The Importance of a Stockholder's Equity on a Financial Statement

by Marquis Codjia; Updated September 26, 2017
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Stockholder's equity on a financial statement, such as a balance sheet or a statement of retained earnings, indicates to an investor or a regulator the owners' investments in a corporation. Stockholder's equity on a financial statement may be computed at a given point in time, such as the end of the year or quarter.

What Is Stockholder's Equity?

Stockholder's equity represents cash that a corporation's owners (also known as shareholders) invest in a company. Let's say Mr. A.B., Mrs. C.D. and Mr. E.Y. are three partners who want to establish a new business. Mr. A.B. invests $1 million in the new company, Mrs. C.D. contributes $2 million, and Mr. E.Y. brings in $1 million. Their total stockholder's equity in the corporation is $4 million.

Reporting Purposes

Stockholder's equity on a financial statement is an important indicator of a corporation's financing sources because it indicates to a financial statement reader whether the corporation borrows funds to operate or relies on its own cash. Stockholder's equity on a financial statement, such as a balance sheet or a statement of retained earnings, helps top management understand dividend payments that the corporation periodically sends out to investors. An investor who buys a corporation's common stock or preferred stock becomes a shareholder.

Reporting Time Frame

A corporation may report stockholder's equity on a financial statement at the end of a period, such as the end of a quarter or a year, or randomly. Generally accepted accounting principles (GAAP) require a company to issue a full set of financial statements in order to show stockholder's equity and corporate profitability. A full set of financial statements includes a balance sheet, a statement of profit and loss, a statement of cash flows and a statement of retained earnings.

Stockholder's Equity on Balance Sheet

A corporation may report stockholder's equity on the balance sheet in accordance with GAAP. Stockholder's equity on a balance sheet relates to investments from two types of shareholders—common and preferred shareholders. Common shareholders are investors who buy common, or regular, shares of equity. Common shareholders receive periodic dividend payments and make profits when share prices increase. Preferred shareholders are investors who buy preferred shares. Preferred shareholders enjoy similar privileges as common shareholders but receive dividends before common shareholders.

Stockholder's Equity on Retained Earnings Statement

A company may report stockholder's equity on the statement of retained earnings in compliance with GAAP. Stockholder's equity amounts on a statement of retained earnings relate to the stockholder's equity balance at the beginning of a period, dividends paid during a period, net income, and the stockholder's equity balance at the end of a period. For instance, a company's statement of retained earnings may show a stockholder's equity beginning balance of $1 million, dividends paid of $300,000, net income of $1 million and a stockholder's equity ending balance of $1.7 million.

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.

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