A corporation must produce four documents to create a complete financial statement -- the balance sheet, the income statement, the cash flow statement and the statement of changes in shareholders' equity. The shareholders' equity section is part of the balance sheet and lists three sources of shareholder equity: stock, retained earnings and treasury stock.
Corporate stock is divided into shares, each of which represent an ownership stake in a company. A corporation may issue more than one type of stock. Common stock carries with it the right to receive dividends, and the right to vote at shareholders meetings. Preferred stock carries with it a preferential right to receive dividends. Preferred shareholders are granted higher priority than common shareholders in the distribution of dividends, but normally they are not entitled to vote at shareholders' meetings. Shareholder voting rights are distributed on a one-share, one-vote basis.
Retained earnings equal total earnings minus distributed dividends. On a balance sheet, retained earnings are reported on a cumulative basis. For example, if a company earns $100,000 in 2010 and distributes $40,000 in dividends, its retained earnings are $60,000. If it earns $120,000 in 2011 and distributes no dividends that year, its retained earnings for 2011 are $120,000, and its cumulative total for 2010 to 2011 is $180,000.
Treasury stock represents shares that a corporation buys back from its shareholders. For example, a publicly owned company can decide that its share prices are too low. Taking advantage of the law of supply and demand, it may decide to try to boost its stock price by reducing the supply of its shares on the market. It can do so by making an offer to shareholders to purchase its shares.
Total Shareholders' Equity
Total shareholders' equity is simply the cumulative total of corporate stock, retained earnings and treasury stock. Retained earnings can be negative, in which case the figure is placed in parentheses on the balance sheet. For example, ($40,000) means retained losses of $40,000. Treasury stock is also placed in parentheses because its value is subtracted from the total value of shareholders' equity.
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