Statement of Changes in Equity Flashcards
What does the statement of changes in equity show? What does the statement start with?
It shows the changes in total shareholder’s equity for the period, as well as the changes in each component of shareholder’s equity, during the period.
It starts with the account balances at the beginning of the period and ends with the account balances at the end of the period. The time period is the same as for the income statement - for the year, quarter, or month.
What is shareholder’s equity? What does it include?
The ownership interest in a company.
It includes share capital and retained earnings in its simplest form. It can also include other types of accounts, like accumulated other comprehensive income.
What is share capital?
It represents amounts contributed by the shareholders in exchange for shares of ownership. If there is only one type of shares issued, it is called common shares. Another class of share is preferred shares. These two classes of shares combine to form the company’s share capital.
GOOGLE: Share capital refers to the funds that a company raises in exchange for issuing an ownership interest in the company in the form of shares.
Share capital is the money invested in a company by the shareholders. Share capital is a long-term source of finance.
In return for their investment, shareholders gain a share of the ownership of the company.
What does retained earnings represent?
It represents the cumulative profit that has been retained in the corporation. It is the profit that has not been paid out to shareholders that has accumulated since the company’s date of incorporation.
What does it mean if retained earnings are negative?
It means there have been more losses than profits known as a deficit.
In addition to showing the changes in share capital during the period, the statement of changes in equity also shows? Describe the statement of changes in equity.
Also shows the amounts and causes of changes in retained earnings. The statement starts with the beginning balance of retained earnings. Then the profit for the period is added and dividends (if any) are deducted to calculate the retained earnings at the end of the period. If a company has a loss, it is deducted (rather than added) to arrive at the ending balance of retained earnings.
By monitoring the statement of changes in equity for publicly traded corporations, financial statement users can evaluate the use of equity for financings purposes. From this statement, what else can they determine?
They can determine how many shares were issued during the period, or how many were repurchased. More importantly, the statement allows users to monitor a company’s dividend payment practices.
If a company is profitable at the end of each period, what does it have to decide? Why do few companies choose to pay all its current period profit?
It must decide what portion of its profits to pay to shareholders through dividends. In theory, it could pay all of its current period profit, but few companies choose to do this. Why? Because they want to retain part of the profits in the business so the company can expand when it chooses to.
DECISION TOOLKIT:
1) Is the company expanding or contracting its share base?
2) What is the company’s policy on dividends and growth?
1) Info needed for decision: statement of changes in equity
Tools to use for Decision: Did the company issue or repurchase shares?
How to evaluate results: If share capital is increasing, the company may have expansion plans.
2) Info needed for decision: statement of changes in equity
Tools to use for Decision: How much did the company pay out in dividends to shareholders?
How to evaluate results: A company looking for rapid growth will pay no, or a low, dividend.
What are the primary components explained in a statement of changes in equity? What types of items generally increase each component? What types of items generally decrease each component?
A statement of changes in equity explains the changes in the components of shareholder’s equity, such as share capital and retained earnings. Examples of items that increase the components are issue of shares (increase share capital) and profit (increases retained earnings). Examples of items that decrease the components are repurchases of shares (decreases share capital) and payment of dividends (decrease retained earnings).