10/11/2016

HowtoCalculateStockholders'EquityforaBalanceSheetTheMotleyFool

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How to Calculate Stockholders' Equity for a

Balance Sheet
Stockholders'equityisthebookvalueofshareholders'interestinacompanythesearethe
componentsinitscalculation.
Stockholders'equity(aka"shareholders'equity")istheaccountingvalue("bookvalue")ofstockholders'interestinacompany.
Keepinmind,theshareholders'interestisaresidualone:Creditorshavefirstclaimonacompany'sassets.Yougetasenseof
thatpriorityofclaimsinthefollowingexpressionofthebasicaccountingequation:
Stockholders'Equity=AssetsLiabilities
Butbeyondthefactthatitmustmatchupwithassetsandliabilities,whatgoesinto'stockholders'equity'onabalancesheet?
Assumingacompanyhasanyoperatinghistorywhatsoever,thetwobasiccomponentsofstockholders'equityare:
Paidincapital
Retainedearnings
Paidincapital
Asthenamesuggests,paidincapital(or'contributedcapital')isthemoneythecompanyhasraisedfrominvestorsthroughthe
sale(s)ofitsstock.Paidincapitalisitselfbrokendownintotwoaccounts:Parvalueofissuedstockandpaidincapitalinexcess
ofparvalue.
Paidincapital:Parvalueofissuedstock
Theparvalueofissuedstockisanarbitraryvalueassignedtosharesinordertofulfillstatelaw.Theparvalueistypicallyset
verylow(apennypershare,forexample)andisunrelatedtotheissuepriceofthesharesortheirmarketprice.
Corporationsliketosetalowparvaluebecauseitrepresentstheir"legalcapital",whichmustremaininvestedinthecompany
andcannotbedistributedtoshareholders.Anotherreasonforsettingalowparvalueisthatwhenacompanyissuesshares,it
cannotsellthemtoinvestorsatlessthanparvalue.
Parvalueofissuedstockmayalsoappearonthebalancesheetundertheterm'Commonstock'.
Paidincapitalinexcessofparvalue
Whenacompanysellsshares,themoneyitreceivesfrominvestors,minustheparvalue,iscreditedtoanaccountnamed
capitalinexcessofparvalue(or'additionalpaidincapital').Thisistheshareholders'equitysectionofWalMartStores'2014
yearendbalancesheet:

SOURCE:WALMARTSTORES

Inmanycases,paidincapitalisnotbrokenoutonthebalancesheetintotwoseparatelineitemsfortheparvalueandthe
capitalinexcessofparvalue.Apple'sfiscal2014yearendbalancesheetisoneexample:

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HowtoCalculateStockholders'EquityforaBalanceSheetTheMotleyFool

SOURCE:APPLE

Onelastpointonpaidincapital:Bothexamplesaboveonlycontaincommonequitybecauseit'stheonlytypeofequitythat
AppleorWalmarthasissued.However,somecompaniesissuepreferredstock,too,whichisalsoequityand,assuch,must
figureunderstockholders'equity.Furthermore,manycompanieshavemultipleshareclassesandwillprovideinformationon
eachone(eveniftheyprovideonlyasinglebalancesheetvaluefor'Commonstock'.)
Google's2014yearendbalancesheetcontainsalineforconvertiblepreferredstockandbreaksdownitscommonstockshare
countandparvaluebyshareclass('A','B'and'C'shares):

SOURCE:GOOGLE

Retainedearnings
Asthenamesuggests,retainedearningsisthecumulativeamountofnetincomethecompanyhasearnedfromthetimeitwas
createdthatithasnotdistributedtoshareholdersasdividends.Lossesareincludedinthecalculation,too:theysubtractfrom
retainedearnings.
Thefactthatretainedearningshaven'tbeendistributeddoesn'tmeanthey'renecessarilystillavailabletobedistributed.When
companiesseektofinanceexpansionornewprojects,retainedearningsisoftenthefirstformoffinancingtheyturnto(it's
cheaperthanissuingnewequity.)Retainedearningsdoesnotrepresentapoolofliquidassetsinmanycases,theearnings
havebeenreinvestedinthebusiness.
Infact,ExxonMobildoesn'treferto'retainedearnings'initsfinancialstatements,preferringtheterm'earningsreinvested'
instead.Asyoucansee,theoilandgassupermajorhadawhopping$408billioninretainedearningsonitsbalancesheetatthe
endof2014(figuresareexpressedinhundredsofmillionsofdollars):

SOURCE:EXXONMOBIL

However,ifyoulookattheassetsideofthebalancesheet,youfindthatthecompany'stotalcurrentassetsarevaluedatjust
$52.9billion,withlessthan$5billionincash:

SOURCE:EXXONMOBIL

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HowtoCalculateStockholders'EquityforaBalanceSheetTheMotleyFool

Therearetwootheraccountsthatyouwillrunacrossinlookingatcorporatebalancesheets:'Accumulatedothercomprehensive
income'and'Treasurystock'.
Accumulatedothercomprehensiveincome
Youmayhavenoticedthatinalltherealworldexamplesincludedabove,thereisanotherlineiteminshareholders'equity
immediatelybelowretainedearningswithanopaqueandunwieldyname:Accumulatedothercomprehensiveincome.
Thebestwaytoexplainothercomprehensiveincomeistostartbydefiningcomprehensiveincome,whichencompassesall
changesinthecompany'sequityduringareportingperiodthatarenottheresultoftransactionsoreventsinvolvingstockholders
(butonlyintheircapacityasstockholders:IfyouownApplesharesandyoubuyaniPhone,thepurchaseispartof
comprehensiveincome).
Transactionsthatinvolvestockholdersareprimarilythedistributionofdividendsandthesaleorrepurchaseofthecompany's
stock.
Excludingthesetransactions,themajorsourceofchangeinacompany'sequityisretainedearnings,whichareacomponentof
comprehensiveincome.However,thereareothersourcesandthus,othercomprehensiveincome.
Concretely,someexamplesofothercomprehensiveincomeare:
Revaluationsofproperty,plantandequipment.
Changesinthefairvalueofsecuritiescategorizedasavailableforsale.
Actuarialgainsandlossesrelatedtothecompany'sdefinedbenefitpensionplan.
Finally,justastheretainedearningsfigureonthebalancesheetisacumulativeamount,thelineitemthatrelatestotheother
comprehensiveincomeis'Accumulatedothercomprehensiveincome',whichrecordsthecumulativechangetostockholders'
equityfromcomprehensiveincome.
Treasurystock
Treasurystockiscreatedwhenacompanyrepurchasesitsowncommonorpreferredsharesandholdsthemintreasuryinstead
ofretiringthem.Treasurystockisissued,butnotoutstandingithasnovotingrightsanddoesnotreceivedividends(forreporting
purposes,retiredsharesaretreatedasauthorized,butnotissued).Acompanycanholdtreasurystockformultiplepurposes:
Todistributetoemployeesaspartofastockoptionplans.
Tomaintaincontrolandownership,forexampletofendoffahostiletakeoverbid.
Treasurystockisnotanasset,it'sacontrastockholders'equityaccount,thatistosayitisdeductedfromstockholders'equity.
Treasurystockismostoftencarriedonthebalancesheetatcost.
HereisAmazon.com'sstockholders'equityfromits2014yearendbalancesheet:

SOURCE:AMAZON.COM

NotethattheTreasurystockislistedasanegativequantitythatreducesstockholders'equity(asanaside,didyounoticethatthe
capitalstockholdershavecontributedtoAmazonismorethanfivetimesretainedearnings?).
So,nowthatyouknowaboutstockholders'equity,maybeyou'reinterestedin...becomingastockholder.TheFoolwantstohelp:
Checkoutourbrokercenterforadviceonhowtogetstarted.
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TomandDavidGardner,whosenewsletterStockAdvisorhastripledthemarket*overthepastdecadeplus,havehandpicked
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ten"starterstocks"topoweryourportfolio.Whetheryou'reaseasonedinvestororjustgettingstarted,thislistisamusthave!
Clickherefordetails.
ThisarticleispartofTheMotleyFool'sKnowledgeCenter,whichwascreatedbasedonthecollectedwisdomofafantastic
communityofinvestors.We'dlovetohearyourquestions,thoughts,andopinionsontheKnowledgeCenteringeneralorthis
pageinparticular.Yourinputwillhelpushelptheworldinvest,better!Emailusatknowledgecenter@fool.com.Thanksand
Foolon!
AlexDumortier,CFAhasnopositioninanystocksmentioned.TheMotleyFoolownsandrecommendsAmazon.com,Apple,andGoogle(A
shares).TheMotleyFoolownssharesofExxonMobil.TryanyofourFoolishnewsletterservicesfreefor30days.WeFoolsmaynotallholdthe
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1 Smart Tax Move to Make Before the End of

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HowtoCalculateStockholders'EquityforaBalanceSheetTheMotleyFool

IMAGESOURCE:GETTYIMAGES.

Theyearisrapidlycomingtoaclose,andifyou'vesoldanyinvestmentsataprofitthisyear,youshouldanticipatepayingcapital
gainstaxeswhenyoufileyourtaxreturnthatis,unlessyoutakeadvantageoftaxlossharvesting,whichisthepracticeof
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Whatistaxlossharvesting?
Taxlossharvesting,alsoknownastaxlossselling,isthepracticeofsellinglosinginvestmentswiththespecificintentionof
claimingacapitallossonyourtaxes.It'sgenerallydonetowardtheendoftheyear,butitcanbedoneanytime.
TheIRSallowsinvestmentlossestooffsetcapitalgainstaxesyoumayowefromsellinginvestmentsataprofit.Forexample,if
yousellastockata$3,000profiitandthensellanotherstockata$2,000loss,yourcapitalgainsfortaxpurposeswillbejust
$1,000fortheyear.
Therules
Beforeyoustartsellingyourlosinginvestments,herearesomethingsyouneedtoknow.
1.The"washsale"rule:Youcan'tclaimalossfortaxpurposesifyousellaninvestmentandthenbuythesame(ora
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2.Lossesareappliedtothesametypeofcapitalgainsfirstlong/shortterm.Inotherwords,ifyousellastockthatyou'veheld
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HowtoCalculateStockholders'EquityforaBalanceSheetTheMotleyFool

rateis0%.Ifyou'reinthetoptaxbracket,yourrateis20%andyoumayhavetopayanadditional3.8%ifyourincomeisovera
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MotleyFoolhasadisclosurepolicy.

ForgetNetflix!WeThinkThese3CompaniesAreReadytoTakeOff
Letsfaceit...cabletelevisionisonitswayoutandthedeathofTVmeansthe$2.2trillionentertainmentindustryisripe
forthepicking.Rightnow,theresagoldenopportunitytohijackcablesprofitsasAmericanscontinueditchingcable.
BecausewethinkthreestocksarepoisedtosurgenowthatcableTV'sdaysarenumbered.Andyoudbesurprised
NetflixandAmazon.comarentevenonthelist!Clickheretolearnmore.

AUTHOR

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MatthewFrankel
(TMFMathGuy)
MattbroughthisloveofteachingandinvestingtotheFoolin2012inordertohelppeopleinvestbetter.Mattspecializesinwritingaboutthebestopportunitiesinbankstocks,
REITs,andpersonalfinance,butlovesanyinvestmentattherightprice.FollowmeonTwittertokeepupwithallofthebestfinancialcoverage!
Follow@TMFMathGuy

ARTICLEINFO

Nov9,2016at11:05PM
InvestmentPlanning

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