Stockholders, small business owners and analysts review the equity valuation reported on the financial statements. The equity section communicates several things. It shares the financial resources contributed by owners or generated internally. The equity section consists of capital stock and retained earnings for a corporation or owner investments for sole proprietorship. Stock purchases and owner investments refer to money contributed directly to the business. Retained earnings refer to money the corporation earns and keeps within the business. Financial statement users can calculate the value of equity within the company using the statement of cash flows along with the balance sheet from the prior period.
1. Retrieve the balance sheet from the previous period. Locate the total stockholder equity value.
2. Retrieve the statement of cash flows. Read the transactions listed in the cash flows from financing section. Highlight the transactions which increase stockholder equity, such as stock sales, using a yellow highlighter.
3. Highlight the transactions which decrease stockholder equity, such as dividend payments, using a blue highlighter.
4. Add the yellow highlighted transactions to the total stockholder equity value. Subtract the blue highlighted transactions. This calculates the equity value using the statement of cash flows.
- Companies acquire financial resources in ways which do not impact equity. This consists of borrowing. The company may borrow money directly from financial institutions. The company may also make purchases on credit. This allows the company to enjoy use of various assets without paying for it right away. These transactions increase the company’s liabilities.
- After the final balance sheet for the current period is prepared, it reports the final equity valuation for the period.
- Cash flow statements also report investing transactions and operational transactions. The statement of cash flows reports all of the company’s financial transactions which involve cash. Investing cash flow transactions involve purchasing or selling company investments. Operational cash flow transactions involve transactions that occur as a result of the company’s primary business activities.
- Use the most recent statement of cash flows. This ensures that the equity calculated represents the most accurate valuation. If the statement of cash flows is not final, recalculate the equity value after the final statement of cash flows is issued.
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