3JM Company Inc.

Published Articles by David Balovich

Published in: Creditworthy News
Date: 3/24/99

This is the ninth installment in a continuing article on financial statements.


The last item on the balance sheet is stockholders equity. The equity section may contain items such as common stock, preferred stock, retained earnings, treasury stock, paid in capital. We will not discuss all of those due to the constraints of the space allowed for this column.

The valuation of stockholder equity, however, is relatively easy. Recall that assets are equal to liabilities plus stockholders equity. Once the valuation of assets and liabilities has been determined, the stockholders equity is whatever it must take to make the equation balance. Stockholders equity is, by definition, a residual of whatever is left after enough assets are set aside to cover liabilities. If liabilities exceed assets then stockholders equity is a negative number.

We should be aware that we do not need anymore then two consecutive balance sheets to be able to determine if the firm is reporting income or loss.

Retained earnings, listed under stockholders equity, is a cumulative number. Profit is added to retained earnings and losses are subtracted from retained earnings. All that is necessary to determine profit or loss is to subtract the current retained earning number from the one on the previous balance sheet. The difference in numbers will indicate profitability from one statement to the next.

An important note: Remember that financial statements are information supplied to us by management. What we see is what they want us to see. The fact that a company reports a loss does not necessarily meant they did not make a profit. Businesses pay taxes on profits not losses.

When we examine the Income Statement we will address what to look for and question to determine if a firm is really making money even though they are reporting a loss.

I wish you well.

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