Reporting Stockholders’ Equity

The statement of shareholders' equity is synonymous with the statement of

stockholders' equity and the statement of retained earnings.

The financial reporting of statement of shareholders' equity actually involves two

different documents:

The closing procedure itself requires a statement of changes in stockholders'

equity. This links the income statement to the balance sheet by transferring the

period's income statement profits to the retained earnings on the balance sheet.

The second document is the statement of stockholders' equity, which is created

at the end of every period from the ending ledger balances of the accounts that

appear on the statement itself.

Statement of Changes in Stockholders' Equity

The normal end-of-period closing procedure begins with the creation of the income

statement. After that, the statement of changes in stockholders' equity is prepared, as in

the following example:

1. Start with the beginning stockholders' equity from the period's beginning

balance sheet: $10 million.

2. Add earnings for this new period's income statement: $3 million.

3. Deduct any dividends paid to stockholders: $1 million.

4. Calculate the new period's ending stockholders' equity: $12 million.

5. Record this figure on the new period's ending balance sheet.

Statement of Changes in Stockholders' Equity, 6/30/20XX

+ Beginning stockholders' equity $10,000,000

+ Earnings $3,000,000

- Dividends paid $1,000,000

= Ending stockholders' equity $12,000,000

Creating the Statement of Stockholders' Equity

The second reporting process is of the statement of stockholders' equity itself, which is

also prepared at the end of each period using ending ledger balances of the accounts

that appear on the statement.

Consolidated Statement of Stockholders' Equity, 2004–2006

All amounts shown are in U.S. dollars.

Balance

Common

Stock

Capital in

Excess of

Par

Retained

Earnings

Accumulated

Other

Income/Loss Total

12/31/2004 2,000,000 2,000,000 3,000,000 2,000,000 9,000,000

12/31/2005 2,200,000 2,200,000 2,000,000 1,500,000 7,900,000

12/31/2006 2,300,000 2,200,000 2,200,000 1,500,000 8,200,000

One special section of this statement of stockholders' equity is the Accumulated Other

Income/Loss section. This is reported separately from Retained Earnings on this

statement primarily to reflect that these are unusual types of gains/losses that the

Securities and Exchange Commission (SEC) and Financial Accounting Standards

Board (FASB) feel should be kept separate because of what the retained earnings

figure is meant to reflect.

The following are examples of journal entries that would impact the T-account

balances of accounts that would appear on this statement of stockholders' equity.

Issuing common (or preferred) stock at par:

1/1/XXXX Cash $10,000

Common stock at par $10,000

To record issuance of 10,000 shares of stock at $1.00 par value

Issuing common (or preferred) stock at a price in excess of par:

1/1/XXXX Cash $12,000

Common stock at par $10,000

Capital in excess of par $2,000

To record issuance of 10,000 shares of common stock [$1 par] at

$1.20/share

Buying back some outstanding stock (creating treasury stock for later resale versus

permanent retirement):

1/1/XXXX Treasury stock $1,500

Cash $1,500

To record buyback of 1,000 shares of $1 par value stock at cost of

$1.50/share, creating $1,500 of treasury stock

Reselling this same treasury stock:

1/31/XXXX Cash $3,000

Treasury stock $1,500

Paid-in capital

reacquired shares $1,500

To record resale of 1,000 shares of treasury stock at price of

$3.00/share, separated into $1,500 at cost, plus $1,500 gain (or benefit)

to current shareholders' equity of $1,500

Transferring the period's profit, or earnings, to retained earnings:

1/31/XXXX Revenues $4,000

Expenses $2,000

Retained earnings $2,000

To transfer January's reported $2,000 of profit reflected on the income

summary to retained earnings

Reporting gain or loss that would go in the Accumulated Other Comprehensive

Income/Loss column rather than appear on the income statement:

1/1/XXXX Plan assets $10,000

Cash $10,000

To report a gain on (pension) plan assets in January