Net income is a company’s profit that it generates during an accounting period. The amount of net income increases a company’s stockholders’ equity, which is the value of a company’s assets minus its liabilities. A company reports the changes to its stockholders’ equity balance on its statement of stockholders’ equity. You can use the information from this statement to determine how much of an increase in stockholders’ equity came from net income. A company that generates higher net income will grow its stockholders’ equity and increase value for stockholders. Chances are, your stockholders will want to know this information on an ongoing basis to evaluate stock performance.
In order to calculate the net income following changes in stockholder equity, simply subtract the initial equity amount from the current equity. This result could be positive or negative depending on activity.
Where to Find the Information
You should be able to find your company’s most recent statement of stockholders’ equity by looking in your company’s 10-Q quarterly report or 10-K annual report. You can obtain these reports from the investor relations section of the company’s website or from the U.S. Securities and Exchange Commission’s EDGAR database.
Calculate the Increase or Decrease
Once you have the information in front of you, you can begin making the calculations. Find the amount of beginning stockholders’ equity and the amount of ending stockholders’ equity on the statement. For example, assume the statement shows $200,000 in beginning stockholders’ equity and $250,000 in ending stockholders’ equity. Subtract the amount of beginning stockholders’ equity from the ending stockholders’ equity to calculate the increase (or decrease). Continuing the above example, subtract $200,000 from $250,000, which equals a $50,000 increase in stockholders’ equity.
Determine the Increase in Equity
Now you'll need to determine the company's profit for the accounting period in question. First, find the dollar amounts of shares issued, treasury stock purchased and cash dividends paid. The statement shows the amounts of treasury stock purchased and dividends paid in parentheses because they decrease stockholders’ equity. Assume the company received $10,000 from issuing additional shares, purchased $5,000 of treasury stock and paid $8,000 in cash dividends. Subtract the amount of money from issuing additional shares from the increase in stockholders’ equity. Then add the amount of treasury stock purchased and the amount of dividends paid to calculate net income. In this example, subtract $10,000 from $50,000 to get $40,000. Then add $5,000, $8,000 and $40,000 together to get $53,000 in net income. This means the company generated $53,000 in profit during the accounting period, which contributed $53,000 toward the increase in stockholders’ equity.
- AccountingTools; Net Income; Steven Bragg
- AccountingCoach; Introduction to Stockholders' Equity; Harold Averkamp
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