Financial Reporting and Analysis II

Reading 22. Understanding Balance Sheets

Learning Outcome Statements

f. describe the components of shareholders' equity;

CFA Curriculum, 2020, Volume 3

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Subject 4. Equity

Equity is a residual value of assets which the owner has claim to after satisfying other claims on the assets (liabilities). There are five potential components that comprise the owner's equity section of the balance sheet:

  • Contributed capital. The amount of money which has been invested in the business by the owners. This includes preferred stocks and common stocks. Common stock is recorded at par value with the remaining amount invested contained in additional paid-in capital.

  • Minority interest.

  • Retained earnings. These are the total earnings of the company since its inception less all dividends paid out.

  • Treasury stock. This is a company's own stock that has

    • Already been fully issued and was outstanding;
    • Been reacquired by the company; and
    • Not been retired.

    It decreases stockholder's equity and total shares outstanding.

  • Accumulated comprehensive income. This includes items such as the minimum liability recognized for under-funded pension plans, market value changes in non-current investments, and the cumulative effect of foreign exchange rate changes. Refer to Reading 23 [Understanding the Income Statement] for details.

Statement of Changes in Shareholders' Equity

This statement reflects information about increases or decreases to a company's net assets or wealth. It reveals much more about the year's stockholders' equity transactions than the statement of retained earnings.

  • The statement of shareholders' equity is a financial statement that summarizes changes that occurred during the accounting period in components of the stockholders' equity section of the balance sheet. For example, it includes capital transactions with owners (e.g., issuing shares) and distributions to owners (i.e., dividends).
  • The shareholders' equity section of the balance sheet lists the items in contributed capital and retained earnings on the balance sheet date.

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User Contributed Comments 8

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Creg

Why did the equity change?

rethan

What does "with the remaining amount invested contained in additional paid in capital" mean?

benji1983

Rethan, if $1,500 were paid for 1,000 stocks with par value of $1.00 per stock, then $1,000 ($1.00 x 1,000) will be recorded as Contributed Capital. The remaining $500 ($1,500 - $1,000) will be recorded as Additional Paid-in Capital.

Oarona

You got it right benji1983

jpducros

What about appropriated earnings ?

omya

Equity means: Contributed Capital + Retained Earnings - Treasury Stock (buyback shares) + comprehensive income.
Comprehensive Income includes effect of foreign exchange rate changes.

oneashok

whether Paid in Capital will also contribute to Equity??
And does par value denote the face value of the stock?

SeanReam

Par value for stock is usually $1.00, regardless of stock price, this helps show the amount of shares outstanding. If the 1 million shares of stock were sold to the public in one batch at a market value of $45 dollars, it would appear as such

Common Stock ($1 Par Value) 1,000,000
Additional Paid in capital 44,000,000