Communication Paper


Owner’s Equity Paper
Lisa Cook
University of Phoenix
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...