Financial Accounting: In an Economic Context

THE STATEMENT OF SHAREHOLDERS' EQUITY

The statement of shareholders' equity, which is illustrated for Harbour Island in Figure 2-5, explains the changes in the shareholders' equity accounts (contributed capital and retained earnings) over a period. It represents a summary of the activity in the accounts that keep track of the shareholders' investment in the company. The shareholders' investment increases when capital is collected from the sale (issuance) of equity securities (contributed capital) and when profits, which belong to the shareholders, are reinvested in the business (earned capital). Dividends paid to the shareholders reduce their investment in the company. Note that the beginning dollar balances, which come from the December 31, 2010 balance sheet, are adjusted for the activity during 2011 leading to the ending dollar balances, which appear on the December 31, 2011 balance sheet. During 2011 Harbour Island collected $3,100 from common stock issuances, recorded net income of $1,085, and paid dividends of $200.

FIGURE 2-5 Statement of shareholders' equity for Harbour Island Company

Retained earnings represents past profits that have not been returned to the shareholders in the form of dividends. By comparing dividends to profits across time, a user can ascertain a company's dividend policy.

Johnson & Johnson consistently pays significant dividends to its shareholders$ ...