Learning Outcomes
- Recognize the components of stockholder’s equity
Any change in the Common Stock, Retained Earnings, or Dividends accounts affects total stockholders’ equity, and those changes are shown on the statement of stockholder’s equity.
Stockholders’ Equity can increase in two ways:
- Stock is issued and Common Stock increases, and/or
- Business makes a profit and Retained Earnings increases.
Stockholders’ Equity can decrease in two ways:
- Dividends are distributed and Retained Earnings decreases, and/or
- Business takes a loss and Retained Earnings decreases.
Of course, in the business world, things can be a bit more complicated than that. Take a look at the most current regulatory reports for The Home Depot, Inc. On page 36 of the 2019 annual report, the company reports the following changes to stockholders’ equity:
| The Home Depot, Inc. | |||
|---|---|---|---|
| Consolidated Statements of Stockholders’ Equity | |||
| in millions | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 |
| Subcategory, Common Stock: | |||
| Balances at the beginning of year | $ 89 | $ 89 | $ 89 |
| Shares issued under employee stock plans | — | — | 1 |
| Balance at the end of the year | Single line89 | Single line89 | Single line89 | Single line | Single line | Single line |
| Subcategory, Paid in Capital: | |||
| Balances at the beginning of year | 10,578 | 10,192 | 9,787 |
| Shares issued under employee stock plans | 172 | 104 | 132 |
| Stock-based compensation expenses | 251 | 282 | 273 |
| Balance at the end of the year | Single line11,001 | Single line10,578 | Single line10,192 | Single line | Single line | Single line |
| Subcategory, Retained Earnings: | |||
| Balance at the beginning of the year | 46,423 | 39,935 | 35,519 | Cummulative effect of accounting changes | 26 | 75 | — | Net Earnings | 11,242 | 11,121 | 8,630 | Cash Dividends | (5,958) | (4,704) | (4,212) | Other | (4) | (4) | (2) |
| Balance at the end of the year | Single line51,729 | Single line46,423 | Single line39,935 | Single line | Single line | Single line |
| Subcategory, Accumulated Other Comprehensive Income (Loss): | |||
| Balance at the beginning of the year | (772) | (566) | (867) | Cummulative effect of accounting changes | (31) | — | — | Foreign currency translation adjustments | 53 | (267) | 311 | Cash flow hedges, net of tax | 8 | 53 | (1) | Other | 3 | 8 | (9) |
| Balance at the end of the year | Single line(739) | Single line(772) | Single line(566) | Single line | Single line | Single line |
| Subcategory, Treasury Stock | |||
| Balance at the beginning of the year | (58,196) | (48,196) | (40,194) |
| Repurchases of common stock | (7,000) | (10,000) | (8,002) |
| Balance at the end of the year | Single line(65,196) | Single line(58,196) | Single line(48,196) |
| Total stockholders’ (deficit) equity | Single line$ (3,116)Double line | Single line$ (1,878)Double line | Single line$ 1,454Double line |
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Fiscal 2019 and fiscal 2017 include 52 weeks. Fiscal 2018 includes 53 weeks
See accompanying notes to consolidated financial statements.
This might seem intimidating, but you now have the tools to figure this out.
Common Stock
First, the changes to common stock are reported as zero, in millions, which means there could have been $499,999.99 of stock issued left off this report because it is immaterial. From the balance sheet, we learn the stock is $0.05 par value. The $89 million (rounded to the nearest million) in stock would equate to 1.78 billion shares (actually reported on the balance sheet at 1.782 billion).
In other words, in fiscal year 2019, there were no significant issues of new common stock. The increase in that account on the statement is $0.
Paid-in Capital
Except, we see paid-in capital in excess of par actually increased a bit in 2019 as a result of issuance of new shares. In Note 6 to the financial statements on page 56, we see there were in fact four million shares (rounded) issued to employees as part of their non-cash compensation. A $0.05 par value would be $200,000, well below the rounding limit on these financials. In any case, the increase to owners’ equity as a result of additional paid-in capital during 2019 was $11.001 million.
These two accounts—common stock and paid-in capital—are the equivalent of the Capital Contribution account we used for a sole proprietorship.
Retained Earnings
As you might expect, the big changes to retained earnings were net income and dividends. Just as with sole proprietorships and the statement of changes to owner’s equity, the big changes were net income and owner withdrawals. As you may realize by now, a sole proprietor decides when to take money out and how much earnings to withdraw, while a stockholder of a corporation has to wait for the board of directors to declare a dividend (withdrawal of earnings).
In short, retained earnings is a company’s accumulated profit since it began operations minus any dividends distributed over that time—just like it sounds: earnings that are retained in the company.
For The Home Depot, retained earnings has been retroactively adjusted for a change in accounting principles. Further information on those adjustments can be found on page 43 of the annual report but were mostly due to adopting ASU No. 2016-02 that recognizes a “right-of-use” asset for certain leases, and ASU 2018-02 that moved $31 billion of certain tax effects from Accumulated Other Comprehensive Income to Retained Earnings (see the next section).
Accumulated Other Comprehensive Income (Loss)
Other comprehensive income includes certain gains and losses excluded from net earnings under GAAP, which consists primarily of foreign currency translation adjustments.
Treasury Stock
In the ten years between 2010 and 2020, Home Depot reduced its outstanding shares from 1.7 billion to 1.1 billion and continues to regularly buy back shares on the open market, reducing overall stockholders’ equity by $65 billion.
As illustrated by this Home Depot statement, stockholders’ equity equals total paid-in capital plus retained earnings minus treasury stock.
Now, let’s check your understanding of this topic.
Practice Question
