April 1, 2013
Owner’s equity is the interest that common and preferred stockholders have in a company. Stockholders have paid-in capital in the form of stock and bonds to a company to provide cash intended to be used for operations of the company. Investors use equity accounts to evaluate the strength and liquidity of a company. Investors assess if a company is growing by comparing capital accounts in previous years to present year by determining if the company is reinvesting funds to keep it operational. Paid in capital is the funding from sale of capital stock. Paid in capital is new money meant to assist the company in increasing their earned capital. Earned capital is money the company earns from profitable operations. The earned capital is the retained earnings, the accumulated income that a company has earned from normal daily and yearly operations. Both forms of equity capital are represented in the equity section of the balance sheet. If the company combines the two it would be misrepresenting the earnings potential from the operations. Retained earnings should be reported separately from contributed capital so companies can measure and track the accumulated net income over time. Investors are more concerned that a company earns the majority of its money from its operations. Earned capital provides for internal financing, budgeting, and absorbing any asset losses. The amount of earned capital a company reports on the financial statements which is in excess of the sale of stock can show the investor that the company is profitable from its own operations and is a good value to invest in. Another way that investors can find the value of a company is by analyzing the earnings per share. There are two types of earnings per share, Basic earnings per share and diluted earnings per share. Some investors use basic earnings per share and diluted earnings per share to calculate how...