The Balance Sheet Breakdown is a four part series on understanding each section of the balance sheet that is provided by public companies.  By understanding the balance sheet, you will have a gauge of the financial health of the company and whether or not it is a sound investment for you.  Start out with Part 1 (Intro), followed by Part 2 (Assets), and Part 3 (Liabilities).

The Shareholders Equity portion of the balance sheet is the amount of money that the shareholders have at risk/invested in the company.  There are three basic categories of the Shareholders Equity section of the balance; capital, retained earnings and contributed surplus.  Capital is the money paid in by the shareholders.  Retained earnings are any profits left over that have not been distributed as dividends.  Contributed surpluses are sources of capital that originate from non-earnings sources.

Share Capital

The share capital numbers presented on the balance sheet are the amount received for the shares when they were initially issued.  These numbers will not change with the day to day pricing of the shares on the secondary market.  Only in the case of further stock being issued or company buying back stock would these numbers change.

Retained Earnings

In the simplest of terms, retained earnings are all of the left overs.  It is the amount of annual earnings that remain after all expenses have been paid and dividends have been distributed.  Often times companies will not distribute all profits through dividends and will retain some for future growth.

Contributed Surplus

The contributed surplus section deals with money arriving in ways other than through earnings.  How is that possible?  Often times this will occur when a company sells stock at a price higher than the initial par value.  So if a $50 stock is sold at $60, the “par value” of $50 is put into the sharecapital meanwhile the remaining $10 is allocated through contributed surplus.

Foreign Currency Translation Adjustment

In the case of companies with subsidiaries operating internationally there may be an additional section of the Shareholders Equity relating to Foreign Currency Translation Adjustment.  If there is a significant difference in foreign exchange rates between the time of initial recording of international assets and the time of balance sheet preparation, an entry will be created under this section to reflect this.

This concludes the 4 part Balance Sheet Breakdown series discussing some of the basics of the Balance Sheet.  There are other important financial documents that must be understood when gaining an understanding of a company including the cash flow statement, earnings statement and retained earnings statement.  Each one of these deserves some time being discussed and will likely be covered in future financial understanding posts here or posted as links to Canadian Penny Stocks elsewhere on the web.

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