Understanding Common Stockholders' Equity: Definition and Importance
Definition & Meaning
Common stockholders' equity refers to the total value of a company's common stock and related financial components. This includes:
- Common stock
- Related surplus
- Undivided profits
- Disclosed capital reserves that represent a segregation of undivided profits
- Foreign currency translation adjustments
From this total, you subtract any net unrealized holding losses on available-for-sale equity securities that have readily determinable fair values. This definition is important for understanding a company's financial health and is often used in financial reporting and analysis.
Legal Use & context
Common stockholders' equity is primarily used in the context of corporate finance and accounting. It plays a crucial role in:
- Determining a company's net worth
- Assessing financial stability and investment potential
- Calculating financial ratios, such as return on equity
This term is relevant in various legal areas, particularly in corporate law and securities regulation. Users can manage related forms or procedures, such as stock issuance or financial disclosures, with the help of legal templates from US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A company issues 1,000 shares of common stock at $10 each, resulting in common stock worth $10,000. If they have $5,000 in undistributed profits and $1,000 in capital reserves, their common stockholders' equity would be $14,000, minus any unrealized losses.
Example 2: A corporation with $50,000 in common stock, $20,000 in surplus, and $10,000 in undistributed profits, with no unrealized losses, would report common stockholders' equity of $80,000.
Relevant laws & statutes
Common stockholders' equity is governed under various financial regulations, including:
- 12 CFR 325.2 - Capital Maintenance Regulations
- Generally Accepted Accounting Principles (GAAP)