What is the statement of changes in equity, and how can I use the statement of changes
in equity to better understand the balance sheet?
Here’s the fiscal year end consolidated balance sheet of Walmart of 2019.
Assets on the left, liabilities and equity on the right.
Walmart’s fiscal year runs from February through January, hence the balance sheet date
of January 31st.
The balance sheet is an overview what a company owns and what a company owes at a point in
time, and one of its key components is equity: the book value of the shareholder capital.
Here’s the balance sheet of 2020.
You can compare the amount of equity of last year’s balance sheet to that of this year’s
balance sheet.
If you want to know the details of how equity developed from one balance sheet to the next,
then the consolidated statement of shareholders’ equity will help you!
It provides an overview of the changes in equity.
Looking at a total change in equity of $1.9 billion compared to a total equity balance
of around $80 billion, does not seem like an overly exciting thing to do.
However, within that net change in equity of $1.9 billion are several very large line
items that move equity in different directions.
These are worthwhile to review: consolidated net income made equity go up by $15.2 billion,
while cash dividends made equity go down by $6 billion and share buybacks made equity
go down by $5.6 billion.
Let’s review each of the line items of the statement of changes in equity.
We will start with a high level overview of total equity, and later on will take a look
at the more detailed version of the statement of changes in equity.
The first line item, the effect on equity of the adoption of new accounting standards,
is a “technical” one: new accounting standards may affect the historical balance of equity,
and a new “starting point” for the equity balance may have to be defined.
Next is the consolidated net income.
At $15.2 billion for Walmart, this is a line item that significantly increases equity.
The $15.2 billion of consolidated net income is taken from the income statement:
revenue minus expenses.
The third line item on the statement of changes in equity is other comprehensive income, or
more specifically other comprehensive loss as it is a negative number (between brackets)
that decreases equity.
The details of how other comprehensive income or loss is calculated is found in the statement
of comprehensive income.
OCI, other comprehensive income, is the total of unrealized gains and losses that are excluded
from net income on the income statement, but do have an effect on balance sheet amounts
including the equity account.
In this specific case for Walmart,
most of the OCI for the year is driven by pension liabilities.
Next is cash dividends: payments made by a corporation to its shareholders, usually as
a distribution of profits.
$6 billion for Walmart in this fiscal year, which ties one-to-one to the amount of dividends
paid in the cash flow statement.
A negative number in the statement of changes in equity, as dividend payments decrease equity
on the balance sheet, and a negative number in the cash flow statement
as this is a cash outflow.
At Walmart, dividends get declared and paid in the same fiscal year,
hence the one-to-one relationship.
A decrease in equity, and a cash outflow, that is nearly as large as the dividends paid
is the repurchase of common stock.
Around $5.7 billion for Walmart in this fiscal year, with the slight difference between the
numbers of the two financial statements most likely explained because of a difference in
effective date of shares bought back
and the cash settlement date of the payment for the shares.
Walmart declares and pays dividends not only to regular shareholders, but also to the holders
of noncontrolling interest in the subsidiaries where Walmart does not hold 100% of the equity.
The remaining amount of changes in equity is labeled as “Other”.
Here’s the full view of the statement of changes in equity.
Same reconciliation from $79.6 billion (last year’s equity balance) to $81.6 billion
(this year’s equity balance), but a lot more detail as various columns are introduced:
common stock, capital in excess of par value, retained earnings, other comprehensive income
or loss, the subtotal of Walmart shareholders’ equity, noncontrolling interest, and the total
equity on the right.
Of these columns, most of the action (both in terms of the number of line items as well
as the absolute dollar value) is in the retained earnings column.
The statement of changes in equity: a useful overview that helps you understand the details
of how equity developed from one balance sheet to the next.
It shows the changes in profit, dividends, share buybacks,
and other items that affect equity.
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