Unbecoming to become- Learning Corporate Finance Accounting Pt 5

The statement of stockholders’ equity is the fourth financial statement reported in an organisation’s financial report. The report keeps track of an organisation’s total equity and changes thereto over a period of time. For each type of equity, an organisation may have, the statement of stockholders’ equity would usually provide information on the balance at the beginning of the accounting calendar or fiscal year, give a breakdown of all activities that affect the balances (if any) during the period and give a report of the closing balances at the end of the given period.

This means that the information provided in the statement of stockholders’ equity is connected to the statement of financial position, also known as the balance sheet, for the same period. The closing balance of the stockholders’ equity must also be equal to the total equity reported in the balance sheet.

The preparation of the statement of stockholders’ equity varies from one organisation to another, but generally, there are some components that must be featured in the report. These include:

1) The beginning equity or contributed capital- As noted earlier, the closing balances of the total equity is reported and carried over to the beginning of a new period, making it the opening balance for the new period. It provides an overview of the equity contributed from the inception of the business and any changes thereto, which contributed to the organisation’s assets through the issuance of stock to stockholders.

2)Retained earnings- This reports on the total amount of money retained by the organisation from the revenue it generates. That is the amount of income it retains from the net income generated by the organisation. The retained earning is also retained because no part of it is issued out as dividends to stockholders but it is kept for the use of the organisation.

3)Dividends- This is what is given out to stockholders by an organisation, from its net income. There are times that an organisation would decide, through its board of directors to give its investors/ stockholders part of its net income instead of retaining it for its use.

4) Other comprehensive income- This could be viewed as income that is not reflected in the income statement of an organisation. This, therefore, means that it is not part of the net income of the organisation.

Now, therefore, that we have a fair understanding of the four financial statements, which form the financial report of an organisation, I am sure you would ask, “what then, is the connection between these financial statements?”. I asked this same question as a professional who had no understanding, whatsoever of corporate finance management. 

The four financial statements are connected across periods.  For instance, the statement of financial position, also known as the balance sheet is linked with the income statement by retained earnings.

The statement of financial position is connected with the statement of stockholders’ equity through the equity that is reported in both statements which must be equal.

The income statement and the statement of cash flows are connected by net income which is a feature of operating cash flows.

These links, help users interpret what is presented by an organisation, for an informed decision.