Balance Sheet – Shareholders’ Equity Statement
What do you see in the Shareholders’ Equity Statement?
Here, we use financial statements of Microsoft 2021 to illustrate role of the Shareholders’ Equity Statement.
Connecting the Balance Sheet to the Shareholders’ Equity Statement
The Shareholders’ Equity Statement explains the changes in owners’ equity during reporting periods. The beginning and ending balances for line items reported in the owners’ equity section of the Balance Sheet are reported in the Shareholders’ Equity Statement. Typically, balance-sheet line items or rows correspond to columns in the statement of changes in owners’ equity.
Connecting Owners’ Equity Change (OEC) Map to the Shareholders’ Equity Statement
The owners’ equity change map demonstrates the hierarchical nature of concepts reported in the Shareholders’ Equity Statement. At the highest level of this hierarchy, the change in owners’ equity has two components: the net changes associated with transactions with owners and other events that changed owners’ equity.
The net change due to transactions with owners is further divided into two components: contributions from owners, usually in exchange for stock, and distributions to owners, usually in the form of cash dividends or stock repurchases.
Retained earnings is the net profits the company has accumulated since it started less the accumulated distributions of earnings to owners in the form of dividends or share repurchases. Thus, retained refers to earnings that have not been distributed to owners. Reserves, also called surplus or accumulated other comprehensive income, is other comprehensive income the company has accumulated since it started.
Connecting Owners’ Equity Change (OEC) Map to Statements
This demonstrates how Balance Sheet, Income Statement, and Shareholders’ Equity Statement are connected.
Shareholders’ Equity
Equity or Shareholders’ Equity is sometimes called capital or net worth. It is the money that would be left over if a company sold all its assets and paid off all its liabilities. This leftover money belongs to the shareholders or owners of the company.
Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the company’s earnings or losses since inception. Sometimes companies distribute earnings, instead of retaining them. These distributions are called dividends.
Share Capital
Share capital refers to the funds raised by a company in exchange for issuing shares in the company in the form of stock. This does not change even if the share price changes afterward.
Retained Earnings
This item represents the total profits the company has earned since its inception, minus whatever has been paid to shareholders as dividends. Since this is a cumulative number, retained earnings can be negative if a company has lost money over time, and would then be renamed “accumulated deficit.” Retained earnings are reinvested in the core business or used to pay down debt.
Treasury Stock
This item represents the cumulative value of shares the company has repurchased from shareholders. Just like Share Capital, the values here are based on the share prices at the time the company repurchased the shares. This value does not change even if the company’s share price changes afterward.
Other Comprehensive Income
Items like the effect of foreign currency exchange rate changes, unrealised gains and losses on certain types of securities.