Free Essay Sample «Paid-in-Capital and Retained Earnings»

The paid-in-capital and retained earnings are displayed separately in the stockholder's equity section of the balance sheet because they represent the stockholders’ ownership or equity in the total assets of corporation. Paid-in capital results from the investment done by the stockholders whereas the retained earnings come from the customers of the corporation. Thus, the form an important aspect balancing out the income and money gained from business operations while maintain ease of tracking the stockholders’ investment and the earnings got from the customers.

b. Common stock

Investors would buy common stock when preferred stock is available because preferred stock does not provide the same profit value like common stock. Common stock has a high profit potential and thus investors would still buy it even if preferred stock is still available. Common stock guarantees a standard dividend tied to the market.  Common stock has a number of benefits over preferred stock. Common stock has no limits on the number of dividends that can be paid per year.  Sometimes, when earnings are relatively high, dividends could also be high.

Shares of Common stock If I owned 5,000 shares of common stock in Microsoft Corporation and someone offered to buy the stock for its book value, I would decline the offer. This is because common stock does not have limited entitlement as is the case with preferred shareholders. As a common shareholder, there is a chance of reaping two benefits: dividends and capital appreciation. Capital appreciation is occasioned by an increase in the stock value compared to the initial payments for the stock. As a stockholder, profit can be made by selling the stock at the prevailing market value after the capital has appreciated than selling the shares at the book value.