Owners Equity

753 Words Nov 7th, 2012 4 Pages
Owner’s equity paper
Taisha Ransom
ACC/423
August 29, 2011
Henry Leonard

Before investors invest in a company, he or she must take various items into consideration. First, both paid in capital and earned capital are looked at. These items tell investors how well the company is doing and if the company is profitable. Next, investors look at earnings, basic and diluted. Once an investor takes the above into consideration, he or she can then make the decision whether to invest in a company or not. This paper will discuss why it is important to keep paid in capital separate from earned capital. How earned capital and basic earnings are more important than paid in capital and diluted earnings will also be discussed.
Before one can
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If a company has a retained earnings balance that exceeds the amount of paid in capital, an investor is more likely to invest in that company. A company that has most of it money from investors could be a red flag to investors. This shows a company may be less willing to save their company because a lot of the owner’s money is not invested. As an investor basic earnings per share are more important than diluted earnings. Basic earnings “consist only of common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per common share” (Kieso, D. E., Weygandt, J.J., & Warfied, T. D., 2007). In a sense, basic earnings do not reduce the earnings per share. Basic earnings are part of a simple capital structure. Diluted earnings are part of a complex capital structure and have the potential to be converted to common stock. “Upon conversion or exercise by the holder, the dilutive securities reduce (dilute) earnings per share” (Kieso, D. E., Weygandt, J.J., & Warfied, T. D., 2007). A complex structure is when a corporation has earnings that may be diluted. Basic earnings are more important because an investor has less potential to lose money because basic earnings cannot be reduced. An investor would most likely not want to invest in a complex corporation because his or her earnings per share may be reduced, which means he or she may lose money instead of gaining money. For financial

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