Financial statements provide useful accounting information about the financial state of a business at the end of a reporting period and the business's financial performance over the reporting period. A business's financial state, or condition, refers to the amount of money used by the business to purchase various investment and operational assets, and the amount of money obtained from different sources of debt and equity to finance asset purchases. A business's financial performance refers to any change in the business's financial condition over time. Common stock as a form of equity is related to both a business's financial state and its financial performance, and appears in different financial statements.
The set of a business's financial statements consists of four components: balance sheet, income statement, cash flow statement and statement of shareholders' equity. While the balance sheet reveals the financial state of a business, the other three statements record changes in different aspects of a business over a defined period of time. Common stock is part of both the balance sheet and the statement of shareholders' equity. The balance sheet measures the amount of common stock at the end of a reporting period, whereas the statement of shareholders' equity tracks any increase or decrease in common stock over the reporting period.
Video of the Day
Common stock as equity capital is a money source used to finance certain long-term capital needs. A business may issue common stock at any time during an accounting period. A business may also buy back a certain number of common-stock shares at any time during an accounting period. The amount of common-stock issuance and buyback is reported at the end of an accounting period. A business may also reissue and repurchase common stock during subsequent accounting periods, and reports the outstanding issues of common stock at the end of the period and any change during the period.
Common stock is part of the balance sheet under the section of shareholders' equity. A balance sheet is a report on the amount of a business's assets, liabilities and shareholders' equity at the end of a reporting period. Common stock as a form of equity is listed under shareholders' equity within the balance sheet and often subcategorized into capital stock and additional paid-in capital. While capital stock denotes the par value of the common shares issued, additional paid-in capital represents the excess amount paid in by shareholders over the par value. A balance sheet reports the total amount of common stock at the end of a reporting period, but it doesn't show any changes to common stock during the period.
Statement of Shareholders’ Equity
Common stock is also part of the statement of shareholders' equity, which documents any increase and decrease to shareholders' equity during a reporting period, including common stock. To record any change to common stock, a statement of shareholders' equity lists both the amount of common stock at the beginning of the period -- the same amount at the end of the last period -- and the flows into and out of the common-stock account during the period. The statement then adds the changes to the beginning amount of the common stock to arrive at the end-period amount, which should conform to the amount of common stock reported in the balance sheet.