ACC 423 Week 1 Complete Work Owners’ Equity Paper ACC 423 / Intermediate Financial Accounting III Owners’ Equity Paper It has been a challenge to attempt writing a paper on the subject, as it is very difficult to distinguish between paid-in-capital and earned capital. Therefore I have decided to first define the two financial areas while answering the following questions in the assignment. Importance in keeping paid-in capital separate from earned capital. When the company issues the stock to its investors, it receives certain capital as their investment, and this is known as the paid-in-capital. This type of capital is not generated from the operations of the company but it is the excess over the par value of the stock which the investors are willing to pay for the stock they receive from the firm. Thus it is the amount paid in on the capital stock by the stock holders to the company. It therefore represents the shareholders investments, while the earned capital is the capital which is accumulated from the profits of the company. Hence it is very essential for the company to split these two types of capital to ensure the investors about the operations of the company and its profitability. It is the undistributed income which remains with the firm (Kieso, Weygant, & Warfield, 2007). Paid-in or Earned Capital An investor’s decision to invest in any company/firm depends on the ability of the firm to generate continuous income flow and profitability, the policy relating to the dividend and the growth plans of the firm. The earned capital is generated from the operations of the company and it is used to pay up the dividends in terms of both cash and stock. It also reflects the prosperity of the company attracting further investment on the part of the investors. While the paid-in capital is only the excess over the par value which remains fixed not contributing to the dividends payable to the investors. Hence the earned capital is more important to the investor than the paid-in-capital (Scott, 2003). Week 1 DQ1 Why do companies offer stock options? Should stock option compensation be included as an expense when calculating an organization’s net income? Explain why or why not. If so, how should the amount of expense be calculated? Week 1 DQ2 What are some similarities and differences between common stock and preferred stock? As a shareholder, would you want preferred or common stock? Explain why. As a corporation, would you rather issue preferred or common stock? Explain why. Week 1 DQ3 What is the purpose of a stock split? What are some benefits of a stock split for a company? What are some benefits for an investor? What is the effect to the market value of the stock? Week 1 DQ4 What are the differences between basic and diluted earnings per share? What are the differences between the numerator and the denominator in the basic and diluted earnings per share calculations? As an investor, do you evaluate a company as a potential investment using basic or diluted earnings per share? Explain why.