Investors must be aware of the manipulation of earning and computations. That is, the paid in capital accelerates and boosts the earned capital. The reason behind it is that the two values of capital depict the strength of the firm financially.
Conclusion Keeping earned capital alienated from the paid-in capital is a wise decision, so as to avoid major issues that may lead to misinterpretation of the source while taking the financial account. Combining the two source of capital will lead to a misinterpretation and misrepresentation of the earning of the firm.
Most investors are majorly concerned with the earned capital compared to the paid in capital. The reason behind this preference is the facts that earned capital represent the earning potential of a firm.
Therefore, investors want to venture into a business that yield dividend according to their expectations. Majorly, investors prefer to use earned capital instead of paid in capital because of its inclusions of security component.
It also eliminates the confusion that result from the unknown source of capital. The suitability of the diluted earnings per share is the calculation that is associated with it because it is easy to calculate share capital and dividends raised.
On the contrary, the basic earnings per share are less detailed and lack vital and relevant information that allows an investor to make decisions regarding the financial strength of the business.
On the other hand, paid-in capital is the capital raised from the subscription of the shareholder through the sale of capital shares.
If the two source of capital are combined, it will be very difficult to convince them on the method to use on the computation of earnings. This in turn will facilitate a clear distinction with the operational capital acquired from profit making operation.
However, investors find it necessary to separate the two source of capital because for several reasons. This represents the capital invested by the shareholders and does not in any way represent the profitability of the firm. This is because the firm reporting their financial status using earned capital reveals their financial value to the stakeholders.
The two sources of capital must be separated so that the shareholders and investors information can be clearly distinguished from one another.
Therefore, combining the two sources would lead to confusion. Therefore, this dictates that most investors do study the company presentation in terms of future investments.
Despite the importance of the two forms of capital, paid-in capital is more significant than earned capital. Brigham and Houstonp.
As for the investor, it is important to inspect the diluted earnings per share because of its ideal computational techniques, which shows the general and basic earning of the firm per share or dividends.
Another major aspect is the dilution earning, which is more detailed, unlike the basic per share earnings. Another issue that makes an investor preference is the earned capital use in the computation of price to earnings valuation ratio.
Mixing the two will also cause complexity in calculations with regard to profits margins. The reason behind this is that earned capital is a representation of the potential earnings that a firm can generate in its day-to-day operations.
Lacks of dilution securities scares away a potential investor because of the inability of protection from the securities, which can easily be converted into stock. On the other hand, earned capital is the funds that a company or firm can acquire in the form of profit accrued by the sale of goods and services.Preparea to 1,word response to the following questions: · 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? Explain why. · As an investor, are basic or diluted earnings per share more important.
Owner’s Equity Paper Prepare a to 1,word response to the following questions: 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?
View Essay - ACC Week 1 Individual Assignment Owners Equity Paper from ACC at University of Phoenix. Owners Equity1 Owners Equity Name ACC/ Date. Owner’s Equity Paper – Accounting August 11, Posted by octotutor. Accounting, Course: ACC Stockholders’ Equity has two sources of capital, which include paid-in capital and earned capital.
Paid-in capital must be kept alienated from the earned capital. Running Head Owner s Equity Paper Owner s Equity Paper ACC Intermediate Financial Accounting Margaret McAskill 10 24 11 Owner s Equity Paper The.
Owners Equity Owner’s equity paper Taisha Ransom ACC/ August 29, Henry Leonard Before investors invest in a company, he or she must take various items into consideration.Download