The Statement of Changes in Stockholders Equity - dummies

The Statement of Changes in Stockholders Equity

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

Larger businesses generally have more complicated ownership structures than smaller and medium-sized companies. Larger businesses are most often organized as a corporation in contrast to other forms of legal structures.

Corporations can issue more than one class of stock shares, and many do. One class, preferred stock, has certain perks that the other class, called common stock, doesn’t. Also, a corporation may have both voting and non-voting stock shares. And corporations can buy back their own stock shares (treasury stock) for a variety of reasons.

The point is that many businesses, especially larger public companies, engage in activities that change their owners’ equity components. These owners’ equity activities tend to get lost from view in a comparative balance sheet and in the statement of cash flows. Yet the activities can be important.

Therefore, the business prepares a separate statement of changes in stockholders’ equity covering the same period as its income statements. The statement of changes in stockholders’ equity is where you find certain technical gains and losses that increase or decrease owners’ equity but that are not reported in the income statement.

You have to read this summary of changes in the owners’ equity accounts to find out whether the business had any such gains or losses. Look in a column headed comprehensive income for these gains and losses, which are very technical.

The general format of the statement of changes in stockholders’ equity includes columns for each class of stock, additional paid in capital, treasury stock, retained earnings, and the comprehensive income element of owners’ equity. Professional stock analysts have to pore over these statements. Average financial report readers probably quickly turn the page when they see this statement. But it’s worth a quick glance if nothing else.

Many financial reports include a statement of changes in stockholders’ equity in addition to their three primary financial statements. It’s not really a full-fledged financial statement. Rather, it serves as a columnar footnote for the various owners’ equity accounts in the balance sheet.