 Hello and welcome to this session. This is Professor Farhad in which we would look at a stockholders' equity statement. Now this stockholders' equity statement, I consider it simple. Nevertheless, once you understand the simple, the basic accounts, then if more are added, you will be able to absorb the addition. So it's very important to understand the basics. So let's go ahead and dive into this example in order to see how we prepare stockholders' equity statement. A simple one. Let's call it a simple one. Adam Company had the following account balances as of December 31st, 20x5. And they're asking us to prepare the stockholders' equity for Adam Company. We are giving common stock, treasury stock, retained earning, paid in capital. Simply put, we are giving four accounts and the easy part about this, I'm telling you, I'm going to tell you upfront. All these accounts are equity related. The first thing you want to know is, do you understand what each account represents? So you look at common stock and you see common stock is 520,000. It has a $10 par value. If I ask you, do you know what common stock is? Would you be able to explain it to someone? If you do, then you understand what common stock is. Same for treasury stock, retained earnings, paid in capital. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start today, no obligation, no credit card required. So what I'm going to do first, I'm going to explain the accounts. Then after I explain the accounts, we will put the statements of stockholders' equity together. Although I said this is a simple one, it's simple, but it's powerful. Starting with common stock, starting with common stock, what do common stock represent? We have 520,000. Well, common stock represent how much the investors or the shareholders invested in the company. So the 520,000, it tells you this is how much the investors invested in the company. Now, do you know how many shares this company issued? Well, it's not giving, but you can figure out how many shares are issued and outstanding because you have the dollar amount and you have a $10 power value. You remember the power value is simply a number assigned to the account. So if we take 520,000 divided by 10, we will find out that this company has 52,000 shares issued and outstanding. Now, how did I know this? Because when you issue stocks, when you credit, here we go. So let me show you the journal entry. When you issue stocks, you debit cash, credit common stock and credit APIC, additional paid in capital. Now, common stock is credited for the number of shares times the power value. Now, in this example, we are giving the power value 10, we are giving the total. So we are giving the total as 520,000. Well, if the power value was 10, it means we issued exactly 52,000 shares. Now, remember what I said? I said, we debit cash, we credit common stock and we credit additional paid in capital. So now it's time to look at this account called the paid in capital nexus of par. Simply put, let me tell you something, those two accounts are related to each other. Those two accounts are the same in a sense that they both represent what the investors contributed to the company. So if I ask you, how much did the investor contribute to the company? You will take the 520 plus, let me just use the formula, you would take the 520, 520,000, which is represented by common stock and you add to it 1,450,000 and 1,970,000 represent the investor's investment. Now, some of it is recorded under the common stock and how much is recorded under the common stock? Well, what's recorded under the common stock is the number of shares times the power value and anything in access of the power value is recorded under paid in capital. Now, those two accounts are done. Let's look at, I'm going to jump to retained earnings. I'm going to skip Treasury stock for now. Retained earnings. What do retained earnings represent? Well, retained earnings is an equity account and retained earnings represent the earnings of the company over the years, the earnings that they generated and they did not distribute as dividend. So over the years, when the company earned income, when they generate income, they will increase retained earning. If they incur any losses, they reduce retained earnings. When they pay any dividend, they reduce retained earnings. Now, there are other things that reduce retained earnings, which we're not going to discuss, but those are the main things. Now, the only thing that should increase retained earnings is net income. The only thing that should increase retained earnings is net income. I'm going to say it one more time. the only thing that should increase retained earnings is net income. Now, sometimes you might have an error or a prior period adjustment, that's fine, but that error or prior period adjustment resulted in an increase in net earnings, in net income, therefore it increases retained earnings. So, the main component of any stockholders equity, let me tell you this, the main two component of any stockholders equity statement is those two accounts, which is what the investors contributed, which is highlighted in yellow and retained earnings. Now, you might look at other financial statements with stockholders equity financial statements and you might see many other accounts, like preferred stock, you might see all sorts of equity account, like stock options, stock warrant, that's fine. However, those two components, what the investors contributed and retained earnings, so this is one and this is two, those two accounts represent the bulk, the majority of any company's stockholders equity statement. Now, we added a third account, a third account that you might see, a third common account, and this is treasury stock. Well, also treasury stock is equity, but to be more specific, it's contra-aquary, it's the opposite of equity. Treasury stock reduces equity, treasury stock is the opposite of common stock. What do I mean by this? Common stock increases when the company issues stocks, when the company sells stocks to the public. Well, at some point, the company might do what? The opposite. What is the opposite? Buy back the stock, buy back the stock from the public. When they do so, they increase treasury stock and treasury stock will be a negative number on the statement of stockholders equity. So, the best way now to illustrate this is to look at the stockholders equity statement illustrating the accounts that we cover. So, this way, we'll see what it looks like. Again, this is a straightforward one, but nevertheless, it's a very powerful illustration of what we need to cover. Starting with what the investors contributed, and let's see, let's look at that. The investors contributed 520,000, the investors contributed 1,450,000. All in all, we can see that the investors contributed 1,970,000. In addition to that, we said retained earning is the other major component of stockholders equity. So, this is the first component, this is the second component, and those two represent the bulk of any company's stockholders' equity. And what you should do now, go to your favorite company's financial statement, whatever you like, Amazon, Apple, or any company you would like, and look at it as long as it's publicly traded, obviously, and look at their financial statements, and look at the stockholders' equity. And you would see that the majority is represented by what the investors contributed. Sometimes it's called capital surplus rather than common stock and retained earnings. Now, what did I say? I say, we also have treasury stock, and I said that treasury stock is an equity, but specifically, it's contra-equity. It's equity, but contra-equity. So, notice what we do, we put less treasury stock. Now, if the word less wasn't here, we would have deducted treasury stock. The mere fact that the word less is there, what we can do then, we can deduct treasury stock and come up with total equity. Therefore, total equity is $2,920,000. Therefore, this is the total equity, and this is the statements of stockholders' equity for Adam Company, the name of the company, the name of the statement, and the date as a point in time. To summarize this, this is part one, and this is part two. Those are the major component. Then, treasury stock is a negative. Therefore, the stockholders' equity for this company is $2,920,000. What should you do now? Go to farhatlectures.com and work MCQs through false additional exercises that's going to help you understand this topic. Good luck, study hard, and of course,