[MUSIC] Last time, we talked about the liabilities part of the balance sheet, which is one of the ways the company raises resources. In this video, we will discuss where a company gets the remaining part of these resources from, namely the shareholders' equity. We will discuss in detail the different components of shareholders' equity, namely preferred equity, common equity, treasury stock and retained earnings. We will continue to use Amazon's balance sheet from December 2015 to better understand shareholders' equity. Shareholders' equity also referred to as net worth. It represents the total equity interest of all the companies shareholders. It mainly includes preferred equity, common equity, treasury stock and retained earnings. The most important form of equity is common equity. Shareholders' having common equity have voting rights and hence, other companies owners. They have the right to select the board of directors, which then appoints the different CXOs who in turn manage the day to day operations of the company. At the end of 2015, Amazon had closed to 500 million shares of common stocks outstanding each of the par value of $0.01. The value of this shares is 500 million times 0.01 which equals $5 million. When a company sends common shares to the shareholders, the shares are usually sold at the value higher than its par value. The company receives this premium in the form or cash and hence it must be recorded on the balance sheet. This is recorded as additional paid in capital. It is the premium over the par value that the company receives at the time of the sale of shares to the public. Amazon had additional paid-in capital of $13.39 billion at the end of 2015. Treasury stock represents common stock that a company buys back from common shareholders or were authorized but was never sold to shareholders. This recorded at cost. Amazon had treasury stock worth $1.84 billion. This amount is deducted from the value of common shares outstanding as they do not pay dividends, have no voting rights, and hence should not be included in shares outstanding calculations. the other form of equity is preferred stock. It is the investment in the company by preferred stock holders, they have priority over common stockholders which means that company must pay them dividends before it can pay any dividends to the common stockholders. However, preferred stockholders do not have any voting rights in the company. At the end of 2015, Amazon was authorized to issue 500 million shares of preferred stock but it had not issued any preferred stock. So there is no value recorded against preferred equity on Amazon's balance sheet. The other important component of shareholder's equity on the balance sheet is retained earnings. This is an aggregate of undistributed profits across all years. The manager has discretion as to how much, if any, of the profits a company makes should be distributed to shareholders, both common and preferred as dividends. Any part of the profits that is not paid out as dividends Is added to the balance sheet as a part of retained earnings. Profits are computed on the income statement, which we will look at in greater detail later in the course. Amazon had retained earnings of $2.55 billion at the end of 2015. Amazon shareholder's equity also includes other accumulated comprehensive loss for $0.72 billion. Its annual report states that this represents unrealized gains and losses from investments in cash, cash equivalence and marketable securities. Adding all the different items under share holders equity Amazon's total shares holders equity was $13.3 billion. Add this to its total liabilities of 52.06 billion gives us a total of 65.44 billion which equals its total assets. So Amazon's uses of resources exactly matches its sources of resources. We have talked about the balance sheet in the last few videos. Next time we will start looking at the income statement. [MUSIC]
