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MANAGEMENT OF SHAREHOLDERS' EQUITY

INTRODUCTION

Shareholders' equity is the interest of the shareholders, or owners, in the assets of a company, and at any time is the cumulative net result of past transactions affecting this segment of the balance sheet. This equity is created initially by the owner's investment in the entity, and may be increased from time to time by additional investments, as well as by net earnings. It is reduced by distributions of the equity to the owners (usually as dividends). Further, it may also decrease if the enterprise is unprofitable. When all liabilities are satisfied, the balance—the residual—belongs to the owners.

Basic accounting concepts govern the accounting for shareholders' equity as a whole, for each class of shareholder, and for the various segments of the equity interest, such as capital stock, contributed capital, or earned capital. This chapter does not deal with the accounting niceties regarding the ownership interest. It is assumed the controller is well grounded in such proper treatment, or will become so. The concerns relate to the shareholders' interest as a total and not any special accounting segments.

IMPORTANCE OF SHAREHOLDERS' EQUITY

As previously stated, capital structure is composed of all long-term obligations and shareholders' equity—in a sense, the “permanent” capital. Some would describe the capital structure of the enterprise as the cornerstone of financial policy. Such policy must be so planned that it will command ...

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