Statement of Stockholders’ EquityDefined with Examples
A statement of stockholders’ equity, also known as a statement of shareholder equity, is a financial document issued by companies as a part of the balance sheet.
This report provides investors information on how the value of the business to shareholders has changed from the start to the finish of accounting periods.
For investors, this sheet is a valuable indicator of how a business’s activities are contributing to the value of shareholders’ interests.
If the statement of stockholders’ equity reports an increase in value, it shows that the business’s activities are paying off for investors, and if it decreases, it indicates that the business may want to consider its activities.
What Is a Statement of Stockholders’ Equity?
The section of the balance sheet known as the statement of stockholders’ equity gives a company’s shareholders and investors a representation of how a business is performing by highlighting how a business’s activities are contributing to the value of the stockholder’s equity.
A statement of stockholders’ equity is generally calculated by calculating the difference between a given company’s total assets and liabilities.
The value of the stockholders’ equity will increase when a business receives additional capital contributions either from the business’s owner or investors, as well as if the business’s profits increase either due to improvements in profit margin or from increasing sales.
This report is often overlooked in favor of simply considering the income statement.
However, the statement of stockholders’ equity can provide a powerful tool to view how operations affect the value of a business.
Profit and loss statements and cash flow provide an understanding of how money flows in and out of a business.
However, this does not provide business owners and investors a complete understanding of how the business’s value is being affected.
For small business owners, the complexity of the statement of stockholders’ equity can be complex and often intimidating.
However, once broken down, it is easier to understand it as simply the value a business adds through operations that remain with it.
What Is Stockholders’ Equity?
Stockholder equity is essentially the value of a stock issuing company that belongs to its shareholders.
To find the equity of a company, all of its assets are added together, and then its liabilities are subtracted.
For a statement of stockholders’ equity, this is simply a section of a company’s balance sheet, one of the three primary financial statements, that clearly calculates and displays the stockholder equity.
Components of Stockholders’ Equity
There are a few different components to stockholders’ equity, including:
- Share Capital: Share capital is the amount of cash that a company raises through stock issuance. At a company’s initial public offering (IPO), a certain amount of stock will be sold at a set price. After this point, the stock can be freely sold by investors who will retain any profits from the sale. However, in an IPO, the company issuing the stock will retain any money paid, which will become share capital.
- Net Income: Net income can be calculated by first subtracting the cost of goods sold from revenue. This will give you gross income. Then, if you subtract expenses from the gross income, you will obtain the net income. Gross Income = Revenue – Cost of Goods Sold — Net Income = Gross Income – Expenses
- Dividends: When someone buys stock in a company, they own part of the company. This entitles them to part of the profits. When a company chooses to pay a certain amount of money out to investors for each share of stock, this is a dividend. The company does not have to pay out all of the profit as dividends. The company can take part of the profit to pay dividends. This amount will likely be in the stockholder agreement.
Who Is a Statement of Stockholders’ Equity Useful For?
This statement is useful for all businesses. It is used by partnerships with only a couple of employees to large corporations.
If the company isn’t public, then the stockholders’ equity is called owner’s equity.
It is generally best for any business other than possibly a sole proprietorship to have a statement of stockholders’ equity.
The Statement of Stockholders’ Equity shows the changes that have occurred in stockholders’ equity during the period.
This can be useful for several reasons, such as:
- Judging How Effectively You Manage Your Business: The statement of stockholders’ equity is useful for telling if a person is doing a good job of running their business. If the owner’s equity declines, the owner should consider whether or not they might be doing something wrong.
- It Is Useful in Making Plans: This statement can be used while planning to make decisions, such as whether you need to cut costs or whether you will make a profit on sales. It could also help you decide whether to take out a loan to expand your business or update your equipment.
- It Is Useful for Navigating Business Difficulties: The Statement of Stockholders’ Equity can help you to see if you made enough money during the period to keep your business going. It can also help you decide if your business is capable of withstanding a poor economic period or is in good enough shape to obtain a bank loan. It’s also useful if you are considering selling your business to see if it would be worthwhile.
What Is Included in a Statement of Stockholders’ Equity?
There are a number of items included in the Statement of Stockholders’ Equity, and these will be explained below.
When a company makes money by issuing stock, this is share capital.
For an initial public offering, a company will sell a specific amount of stock for a specific price.
Then, after this, the stock is freely traded.
However, in the initial public offering, the money goes to the company, and this money is share capital.
The cumulative earnings a company has after paying out dividends is retained earnings.
If a company makes a profit, it will often pay dividends to stockholders.
However, companies will sometimes choose to keep some of the profits as retained earnings.
Then, often some of these earnings are reinvested in the business.
Common stock is a type of security that gives the owner partial ownership in a corporation.
It is a more risky investment than debt or preferred stock because if the business is liquidated, debt holders and preferred stockholders will be paid before common stockholders.
Preferred stock, similarly to common stock, grants a share of ownership in the company.
However, holders of preferred stock will receive preferential treatment when it comes to the distribution of dividends and assets.
Treasury stock includes stock that a company has bought back from investors.
This is typically the result of attempts to raise stock prices or to prevent takeovers from competitors.
This is often referred to as “additional paid-in capital” or “contributed capital in excess of par” and is an amount that investors paid above the par value of stocks for a company.
When a company issues new shares, this amount will grow, and if the company performs a buy-back of its shares, this amount will reduce.
Unrealized Gains and Losses
Unrealized gains and losses are the changes in the value of an investment that has not yet been sold for either a profit or loss.
As a result of this, they are also often known as “paper” profits or losses.
An unrealized gain is when an investment has raised in value since the acquisition, and an unrealized loss is when it has instead reduced in value.
How Is a Statement of Stockholders’ Equity Created?
To generate a statement of stockholders’ equity, there are four steps.
- Step 1 – Starting Equity: List the company’s equity at the start of the accounting period.
- Step 2 – New Additions to Equity: Now list any additions to the equity that occurred during the period. This would include any further investments of capital that stockholders or owners pay into the company during the year, as well as any net income if the company was profitable.
- Step 3 – Subtractions from Equity: List any dividends that the company paid to stockholders as well as any net losses. These will be subtracted from stockholders’ equity.
- Step 4 – Ending Balance: In the final line, you will list the ending equity balance for the period.
As always, with a financial statement, include a heading with the name of the company, the title of the statement, and the time period that the report covers. This is crucial to avoid any confusion down the line.
Example of a Statement of Stockholders’ Equity
Here is an example of a statement of stockholders’ equity.
Statement of Stockholders’ Equity
For the Year Ending December 31, 2021
|Common Stock, $1 Par||Paid-in Capital in Excess of Par||Retained Earnings||Treasury Stock||Total Stockholders’ Equity|
|Balance on January 1||$10,000,000||$30,000,000||$11,000,000||$(3,000,000)||$48,000,000|
|Issued Shares for Cash||2,000,000||8,000,000||10,000,000|
|Purchase of Treasury Stock||(3,000,000)||(3,000,000)|
|Balance on December 31st||$12,500,000||$41,900,000||$10,100,000||$(6,000,000)||$58,500,000|
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Harvard Business School Online "Financial Statement Analysis: The Basics for Non-Accountants" Page 1 . November 29, 2021
Columbia Business School "Analysis of the Equity Statement, Hidden Losses, and Off-Balance-Sheet Liabilities: Microsoft Corporation " White paper. November 29, 2021
Clinton Community College "The Balance Sheet and Notes to the Financial Statement" Chapter 3. November 29, 2021