Which statement reports total assets total liabilities and total stockholders equity?

Owner's Equity Statements: Definition, Analysis and How to Create One

By Autumn Banks, TD In-Store Small Business Lead
Monté Foster, SVP, Retail and Small Business Banking

In simple terms, you can calculate owner's equity for your business by subtracting all your business liabilities from the value of all your business assets. When your business makes a profit, owner's equity is positive. When your business takes a loss, owner's equity is negative.

What is an owner's equity statement and what business types use one?

A statement of owner's equity is a one-page report showing the difference between total assets and total liabilities, resulting in the overall value of owner's equity.

Tracked over a specific timeframe or accounting period, the snapshot shows the movement of cashflow through a business. The owner's equity statement is one of four key financial statements and is usually the second statement to be generated after a company's income statement.

Sole proprietorships, partnerships, privately held companies and LLCs typically use the owner's equity statement – also known as statement in changes in owner's equity or statement of retained earnings. Corporations use a shareholder's or stockholder's equity statement, which are more complex and involve dividends and stock components.

What is the purpose of an owner's equity statement?

This important business tool determines overall financial health and stability of your business. The equity statement indicates if a small business owner needs to invest more capital to cover shortfalls, or if they can draw more profits.

Small business owners utilize this data when making business decisions, such as expansion and diversification. Positive equity is an indicator of financial soundness and the ability to cover liabilities. Negative equity could indicate potential bankruptcy or inability to cover costs and expenses. For example, if a business is unable to show its ability to financially support itself without capital contributions from the owner, creditors could reconsider lending the business money.

How is an owner's equity statement created?

First, create the statement heading
The heading of the statement consists of three lines:

1. Name of the company
2. Title of the statement
   Sole proprietors would title the report as an Owner's Equity Statement, partnerships as Partner's Equity Statement and a corporation as Shareholder's Equity Statement
3. Period being reported

Business ABC
Owner's Equity Statement
Period ending December 31, 2020

Publicly-owned businesses must file standardized reports to the Securities and Exchange Commission (SEC) to ensure the public has access to their financial performance. The reports have many uses—one of the most common is a financial analysis by investors.

One of these financial reports is the balance sheet. Investors can use it to determine how a business is funded and structured. Learn how to read a balance sheet and some typical investor uses.

What Is a Balance Sheet?

A balance sheet lists the value of all of a company's assets, liabilities, and shareholders' (or owners') equity. The format of the sheet is based upon the following accounting equation:

The balance sheet has three sections, each labeled for the account type it represents. Balance sheets can follow different formats, but they must list the three components of the accounting equation.

The most common are horizontally and vertically structured formats. For investors, the vertical format is the easiest to read because it lists the results of multiple periods in columns next to each other.

This equation—thus, the balance sheet—is formed because of the way accounting is conducted using double-entry accounting. Each side of the equation must match the other—one account must be debited and another credited.

The Balance Sheet and Other Financial Statements

Two other statements are vital to understanding a company's finances. The income statement records the company's profitability for the same period as the balance sheet.

The income statement lists the business's net and comprehensive earnings from all sources. For instance, Johnson & Johnson's comprehensive income statement includes income from securities, derivatives, hedges, and employee benefit plans.

Note

Investors also use financial ratios generated from these three statements to help them valuate a business and determine if it fits their investment strategy and risk tolerance.

The statement of cash flows is a record of how much cash is flowing into and out of a business. There are three areas on this statement—operating activities, investing activities, and financing activities. Each of these areas tells investors how much cash is going into each activity.

Used together, these three sheets tell investors how a company is financed (debt or equity), how much cash or cash equivalents it has on hand available to manage its obligations, and how much income it is generating using its assets, equity, and debts.

What Does a Balance Sheet Tell You About a Business?

The balance sheet is an annual financial snapshot. It is also a condensed version of the account balances within a company. In essence, the balance sheet tells investors what a business owns (assets), what it owes (liabilities), and how much investors have invested (equity).

The balance sheet information can be used to calculate financial ratios that give investors a general outlook for the company. Some companies use a debt-based financial structure, while others use equity. The ratios generated from analysis should be interpreted within the context of the business, its industry, and how it compares to its competitors.

Understanding the 3 Parts of the Balance Sheet

The three parts of a balance sheet follow the accounting formula. Assets are listed first, then liabilities, then equity.

Assets

The assets section of the balance sheet breaks assets into current and all other assets. In general, current assets include cash, cash equivalents, accounts receivable, and assets being sold.

Cash equivalents are assets that a company can quickly turn into cash, such as Treasuries, marketable securities, money market funds, or commercial paper.

Current assets are combined with all other assets to determine a company's total assets.

Note

Generally accepted accounting procedures (GAAP) dictate that companies must list the most liquid assets and short-term liabilities first, which is why there is usually two subsections in assets and liabilities.

Liabilities

The liabilities section is also broken into two subsections—current liabilities and all others. These two subsections are combined to calculate total liabilities. It's common to see companies combine liabilities and stockholders' equity into one section called Liabilities and Shareholder's Equity.

Stockholders' Equity

The equity section generally lists preferred and common stock values, total equity value, and retained earnings.

How to Read a Balance Sheet

While it is required for publicly-owned companies to list all assets, debts, and equity on their balance sheet, the way a company accounts for and records them varies. This can sometimes make it difficult to understand what is listed in each section.

As an investor, it helps not to be concerned about how a company records transactions and defines assets; instead, focus on the information that is provided.

Vertical balance sheets list periods (usually one year) vertically next to each other. This lets investors compare the different periods to help them determine what a company might be doing. For instance, Johnson & Johnson's balance sheet for December 31, 2020, lists $174 billion in assets. In 2019, it recorded $157 billion—they acquired $17 billion in assets over that period.

Note

If you're using formulas to calculate financial ratios, you may see terms in the equations not listed on the balance sheet. This is because the company doesn't use that item, or records them differently. You might have to search their 10-K or annual reports for explanations.

Most notably, cash and cash equivalents decreased over the period. Inventories increased, along with prepaid expenses and receivables. Property, plants, and equipment value increased, along with a significant increase in intangible assets, goodwill, deferred taxes, and other assets.

Johnson & Johnson increased its liabilities to $111 billion, up from $98 billion in 2019. It seems that most of their liability increases have taken the form of long-term debt due in 2025, 2027, the 2030s, 2040s, and beyond.

From this limited and brief analysis, an investor can see that Johnson & Johnson has total current assets of $51 billion and total current liabilities of $42 billion. If current assets are liquid assets, and current liabilities are debts due within one year, the company has more than enough to pay off its short-term debts—even with a reduction in cash and cash equivalents.

This is known as the current ratio, a measurement used by investors to test short-term financial risk—to calculate it, divide current assets by current liabilities. In this case, Johnson & Johnson has a current ratio of 1.2.

Some businesses have higher and lower current ratios, depending on how they are financially structured. Generally speaking, a company with assets and debt should have a current ratio of above 1 to stay afloat.

Other useful ratios derived from the balance sheet include:

• Quick ratio: (cash + cash equivalents + temporary investments + accounts receivable) ÷ current liabilities
• Debt-to-equity ratio: total liabilities / total stockholders' equity
• Working capital ratio: current assets - current liabilities

The Bottom Line

It can be easy to get confused when looking over balance sheets from different companies. It helps to read the corporate reports and the Form 10-K. The 10-K is required to be filed with the SEC and summarizes financial decisions, internal controls, investment strategies, and much more. These insights can give an investor an excellent idea of what is going on inside a company.

The balance sheet is one of three required forms that are important when analyzing a company. It is helpful on its own, but it is hard to fully understand its financial performance without its associated statements and annual reports.

Frequently Asked Questions

How Do You Calculate Net Worth From a Balance Sheet?

Calculating net worth from a balance sheet is straightforward. Subtract the total liabilities from the total assets.

How Do You Calculate a Dividend From a Balance Sheet?

It is not possible to calculate dividends from a balance sheet by itself. If the company does not list dividends, obtain their income statement. The easiest way to find dividends paid is to look at a company's statement of cash flows and find "dividends paid." You can also find the dividends on many finance websites.

What Are Retained Earnings on a Balance Sheet?

Retained earnings are the profits left after all expenses, dividends, distributions, and taxes have been paid.

Which financial statement reports assets liabilities and stockholders equity?

Which statement reports total assets total liabilities?

Which financial statement reports total assets?

Which financial statement reports assets liabilities and stockholders equity quizlet?