Course 107: A Tour through the Balance Sheet
Shareholders' Equity
In this course
1 Introduction
2 Assets
3 Liabilities
4 Shareholders' Equity


As noted earlier, shareholders' equity is equal to total assets minus total liabilities, and it represents the part of the company owned by its shareholders. It's generally broken down into three main subheadings.
 
Par Value of Stock. Par value is a legal fiction designed to protect the personal property of the company's shareholders from creditors in the event of bankruptcy. Basically, the law says that such property is protected, as long as the company's stock was issued at or above its par value--so companies arbitrarily set the par value very low, generally around $0.01 a share. The total par value of a company's stock is often a negligible amount, but it has to be listed on the balance sheet anyway. Contributed Capital (Above Par Value). Contributed value represents the amount above par value that shareholders have paid the company for their stock. Note that this isn't necessarily the same as the current market value of the stock, since the company itself doesn't get anything when its stock is traded between third parties (which is essentially what goes on in the stock market). Contributed capital only refers to money the company got when it first issued the stock, either in an IPO (initial public offering) or in a secondary offering. Retained Earnings. Retained earnings represent the profits the company has earned, minus whatever has been paid out as dividends. It's cumulative, so each year the company makes a profit and doesn't pay it all out as dividends, retained earnings grow some more. Likewise, if a company has lost money over time, retained earnings can turn negative and are often renamed an "Accumulated Deficit" on the balance sheet. One final thing to keep in mind about balance sheets is that they are merely snapshots of a company's financial health at a given point in time. This is unlike the income statement or the statement of cash flows, which tally a company's activity over a period. Balance sheets always have dates on them, typically listed at the top, and this indicates the time the "snapshot" was taken.   

Next: The Quiz >>


Search
Print Lesson |Feedback
Del.icio.us Del.icio.us | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.