What is the purpose of the statement of stockholders' equity and what does it show?

• A. Shows changes in equity accounts (common stock, retained earnings, additional paid-in capital, treasury stock, dividends) over a period
• B. Shows cash inflows and outflows from financing activities
• C. Shows assets and liabilities at a point in time
• D. Shows revenues and expenses for the period

Answer: (A)

The statement of stockholders’ equity shows how owners’ claim on the company changes over a period. It starts with the beginning balance of equity and then reports the changes during the period—net income increasing retained earnings, dividends reducing retained earnings, issuances of common stock or increases in paid-in capital, treasury stock and other adjustments, and any changes from other comprehensive income. The end result is the ending balance of stockholders’ equity, giving a clear view of how profits, financing decisions, and distribution to shareholders affect equity. This differs from other statements: it isn’t about cash flows from financing activities (that’s the cash flow statement), it isn’t a snapshot of assets and liabilities at a moment in time (that’s the balance sheet), and it isn’t a summary of revenues and expenses (that’s the income statement).