Question

"Equity" represents the owners' claims on the assets of the business. Equity is comprised of investments made by the shareholders when the stock was issued to the public plus net income retained in the corporation since its inception.

Answer 1

Equity is the money that indicates liability if a company to its owners. Equity holders are the investors in the company. When a Common stock is issue company receives a par value and the share of asset that has enhanced the value of shares. In other words let us say value of equity is Total assets minus Liabilities except shareholders fund, the amount of Common stock plus retained earnings or any other accumulated funds represents intrinsic value of a share.

Lets take a practical example

Total assets of a company are 2000000

Long term and short term liabilities are 1500000

Common stock are 200000 (number o shares 20000)

Retained earnings is 300000

Now if we see the value of one share is 10 but if we calculate intrinsic value of share then it will be 25 per share.

(Total assets-Liabilities)/number of shares                 (2000000-1500000)/20000 =25

Generally when a share is issued it is issued at a value which is near to a shares intrinsic value.

The statement is true that "Equity" represents the owners' claims on the assets of the business and Equity is comprised of investments made by the shareholders when the stock was issued to the public plus net income retained in the corporation since its inception. The above given example states that equity is comprised of investment made by the shareholders when a share is issued plus net income retained since its inception.