All corporate financial reporting boils down to the "basic accounting equation" -- a company's total assets are equal to the sum of its total liabilities and its total stockholders' equity. Put in simple mathematical terms, assets = liabilities + equity. If you know a company's assets and liabilities, you can calculate its equity using simple subtraction. If you don't have access to figures on the company's liabilities, it's still possible to determine stockholder equity by adding up the individual components. You can't pull this number out of thin air, though; specific information from the company's financial statements is needed.
Determine Retained Earnings
Find the total amount of retained earnings on the company's previous balance sheet. Retained earnings are listed on the balance sheet under "Stockholders' Equity." This entry might also be labeled "Owners' Equity" or even "Net Worth."
Determine the company's net income (or net loss) for the period since the last balance sheet was prepared. This total appears on the current income statements, reflecting the data for the period since the prior balance sheet was prepared. Alternatively, you can calculate it by subtracting the company's expenses for the period from its revenue.
Add the net income to the previous retained earnings. If the company had a net loss, subtract that net loss from the previous retained earnings.
Subtract from the total any cash dividends paid since the last balance sheet. The result of this calculation is the company's current retained earnings.
Calculate Other Income
Identify whether the company had "other comprehensive income" since the last balance sheet was prepared. "OCI," as it's called, includes certain earnings and losses that a company can't include in net income because they reflect changes in value that exist only on paper and haven't been realized yet. If a company has OCI, it will appear on its current income statements.
Identify whether the company's previous balance sheet had a category for "accumulated other comprehensive income," or AOCI, in the stockholders' equity section.
Add the current OCI to the AOCI total from the previous balance sheet. The total is the "new" AOCI.
Add up the company's paid-in capital. This is simply the money the company has received for selling stock to the public. It is not the current value of the outstanding stock. If the company hasn't sold stock in the past year, then just use the figure from the previous balance sheet. If it has sold stock, add the money it received to the figure from the previous balance sheet.
Add current retained earnings and new AOCI, both of which you calculated earlier, to the paid-in capital.
Identify the cost of the company's treasury shares, if any. Treasury shares are stock that the company bought back from the public -- for example, to boost the share price or reduce the threat of a hostile takeover. Much like with paid-in capital, what matters here is only the price the company paid to buy back the shares, not the current market value of the shares. If the company had no buybacks since the last balance sheet, use the treasury shares figure from that balance sheet. Otherwise, add the buyback total to the previous figure.
Subtract the cost of the treasury shares from the total paid-in capital, current retained earnings and new AOCI. The result is stockholders' equity.
Items you will need
- Company's previous balance sheet
- Company's current income statements
- "Financial Accounting for MBAs," Fourth Edition; Peter Easton et al; 2010
- AccountingCoach; Sample Balance Sheet; Harold Averkamp
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