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 statements and it is one of the financial elements used by the analysts to understand the financial progress of the company. Stockholders’ equity is the value of assets available to the shareholders after all liabilities have been settled by the company. 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.
#2 – Retained Earnings
Retained earnings are the total profits/earnings of the company accumulated over the years which are not yet been distributed to the stockholders and retained by the company for investing further into the business. It is used for managing the working capital position; procurement of assets; repayment of debt etc.
A profitable company’s retained earnings will show an increasing trend if the same is not distributed to shareholders. Movement of retained earnings is captured in the Stockholder’s equity statement.
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 period, and the same will be added to the opening retained earnings available and dividend payment will be made 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 losses 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 Stockholders equity statement.
The following are the details pertaining to XYZ Corp as of 31st December 2018.
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 statements. The three main events which impact the equity of the business 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 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; dividend etc.
Shareholders’ equity can either be positive or negative. If it is positive it indicates that the assets of the company is more than its liabilities and if it is negative it indicates that the liabilities are more than its assets. Negativity may arise due to buyback of shares; 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 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 –