from outside investors. It is, "the
capital that develops if the business operates profitably; it consists of all undistributed income that remains invested in the enterprise". In other words it is my understanding that this is the money that is re-invested in the company or corporation to continue growing and operating.
As an investor, is paid-in or earned capital more important? Why?
From my understanding earned capital is more important to an investor. When the retained earnings are high it is more likely that a company/corporation will declare and pay dividends. Furthermore, the less outstanding stock, the higher return an investor will receive because the dividend is distributed among a smaller amount of investors.
As an investor, are basic or diluted earnings per share more important? Why? I believe that an investor is more interested in the diluted earnings per share. The basic EPS is basically the total amount of shares outstanding at that moment in time. The diluted EPS shows the earnings per-share a company/corporation would have made if all stock options outstanding were exercised. If all the options offered to executives, managers, and in some companies, such as GEICO, normal employees that have been vested or just simply have passed their probation time, the company has just issued more stock. The total amount of dilution takes away from the current investor's return. Therefore, I believe it would be more important to know the full extent of the diluted EPS.
Why is it important to keep paid-in capital separate from earned capital? It is important to distinguish between paid-in capital and earned capital in order to understand why the two should be kept separate. Paid-in capital, which is also referred to as contributed capital, "Is the total amount paid in on capital stock." This is money received from investors to purchase stock in the company. Earned capital is not monies received from outside investors. It is, "the
capital that develops if the business operates profitably; it consists of all undistributed income that remains invested in the enterprise". In other words it is my understanding that this is the money that is re-invested in the company or corporation to continue growing and operating.
As an investor, is paid-in or earned capital more important? Why?
From my understanding earned capital is more important to an investor. When the retained earnings are high it is more likely that a company/corporation will declare and pay dividends. Furthermore, the less outstanding stock, the higher return an investor will receive because the dividend is distributed among a smaller amount of investors.
As an investor, are basic or diluted earnings per share more important? Why? I believe that an investor is more interested in the diluted earnings per share. The basic EPS is basically the total amount of shares outstanding at that moment in time. The diluted EPS shows the earnings per-share a company/corporation would have made if all stock options outstanding were exercised. If all the options offered to executives, managers, and in some companies, such as GEICO, normal employees that have been vested or just simply have passed their probation time, the company has just issued more stock. The total amount of dilution takes away from the current investor's return. Therefore, I believe it would be more important to know the full extent of the diluted EPS.