Owner's Equity Cycle Paper

Owner's Equity Cycle Paper

Running head: Owner’s Equity Cycle Paper

Owner’s Equity Cycle Paper

Intermediate Accounting III

November 4, 2007

Introduction

This paper I found to be challenging to write because understanding the subject of paid-in-capital and earned capital is not easy to explain on paper. I decided that first a good definition of these two financial areas would be necessary before I could answer the questions asked for this assignment. While I analyzed the meaning of each area in question I discovered just how much I lacked in understanding of the subject. What I thought would be a simple answer to each of these questions now became more complicated, therefore, I am going to explain what I believe the answer is for each of these question based on what I have read.

Paid-in-capital and Earned Capital

Why is it important to keep paid-in-capital separate from earned capital? Paid-in-capital is defined as contributions made by investors in exchange for capital stock. Earned capital is the capital that develops from profitable operations of a company. The reasons I believe paid-in-capital and earned capital should be kept separate is to see exactly how a company is performing because the goal of a company is to make a profit for its investor. This is only one reason to keep paid-in-capital and earned capital separate, another reason would be that earned capital is taxed not paid in capital, if these two items were not separated I would think that it could cause a misrepresentation of revenues earned for stockholders and tax agencies. One more reason would be for stockholders to see if the liabilities a company has are being met by earned revenues rather than seeing their investments erode before they could have a chance to pull out what investments the stockholder has left in a company.

As an investor, is paid-in or earned capital more important? I believe that both paid-in and earned capital is important to the investor. If I were the investor I would be very concerned about the money I invested in a company knowing that in today’s business environment there are many variables involved in the successful operation of a company. In terms of profitability earned capital increases are definitely what investors want to see on financials, however, both paid-in and earned capital are in my opinion equally important.

Basic or Diluted Earnings

As an investor, are basic or diluted earnings per share more important? Based on my understanding I would say the diluted earnings per share is more important