Published Articles by David Balovich
||FINANCIAL STATEMENT ANALYSIS -
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
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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