The statement of shareholder’s equity is a financial statement that can be used by investors and company management to better determine the health of the company. The statement of shareholder’s equity indicates changes in the shareholder interest in the company that has occurred over a period of time.
In other words, the statement of owner’s equity details the ownership claims on the assets in the balance sheet. .
We are able to see how the firm arrived at the current levels of equity.
Some companies may not prepare this sheet if the shareholder’s equity can be adequately represented on the balance sheet. However, most companies do prepare this statement.
To better understand the statement of shareholder’s equity we will cover:
What is in the Statement of Shareholder’s Equity?
Each type of shareholder’s equity account should be represented in this statement. The statement of shareholder’s equity lists each item in order of liquidity from the most liquid to the least liquid. A few common equity accounts are:
Preferred Stock– Senior to common stock, preferred stock is issued to preferred stockholders and allows certain extra privileges. These stockholders of this type may be entitled to regular dividend distributions, but they give up their ability to vote on company issues.
Common Stock– Junior to preferred stock, common stock may also be entitled to dividends from the retained earnings. Common stockholders are entitled to vote on company decisions like electing the board of directors.
Par Value Stock- When the company issues stock, this records the amount received for the stock sold directly from the company. This account is unique because it is often that investors purchase stock from other investors or the “secondary market.”
Additional Paid-In Capital- This account holds the funds received from investors buying stock directly from the company. When the company is able to sell the stock for greater than its par value, the funds are allocated here.
Treasury Stock- Treasury stock are stocks that have been repurchased by the company. Typically a company may choose to repurchase stock when they believe that the outstanding shares are being undervalued by the market. This tactic can create a scarcity of the firm’s stock and may boost the stock price. At a later date, the company can decide to resell the stock to the public at the higher price.
Retained Earnings- When the company generates net income, it has the option of keeping those earnings within the company or distributing a portion of the income to its owners. The retained earnings account keeps track of the money that the company has decided to keep internal. A firm may choose to use this money as a way to finance growth, new projects, or pay off debt.
Sample Statement of Shareholder’s Equity
Below is a sample statement of shareholder’s equity for Company ABC.