The Statement of Shareholders Equity

Just as for the income statement, the statement of shareholders equity can have a number of different names; however, in all cases in breaks out the equity section in more detail.  Below is the statement issued by Clayton Homes in its 1999 annual report.

This statement can also be called the statement of owners equity, the statement of changes in owners equity or the statement of capital.  Like many words in finance, the word capital can mean slightly different things in different contexts.  When talking about the statement of shareholders equity—capital and equity are the same thing.  Shareholders—owners—invest capital in the corporation.  They capitalize the corporation.  These investors own a share in the capital stock of the corporation.

Statement of Shareholders Equity for Clayton Homes for Fiscal Year 1999

The statement of changes in shareholders equity addresses any changes that affect the capital of the corporation.  Comprehensive income includes not only income, but changes in equity such as distributions to owners (dividends).  There are some changes that can affect the makeup of equity but not its value.  For example, if a company declares a stock split, or if preferred shares are converted into common shares.

Let me first of all run through the items in the first column of the statement above and expand some more.  The top and bottom rows show the state of various accounts at the start of and the end of a given fiscal year.  There are six columns in all.  Columns two through five show changes made to various accounts during the fiscal year.  The first is a description, the second is shareholders equity.  (Remember: shareholders equity is the difference between the value of the assets and the value of the liabilities.  The total shareholders equity of $947,768 on June 30, 1999—the figure at the end of column 2—is identical the same as in the balance sheet.  In fact, this statement shows how that number was determined.)  You can picture the next four columns as breaking up shareholders equity into components: common stock, additional paid-in capital, retained earnings, and other comprehensive income.  If you add up the numbers in a given line found in the third through the sixth column, you get the number in column two.

Net income has been defined previously.  Comprehensive income consists of net income (from operations) together with all other sources of income.  One other source is an unrealized loss than occurred on securities that were available for sale.  The term “gain” and “loss” were discussed in the section dealing with the income statement.  If you scoot up you will find that there are securities available for sale recorded as assets on the balance sheet.  These securities have been written down, as their market value declined.

Accounting rules have a thing called the historical principle.  This principle means that assets are recorded at their purchase price regardless of what the market says they’re worth.  For example, if your company bought an acre of land on Manhattan for $100 in 1801; it would be recorded as worth $100—even though you could sell it for many millions.  If an asset loses value, it can be written down—the historical principle allows companies to underestimate the value of an asset but not overestimate that value.

The total comprehensive income, printed in bold face, is net income (taken from the income statement) less the unrealized loss.  Total comprehensive income was $154,147 in fiscal year 1999.

Next, the company bought 6,465,000 shares of its common stock.  Total shareholders equity dropped by $81.394 million.  The average price per share is $12.59 ($81.394 million divided by 6.465 million shares).  Remember that weird accounting tradition about par value discussed earlier?  The par value is $0.10 per share, so $647,000 of the transaction affects the value of common stock recorded on the balance sheet; the rest is credited to additional paid-in capital.  When a company buys back its shares, they are still issued but not outstanding.

The company declared and paid dividends of $0.064 per share during the year—that’s a whopping 6.4¢ per share!  The company paid out $9.606 in dividend payments during the year.  You might think to yourself, hey, I could calculate the number of shares.  If I pay out $9.606 million and it represents $0.064 per share, then $9.606 million divided by $0.064 should give me the number of shares.  You’ll find this number differs when compared to the number used to calculate EPS in the income statement.  Remember the number of shares is changing as the company buys them back: treasury stock is not outstanding so doesn’t get a dividend.

Distributions to owners , are most commonly dividends.  These distributions decrease the equity of the corporation.  In essence, when you make a distribution, you’re taking something that would have been recorded in the Shareholders Equity part of the balance sheet and giving it to the shareholders.  You are reducing retained earnings.

Finally, the company went ahead and issued 3.602 million shares.  These shares were issued as a result of incentive or other benefit plans.  They increase the pool of issued and outstanding shares and are recorded on the balance sheet under “common stock” and “additional paid-in capital.”
If you read down the columns, the changes in 1999 are added (or subtracted) to the total at the end of 1998—found at the head of the respective column.  For example, at the end of fiscal 98, retained earnings were $703.754; earnings (or net income) of $154.968 million increased retained earnings.  Dividend payments of $9.606 million reduced them slightly.  Summed together, retained earnings at the end of fiscal year 99 were $849.116.  This number is transferred over to the balance sheet in the equity section.  Earnings link all four reports together.