Owners get what is left
Morrow Bikes holds $30,000 of cash, parts and equipment. The bank is owed $7,800. Nobody signs a contract saying what the owner gets; the owner gets the rest, 30,000 − 7,800 = $22,200, and that number moves every time either side does.
Equity is the residual claim: assets minus every other claim. Lenders come first, with fixed promises. Preferred shareholders, if there are any, come next, with priority rights that can earn them different accounting depending on their terms. Common shareholders stand last in line and own whatever is left. This is a Snapshot (balance sheet) question, and the reflex is whose claim?
Equity has two main sources. Contributed capital is what the owners paid in. Retained earnings is profit the business kept rather than paid out. Shares the company has bought back sit as treasury stock and reduce equity.
Raise it, earn it, pay some out
Scale Morrow up into a company. It issues 1 million shares at $10 and raises 1,000,000 × 10 = $10m of cash. Issuing shares is funding, not revenue: cash goes up, contributed capital goes up, and the Scorecard (income statement) does not move. It then earns $2m and pays a $0.5m dividend. Retained earnings rise by 2 − 0.5 = $1.5m, assuming nothing else moved. A dividend is a distribution to owners, not an operating expense.
Four share counts that are not the same number
Market capitalization is price per share times shares outstanding, and "outstanding" is a specific count. A company can authorize far more shares than it has issued, and can repurchase shares that then stop participating like outstanding common shares. Authorized, issued, outstanding and weighted-average are four different counts. The last one, weighted-average, is the denominator the next lesson runs on.
A company raises $10m by issuing shares and later pays a $0.5m dividend. Which statement is right?