Week 4 Discusion 2 Business & Finance homework help

Week 4 Discusion 2 Business & Finance homework help

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1) Discuss the propriety of showing:

a. Treasury stock as an asset.

b. “Gain” or “loss” on sale of treasury stock as additions to or deductions from income.

c. Dividends received on treasury stock as income.

2)  Why is the distinction between paid-in capital and retained earnings important? 

Answer– 

The Paid-in Capital is the value of the shares issued by the company, at par value. Common stock is owned by shareholders with voting rights. Preferred stock sold also generate Paid-in Capital for a company, but preferred stock doesn’t give the owner voting rights. If a company issues additional stock, it generates Additional Paid-in Capital.  Owners of stock receive dividend payments out of the company’s earning, if the board of directors chooses to declare dividends. This number can only be positive. 

Retained Earnings are earnings that remain in the business for re-investment, or are paid out to owners as dividends (in case of corporations). RE is used to track a company’s income over time. This number can be negative or positive. 

Paid-in capital shows how much owner’s capital is invested in the business. Retained Earnings are earnings generated by the business. I see the importance in the fact that Paid-in Capital is the provision of capital to a business at start-up. Each shareholder has his stakes in the business, and will receive dividends based on shares held. Retained Earnings get booked each year and generate dividends. These numbers cannot be mixed up, because they would complicate shareholders’ EPS (earnings per share)

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