11 - Company financial statements Flashcards
What is the difference between the nominal value of a share and the issue price?
A company’s initial capital is divided into shares which have a nominal value.
The issue price of a share is the amount that the shareholders actually paid for the share and this often exceeds the par value.
What is share capital?
Number of shares issued x shares nominal value
What are equity (ordinary) shares?
No entitlement to dividends
Carry voting rights
They are treated as capital in the equity section of the SFP:
Issued share capital - 1000 x £1 = £1000
Called up share capital (included in SOFP) - 1000 x 75p = £750
Paid share capital - 900 x £1 = £900
Dividends expressed as p per share or % of nominal value
What are preference shares?
You have a set entitlement to dividend, usually expressed as % of nominal value.
Usually no voting rights. For example, 2% stays 2% every year of the share value.
Redeemable are treated as a non current liability on the SOFP. Think of them as a loan. It is treated as an interest expense (finance charge) in the SPL.
Irredeemable are treated as capital in the equity section of the SOFP. Dividend charged to retained earnings.
Accounting for dividends
Equity or irredeemable preference shares:
Dividend paid during the period:
Dr Retained earnings Cr Cash
Dividend declared before the period end:
Dr retained earnings Cr Accruals
Redeemable preference shares (loan):
Dividend paid during the period:
Dr Finance charge Cr Cash
Dividend declared before the period end:
Dr Finance charge Cr Accruals
Accounting for share issues
Shares are often issued in excess of their par value. The difference is taken to a share premium account (Cr balance in the equity section of SFP).
Dr Cash £ issue proceeds
Cr Share capital £ nominal value of shares issued
Cr Share premium £ the balance
What is the retained earnings figure?
Represents accumulated profits and losses over time.
Brought forward + profit - dividend = Carry forwards
What are rights issues?
They are made to existing shareholders in proportion to their shareholdings. It is a means for a company to raise new cash.
Company with 20m shares in issue makes a 1 for 4 rights issue, which would mean issuing another 5 million shares.
Double entry for bonus issues
Dr Share premium or retained earnings
Cr Share capital
You increase share capital and decrease share premium.
Accounting for non current liabilities
On issue of debt:
Dr Cash Cr Non current liabilities
On repayment of debt:
Dr Non current liabilities Cr Cash
Interest paid:
Dr interest expense Cr Cash
Outstanding interest owed:
Dr interest expense Cr accruals
What do you do if you repay loans in shares
Dr Loan 20k
Cr share capital 5k
Cr share premium 15k
What are provisions?
Provision are liabilities of uncertain timing or amount
Accounting for provisions:
Create provision based on best estimate of amounts payable:
Dr Expense Cr Provision
Incur expenditure: (Note that if the expenditure is greater than the amount provided, the excess will be charged to the profit or loss account)
Dr expense Cr cash
Remove excess provision: (If the expenditure is less than the amount provided, then the unused provision is released to the profit or loss)
Dr Provision - to clear and Cr Expense
What do increases and decreases in provision look like?
Increase:
Dr Expense
Cr Provision
Decrease:
Dr Provision
Cr Expense
Accounting for tax
When the tax charge is estimated for a period:
Dr tax expense Cr tax payable (current liability)
When a payment is made for tax:
Dr Tax payable (current liability)
Cr Cash
If you end up with a remaining credit on tax payable you over estimated tax. So you will reduce tax expense the next year
If you end up with a remaining debit on tax payable you underestimated tax and so you will increase tax expense in the following year
