The statement of shareholders' equity is a financial document a company issues as part of its balance sheet. It highlights the changes in value to stockholders' or shareholders' equity, or ownership interest in a company, from the beginning of a given accounting period to the end of that period. Typically, the statement of shareholders' equity measures changes from the beginning of the year through the end of the year.
In its simplest form, shareholders' equity is determined by calculating the difference between a company's total assets and total liabilities. The statement of shareholders' equity highlights the business activities that contribute to whether the value of shareholders' equity goes up or down.
The statement of shareholders' equity typically includes the following components:
- Preferred stock. This is a special type of stock, or ownership stake in a company, that offers holders a higher claim on a company's earnings and assets than those who own the company's common stock. Preferred stockholders will typically be entitled to dividends before holders of common stock can receive theirs. Preferred stock is usually listed on the statement of shareholders' equity at par value, or face value, which is the amount at which it is issued or redeemable. Holders of preferred stock do not have voting rights in the issuing company.
- Common stock. This is a type of stock, or ownership stake in a company, that comes with voting rights on corporate decisions. Common stockholders are lower down on the list of priorities when it comes to paying equity holders. If a company needs to liquidate, holders of common stock will get paid after preferred stockholders and bondholders. Like preferred stock, common stock is typically listed on the statement of shareholders' equity at par value.
- Treasury stock. Treasury stock is stock that the issuing company repurchases. A company might repurchase its own stock in an attempt to avoid a hostile takeover or boost its stock price. Shareholders' equity is reduced by the amount of money spent to repurchase the shares in question.
- Additional paid-up capital. Also known as contributed capital, additional paid-up capital is the excess amount investors pay over the par value of a company's stock.
- Retained earnings. Retained earnings are the total earnings a company has brought in that have not yet been distributed to shareholders. This figure is calculated by subtracting the amount paid out in shareholder dividends from the company's total earnings since inception. A company that's been profitable for quite some time will probably show a large amount of retained earnings.
- Unrealized gains and losses. Unrealized gains and losses reflect the changes in pricing for investments. An unrealized gain occurs when an investment gains in value but hasn't been cashed in. Similarly, an unrealized loss occurs when an investment loses value but has yet to be sold off.
The statement of shareholders' equity enables shareholders to see how their investments are faring. It's also a useful tool for companies in helping them make decisions about future issuances of stock shares.
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