Shareholder's Equity

Topics: Stock market, Dividend, Stock Pages: 5 (1609 words) Published: April 8, 2013
Shareholder’s Equity
Samantha Partida
ACC 306
Ashley Harper
December 10, 2012

Shareholder’s equity, also known as stockholder’s equity, is essentially the amount of equity directly from stock. The calculation to determine shareholder’s equity is quite simple as outlined further in this paper. In order to figure out where the numbers are located for this figure, just look for the shareholder’s equity financial statement. Comprehensive income also plays a role in equity. Shareholder’s equity is also affected by the amount of shares in the open market. In addition, retained earnings and corporate dividends are coupled into the financial statement that encompasses shareholder’s equity. Overall, shareholder’s equity is easily determined by viewing the shareholder’s equity statement.

Stockholder’s equity is the ownership interest of shareholders. It is easily calculated by taking total assets minus total liabilities. The remaining amount is the equity in the business that is not financed, investments, and operating income. This is simply the amount invested by the shareholder’s through the purchase of stock, common and preferred. Common stock has a basic layout. It can include dividends but a company is not required to pay out dividends. Preferred stock sells at a higher price because it has a set of rules essentially. If the preferred stock requires dividends the company is required to pay them first before common stockholders are paid. Shareholder’s equity is reported in a single statement called the shareholder’s equity statement. This financial report includes information from accounts of common stock, capital in excess of par, preferred stock (if applicable), and capital in excess of par in relation to preferred stock, retained earnings, other comprehensive income, and treasury stock (if applicable). Basically this is a breakdown of what happens and where the excess of total assets minus total income is allocated.

Comprehensive income is almost like the statement of shareholder’s equity except it encompasses any changes in equity except those caused by transactions with owners. It includes: net holding gains (losses) on investments, gains (losses) from postretirement benefits, deferred gains (losses) on derivatives and gains (losses) from currency translation. Other comprehensive income is also included in this category of explanation. This category encompasses things that have to do with assets that are for sale or may not be included in the income statement because they are not really reported in those categories but they still pose a possibility for profit to the company. For example, if a company has a security for sale that increases in value between accounting periods, that increase can be considered other comprehensive income because it is a possible income but it is not recorded and realized until the actual sale. Comprehensive income plays a role in shareholder’s equity because it is a larger net that brings in more information that leads to a similar answer (Turen, Hussiny, 2012).

Shareholder’s equity is broken down by number of shares on the open market available for sale. For example if a firm has 100 shares of stock available at $10 per share they have $1,000 in equity from stock. But if the firm increased that number of shares to 1,000 they would have $10,000 in equity from those shares. This is a way of increasing funding or equity from stock. A firm is only allowed to issue so many shares though so sometimes a firm may want to decrease the number of outstanding shares. This can be a ploy for control of the company as well as a way to increase retained earnings. The more shares of stock are sold and in shareholder’s hands the more retained earnings are split. Smaller dividends are the result of this or even the possibility for reinvestment of the retained earnings. Some companies such as Microsoft do not pay out dividends but prefer to simply re-invest in the company...

References: Crawford, D., Franz, D.R., & Lobo, G.J. (2005). Signaling Managerial Optimism through Stock
Dividends and Stock Splits: A Reexamination of the Retained Earnings Hypothesis. Journal of Financial & Quantitative Analysis, 40(3), 531-561.
Solanki, A. H. (2012). An Empirical Study of Corporate Dividend Policy-A Study with reference to
Selected Auto Sector. Advances in Management, 5(8), 38-46.
Turen, S., & Hussiny, F. (2012). Comprehensive or Net Income in Performance Evaluation of
Insurance Firms: Evidence from GCC Countries. International Research Journal of Finance &Economics, (98), 97-105.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Debt Versus Equity Financing Paper
  • History and Development of Equity Essay
  • equity Essay
  • equity Essay
  • Mix of Debt and Equity Essay
  • Essay about Sources of Capital: Owner's Equity
  • Development of Equity Research Paper
  • Essay about Fusion of Equity

Become a StudyMode Member

Sign Up - It's Free