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About this lesson
How to calculate the Equity Control Account and input into the Financial Statements.
Exercise files
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Equity Part 2.xlsm130.7 KB Equity Part 2 - Solution.xlsm
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Quick reference
Equity Part 2
Understand Equity.
When to use
When constructing a basic Financial Model.
Instructions
- This section looks at calculating the Equity Control Account
- The Opening Equity is taken from the previous period’s Closing Equity
- The Equity Issuances and Buybacks are taken from Rows 369 & 370
- The Closing Equity is the sum of the rows above
- Once the Control Account has been calculated it can be transferred into the Financial Statements:
- 00:05 Let's continue with equity than.
- 00:07 We're now in the cash flow statement and
- 00:09 we've done most of the case flow statement.
- 00:12 What we've got left to do is the equity issuance, buybacks and dividends paid.
- 00:17 So without further ado, let's get modeling.
- 00:21 Now before we consider equity, I want to go somewhere else first of all.
- 00:25 I want to go to the Income Statement and show you just one last look here that you
- 00:30 don't have to take the slide's word for it.
- 00:33 The Income Statement is now finished.
- 00:35 We are, in fact, okay to move on to the Cash Flow Statement.
- 00:39 And not cash flow statement, all the net operating cash flow is done,
- 00:43 all the investing cash flow statement is done and
- 00:47 in financing still got three lines to go.
- 00:51 We gotta go ordinary equity issuance's, ordinary equity buybacks and
- 00:55 dividends paid.
- 00:56 That is return off equity or return off capital, and
- 01:00 return on equity or return on capital.
- 01:03 That's what we're got to do.
- 01:04 Remember we always do the return of capital first because
- 01:08 it may be that has something to do with how the actual return on is calculated.
- 01:13 Now in this case equity issuances and
- 01:15 buybacks on the Assumption sheet, are just actually typed in numbers.
- 01:19 And that is often how it is with issuance's and buybacks.
- 01:21 It's a case of it takes so long to actually get the financing, you can't just
- 01:25 draw down more equity when you're running short, this is what's debts for instead.
- 01:30 And buy backs can be difficult too.
- 01:33 The dividend as well often has nothing to do with the issuance's and buybacks but
- 01:38 it's actually more to do with the number of shares which isn't always captured
- 01:41 in a financial model.
- 01:41 And is often computed instead on a dividend payout ratio but
- 01:45 more on that next time.
- 01:46 Let's look at the return of equity, first of all.
- 01:49 Let's put that Calculation through on this first session.
- 01:53 So I've brought in the issuances and buybacks.
- 01:55 I've put in here the closing equity from the opening balance sheet.
- 02:01 So the opening equity is the previous period's balance as always.
- 02:06 Are you bored of this yet?
- 02:07 And this is going to sum those rows there, so copy.
- 02:10 So far, so good.
- 02:17 The equity issuance's, this is just like the debt that we did before isn't it?
- 02:20 Equals that and that equals minus that.
- 02:23 Done.
- 02:24 Copy across.
- 02:27 Just got to make sure it's all styled as a number so we got the brackets.
- 02:31 This is why we should always remember about the styling.
- 02:35 We've done our first control account.
- 02:36 We've done the return of equity control account.
- 02:39 And that's all we'll look at this time out.
- 02:41 So how many lines are there?
- 02:42 There's four.
- 02:43 Four minus one, three.
- 02:45 That's how many calculations we've got to put through our financial statements to
- 02:48 get it to balance.
- 02:49 And look, nothing more to do with the income statement.
- 02:52 The drawdowns and repayments, called issuance's and buybacks when it's
- 02:56 equity goes through the cash flow statement, the financing section.
- 02:59 And the closing equity balance is the balance sheet.
- 03:02 Income statement's finished,
- 03:03 this is why we're doing it in the order we're doing it in.
- 03:06 Hopefully it's all starting to come together.
- 03:07 Hopefully you can see it's making sense.
- 03:10 All right, let's go and put these through in the Cash Flow Statement then.
- 03:14 So equals back to the Calculation sheet.
- 03:17 Put that number in first, then we'll copy that across
- 03:23 and we'll also copy it down and copy that across.
- 03:26 That's our drawdowns and repayments called issuance's and
- 03:29 buybacks in the correct vernacular.
- 03:32 And we've got a balance sheet not balancing.
- 03:35 But if we now go to our Balance Sheet and
- 03:37 put in our ordinary equity, the top of the equity section here.
- 03:41 Equals, go to our Calculation sheet, put this in, copy that across.
- 03:48 It balances.
- 03:50 We've done the first two equity control accounts, return of equity.
- 03:55 Next time out, we're going to do return on equity.
- 03:57 And we're finally gonna get rid of that dividends declared work in progress,
- 04:01 which we had right at the beginning.
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