1. Limited Companies

Question 1

What what is the aim of financial statements?

Answer 1

• to identify how well the business has performed
• to identify the value of the assts and liabilities
• to understand the cash flow position
• to communicate information to the users of the accounts

Question 2

What are the advantages of trading as a limited company?

Answer 2

• Limited liability status
• Easier to raise finance
• Company continues to operate regardless of the ownership
• Taxed under corporation tax

Question 3

Why are the disadvantages of trading as a limited company?

Answer 3

• Accounts submitted to companies house - anyone can access them
• More regulation to comply with
• Accounts of larger companies must be audited
• Issues of shares highly regulated

Question 4

What financial statements are required for a sole trade or partnership?

Answer 4

Statement of profit or loss

Statement of financial position

Question 5

What financial statements are required for a company?

Answer 5

Statement of profit or loss
Statement of financial position
Statement of changes in equity
Statement of cash flows
Notes to the financial statements

Question 6

What are the nominal value of shares?

Answer 6

The face value of the shares

Number of shares X nominal value

Question 7

What is the market value of shares?

Answer 7

The value at which existing shares can be traded

Question 8

What is the allotted share capital?

Answer 8

The shares that have actually been issued

Question 9

What are the main features of ordinary shares?

Answer 9

• sometimes called equity shares
• can give dividends, at the directors discretion
• shareholders are entities to vote in a general meeting

Question 10

What are the main points of preference shares?

Answer 10

• fixed rate dividend
• dividend must be paid before any dividend to ordinary shareholders
• do not have any voting rights

Question 11

How are dividends treated?

Answer 11

Always as a reduction to retained earnings and are deducted from the retained profit reserve.
Never an expense on the P/L

Question 12

What is the equation for retained earnings?

Answer 12

Retained earnings B/F. x
Current year profit. x
Less: Dividends. (X)

Retained earnings C/F. X

Question 13

Name some ‘other reserves’

Answer 13

• Share Premium account
• Revaluation Surplus
• Capital Redemption Reserve
• General Reserve