The Statement of Shareholders' Equity

The statement of shareholders' equity starts with beginning-of-the period equity and ends with end-of-the period equity, thus explaining how the equity changed over the period. 

For purposes of analysis, the change in equity is best explained as follows:

Ending equity = Beginning equity + Comprehensive income - Net payout to shareholders

----

Beginning equity
+Comprehensive income
- Net payout
___________________
=Ending equity
___________________


This is referred to as the STOCKS AND FLOWS EQUATION for equity because it explains how stocks of equity (at the beginning and end of the period) changed with flows of equity during the period. 

Owners' equity increases from value added in business activities (comprehensive income) and decreases if there is a net payout to owners. 

Net payout is amounts paid to shareholders less amounts received from share issues.  As cash can be paid out in dividends or share repurchases, net payout is stock repurchases plus dividends minus proceeds from share issues. 

----

Dividends
+ Share repurchases
_______________
= Total Payout
-Share issues
_______________
= Net Payout
_______________

Comprehensive income includes net income reported in the income statement pl,us some additional income reported in the equity statement.  The practice of reporting income in the equity statement is known as DIRTY SURPLUS ACCOUNTING, for it does not give a clean income number in the income statement.  The total of dirty surplus income items is called OTHER COMPREHENSIVE INCOME and the total of net income (in the income statement) and other comprehensive income (in the equity statement) is COMPREHENSIVE INCOME:

Comprehensive income = Net Income + Other comprehensive income

----

Net Income
+ Other comprehensive income
________________________
Comprehensive income
________________________

A few firms report other comnprehensive income below net income in the income statement and some report it in a separate "Other Comprehensive Income Statement."

Shareholders' equity: the retained earnings portion is often the largest component.

Shareholders' Equity

 

What Does Shareholders' Equity Mean?

 

A firm's total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity represents the amount by which a company is financed through common and preferred shares.

 

Also known as "share capital", "net worth" or "stockholders' equity".

Shareholders' equity comes from two main sources.

• The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter.
• The second comes from retained earnings which the company is able to accumulate over time through its operations. In most cases, the retained earnings portion is the largest component.