Owner’s Equity
As an investor, is paid-in capital or earned capital more important? Explain why.
According to viewpoint from accounting, the money invested by the owner of the company is company’s equity and is made up of different parts, some being coming from the money owners directly and some coming from the profits of the company. The need of financing fulfilled from the issuance of the share which is paid in by investor as common or preferred stock is the paid in capital. It also may be referred as contributed capital.
On the other hand, additional paid-in capital is that which is included in contributed surplus account in the shareholders’ equity division of the balance sheet. The account shows the excess amount paid by investors over the par value of the stock issued (Investopedia, 2003).
Now the capital financed from the earnings of the company, on the other hand, is earned capital. It also may be known as retained earnings and is the portion of net income, which the firm has decided not to return to the shareholders as dividend but retain within the company for financing. Now this is the case when the company is making a profit. In contrast, if the companies is making losses, then the earned capital and hence the equity will be abridged by the amount of loss and the owners will face a decrease in the value of the wealth.
Now all these paid in capital and earned capitals are separated from each other for reporting purpose so that investing segment of capital can be distinguished from shareholders segment. Now the question here lies is, as an investor, what is more, important, paid in capital or the earned capital. For an investor, the earned capital becomes more of importance as this amount is another form dividend payout of the company out from retained earnings. The investors are more interested in it overpaid in the capital as they will receive a higher dividend if retain earnings are higher Budgeting (Money - The Nest, 2015).
Hence, from investor’s point of view, earned capital gains more attention than the paid in capital.
As an investor, are basic or diluted earnings per share more important? Explain why?
Diluted Earnings per Share by definition is the company’s earnings per share which is obtained after calculation of assumption that convertible securities are duly exercised. While calculating diluted earnings per share, the convertible securities such as convertible bonds, preferred shares, warrants and stock options which were supposed to be transformed into common stock is considered, actually has been converted into the common stock in reality.
This becomes more important for the investors of the company than basic EPS. This is because as the factors of Diluted EPS decreases the Basic EPS value, it also further dilutes the true number of shares resulting in spreading of the dollar out among many shares. Hence, the investors become more concerned about how the Basic EPS is diluted and how the diluted share has deprived the actual value of the investment they have made in the company (Readyratios.com, 2015). The company too needs to show the basic and diluted EPS separately on their reports to give information about the impending information of the stock that investors has invested.
Hence, in conclusion thought the capital paid in is where the actual investment of the investors lies, the interest lies in the actually in the earned capital and similarly goes for the Diluted EPS as it plays role in decreasing the earnings that actually belongs to the investors.
References
Budgeting Money - The Nest,. (2015). Paid in Capital Vs. Earned Capital. Retrieved 26 July 2015, from http://budgeting.thenest.com/paid-capital-vs-earned-capital-26802.html
Investopedia,. (2003). Paid In Capital Definition | Investopedia. Retrieved 26 July 2015, from http://www.investopedia.com/terms/p/paidincapital.asp
Readyratios.com,. (2015). Diluted Earnings per Share. Retrieved 26 July 2015, from http://www.readyratios.com/reference/accounting/diluted_earnings_per_share.html
