CFA Level 1 - Shareholders' (Stockholders') Equity Basics

SHAREHOLDERS' (STOCKHOLDER'S) EQUITY BASICS

I. Basics

Components of Shareholder’s Equity
Also known as “equity” and “net worth”, the shareholders’ equity refers to the shareholders’ ownership interest in a company.

Usually included are:

Preferred stock – This is the investment by preferred stockholders, which have priority over common shareholders and receive a dividend that has priority over any distribution made to common shareholders. This is usually recorded at par value.
Additional paid-up capital (contributed capital) – This is capital received from investors for stock; it is equal to capital stock plus paid-in capital. It is also called “contributed capital”.
Common stock – This is the investment by stockholders, and it is valued at par or stated value.
Retained earnings – This is the total net income (or loss) less the amount distributed to the shareholders in the form of a dividend since the company’s initiation.
Other items – This is anall-inclusive account that may include valuation allowance and cumulative translation allowance (CTA), among others. Valuation allowance pertains to noncurrent investments resulting from selective recognition of market value changes. Cumulative translation allowance is used to report the effects of translating foreign currency transactions, and accounts for foreign affiliates.

Look Out!

These components are listed in the order of their liquidation priority.

Figure 6.5: Sample Balance Sheet

Stockholders’ Equity Statement
Instead of presenting a detailed stockholders’ equity section in the balance sheet and a retained earnings statement, many companies prepare a stockholders’ equity statement.

This statement shows the changes in each type of stockholders’ equity account and the total stockholders’ equity during the accounting period. This statement usually includes: