Study Notes on Stockholders' Equity

Accounting Equation

  • Assets = Liabilities + Stockholders’ Equity

Retained Earnings Calculation

  • Retained earnings = Net Income - Dividends

Performance Evaluation Formulas

  • Return on Equity (ROE) = Net IncomeAverage Stockholders’ Equity\frac{\text{Net Income}}{\text{Average Stockholders' Equity}}

Practice Problems

  1. Accounting Equation

    • Problem: A company has total assets of 350,000350,000 and liabilities of 120,000120,000. Calculate the Stockholders' Equity.

    • Solution:

      • Assets = Liabilities + Stockholders

      • 350,000=120,000+Stockholders’ Equity350,000 = 120,000 + \text{Stockholders' Equity}

      • Stockholders' Equity = 350,000−120,000=230,000350,000 - 120,000 = 230,000

      • Answer: Stockholders' Equity is 230,000230,000

  2. Retained Earnings Calculation

    • Problem: If a company reported a Net Income of 75,00075,000 and paid out 25,00025,000 in Dividends, what is the amount added to Retained Earnings?

    • Solution:

      • Retained earnings = Net Income - Dividends

      • Retained earnings = 75,000−25,00075,000 - 25,000

      • Retained earnings = 50,00050,000

      • Answer: 50,00050,000 is added to Retained Earnings.

  3. Return on Equity (ROE)

    • Problem: A business generated a Net Income of 150,000150,000 and its Average Stockholders' Equity for the year was 600,000600,000. Calculate the Return on Equity (ROE).

    • Solution:

      • ROE = Net IncomeAverage Stockholders’ Equity\frac{\text{Net Income}}{\text{Average Stockholders' Equity}}

      • ROE = 150,000600,000\frac{150,000}{600,000}

      • ROE = 0.250.25 or 25%25\% (as a percentage)

      • Answer: The Return on Equity (ROE) is 25%25\%.