What is shareholders' equity?

Answer 1

1 . Shareholders' equity is a residual interest. It represents the shareholders' claim on the assets of a firm after the firm satisfies all higher-priority claims.

2 . All corporations issue common stock. Firms may also issue preferred stock, which has a claim that is senior to that of the common shareholders.

3 . Common and preferred stock usually have a par or stated value. Firms report amounts received from issuing common stock in excess of the par or stated value as Additional Paid-In Capital, or Capital in Excess of Par Value, or a similar account title. The amounts in Additional Paid-In Capital for a firm usually exceeds the amounts in Common Stock, indicating that the firm issued common stock for substantially more than par value, a common practice among publicly traded firms.

4 . Firms accumulate information about revenues and expenses during a reporting period to enable the preparation of the income statement. Net income for a period increases net assets (assets minus liabilities) and retained earnings; a net loss reduces net assets and retained earnings.

5 . Firms may periodically distribute net assets generated by earnings to shareholders as a dividend. Firms reduce net assets and retained earnings for the distribution.

6 . Retained earnings on the balance sheet provides a measure of the cumulative net assets generated by earnings in excess of dividends declared. The retention of net assets generated by operations represents the primary source of funds for most successful businesses.