Stockholder’s Equity Statement Definition
Stockholder’s equity statement is a financial report which forms part of the financial statements that capture the changes in the equity value of the company (i.e.) increase or decrease in equity value from the commencement of a given financial period to the end of that period. It contains share capital and retained earnings.
It provides information relating to equity-related activity to the users of financial statementsUsers Of Financial StatementsFinancial statements prepared by the Companies are used by different categories of individuals and corporates on the basis of their relevancy to the respective parties. The most common users to the financial statements are Management of the Company, Investors, Customers, Competitors, Government and Government Agencies, Employees, Investment Analysts, Lenders, Rating Agency and Suppliers., and it is one of the financial elements used by the analysts to understand the financial progress of the company. Stockholders’ equity is the company has settled the value of assets available to the shareholders after all liabilities. It indicates the company’s net worth. It is also is known as Shareholder’s Equity.
Components of Stockholder’s Equity Statement
The following are the components of the stockholder’s equity statement.
#1 – Share Capital
It contains the capital invested by the investors of the company. The ownership of the investors is indicated by way of the shares/stock. Companies generally issue common stock or preferred stock. Movement or changes in the capital structure and value is captured in the Stockholders’ equity statement.
The common stockholders have more rights in the company in terms of voting on the decision of the company, but when it comes to payment, they are the last ones on the priority list. In case of liquidation, common stockholders will be paid only after settling the outside liabilities, then to bondholders and preference shareholders, and the remaining will be paid to the common stockholders.
The preference stock enjoys a higher claim in the company’s earnings and assets than the common stockholders. They will be entitled to dividend payment before the common stockholders receive theirs. They don’t carry voting rights.
Treasury StockTreasury StockTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. is the value of shares bought back/ repurchased by the company. It acts as a reduction to the share capitalThe Share CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.. It is the difference between Shares issuedShares IssuedShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet. and shares outstandingShares OutstandingOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet..
#2 – Retained Earnings
Retained earnings are the total profits/earnings of the company accumulated over the years. These are not yet been distributed to the stockholders and retained by the company for investing in the business. The company uses it for managing the working capitalManaging The Working CapitalWorking Capital Management refers to the management of the capital that the company requires for financing its daily business operations. It is important for the company in order to maximize its operational efficiency, manage its short term liabilities and assets properly, avoiding the underutilization of the resources and avoiding the overtrading, etc. position, procurement of assets, repayment of the debt, etc.
A profitable company’s retained earnings Retained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. will show an increasing trend if not distributed to shareholders. Stockholder’s equity statement captures the movement of retained earnings.
Retained Earnings= Retained Earnings at the beginning of the period (+) net income /loss during the current reporting period (-) Dividends paid to stockholders.
#3 – Net Profit and Dividend Payment
Net profit/ Net income is the money earned by the company in the reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.. It adds up to the opening retained earnings available. The company makes dividend payments from the amount available in retained earnings. The payment of the dividend is at the option of the company, and it is not mandatory.
#4 – Other Comprehensive Income
It captures the unrealized gains and lossesUnrealized Gains And LossesUnrealized Gains or Losses refer to the increase or decrease respectively in the paper value of the company's different assets, even when these assets are not yet sold. Once the assets are sold, the company realizes the gains or losses resulting from such disposal. that are not reported in the income statement. It is not realized, and it is a national impact. It may arise because of pension liabilities. Investments made foreign currency transactions and hedging transactions.
Example of Stockholders Equity Statement
Below is an example of the Stockholder’s equity statement.
The following are the details pertaining to XYZ Corp as of 31st December 2018.
|No of Common Stock||50000|
|No of Preferred Stock||20000|
|Stock Price (Common Stock)||140 per share|
|Stock Price (Preferred Stock)||120 per share|
|Par Value (Common Stock)||100 per share|
|Par Value (Preferred Stock)||100 per share|
|Treasury Stock – Common Stock||100000|
|Retained Earnings at Beginning||500000|
|Net Income of Year||200000|
|Accu. Other Comprehensive Income||10000|
Stockholder’s Equity Statement Format
Below is the format of stockholder’s equity statement
Calculation of Additional Paid-in Capital of Common Stock
Calculation of Additional Paid-in Capital of Preferred Stock
Stockholders’ equity statement forms part of the balance sheet in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.. The three main events which impact the equity of the business are changes in the share capital either by the issue of shares or by selling, or repurchase; changes in retained earnings which are influenced by current period profit or loss and the dividend payout; and the movement of other comprehensive incomeComprehensive IncomeOther comprehensive income refers to income, expenses, revenue, or loss not being realized while preparing the company's financial statements during an accounting period. Thus, it is excluded and shown after the net income..
Users of financial statements can understand the movement of equity value. It helps to understand the performance of the business and the financial health and the decisions of the company in terms of share capital, dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company., etc.
Shareholders’ equity can either be positive or negative. If it is positive, it indicates that the assets of the company are more than its liabilities. If it is negative, it indicates that the liabilities are more than its assets. Negativity may arise due to buyback of shares;Buyback Of Shares;Share buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company. Writedowns; Continuous losses. If the negativity continues for a longer period, then the company may go insolvent due to poor financial health.
Overall financial health can be understood by analyzing the statement of equity as it gives a broad picture of the performance.
This article has been a guide to Stockholder’s Equity Statement and its definition. Here we discuss components of stockholder’s equity statement along with an example. You may learn more about accounting from the following articles –