12. Company Accounts

Question 1

What is shown in the Capital and Reserves section of a company’s balance sheet?

Answer 1

Capital Employed Section
- Capital: Amount used to start the business
- Reserves: what company ‘owes’ to its shareholders which would be paid to shareholders on winding up

Question 2

Sub Categories within ‘reserves’ on a company’s balance sheet

Answer 2

Revenue Reserves
- Including profit and loss reserve
- Reserves labelled to show why they have been retained (ie. debenture redemption reserve)

Capital Reserves
- One is share premium account

Question 3

Which reserves can dividends be paid from (in the balance sheet)

Answer 3

Revenue Reserves (not capital)

Question 4

What are consolidated accounts? When are they prepared / by who?

Answer 4

1. if a company is in a ‘group’, Parent companies prepare a consolidated profit and loss account and balance sheet showing the finances of the GROUP
2. Each individual company must still prepare their own accounts

Question 5

Statutory Regulation for the accounts of a company

Answer 5

1. Companies must keep adequate accounting records and prepare accounts or the company every financial year (CA 2006)
2. Directors should not approve them unless they give a true and fair view of company (if untrue or misleading, directors are civilly and criminally liable)
3. Companies file accounts with Registrar of Companies and send copy of annual accounts and reports to shareholders, debenture holders and anyone else entitled to receive notice of general meetings

Question 6

Public Companies Final Accounts: aside from filing with registrar of companies and sending to those entitled to receive notice of final meetings - where else must they be put?

Answer 6

Before members in a general meeting

Question 7

Which companies require auditing?

Answer 7

Companies except those which are exempt (like small companies, micro-entities and dormant companies)

Question 8

When can a shareholder require that their company has their accounts audited?

Answer 8

If the shareholder has 10% or more of nominal issued share capital

Question 9

Accounting Principles to ensure compliance with FRS 102 In the UK

Answer 9

The CA 2006 requires companies to prepare either ‘Companies Act Individual Accounts’ or ‘International Accounting Standards Individual Accounts’, which essentially comply with FRS 102 and the IFRS respectively.

• Both require preceding financial year’s figures to be shown alongside figures for current year (enabling comparisons)

Question 10

Significance of the International Financial Reporting Standard: how does its standards differ to the UK format?

Answer 10

• Profit and loss account (income statement) similar to UK format, but sales / turnover is labelled revenue
• Balance sheet: different terminology
  • Non-current assets - fixed assets
  • Non-current liabilities - long-term liabilities
  • Receivables - Debtors
  • Payables - Creditors
  • Inventories - closing stock
  • Loan notes - debentures

Question 11

Annual Reports and Accounts: Who requires them and what are they?

Answer 11

The CA 2006, FRS 102 and IFRS require additional reports and financial statements to be produced, in addition to the balance sheet and profit and loss account. The documents are known collectively as the ‘Reports and Accounts’, and what is required depends on the size and type of company.

• Strategic Report
• Chair’s report
• Director’s report
• Auditor’s report

Question 12

Strategic Report: what is it and who must provide one

Answer 12

This contains a review of the company’s business, designed to enable the performance of the company to be measured and assessed. This report is required under the CA 2006, but small companies are exempt.

Question 13

Chair’s Report: what is it and who must prepare it

Answer 13

A Chair’s Report is often produced by quoted companies, but it is not a strict requirement for any company to prepare one.
- It explains what has happened to the company over the course of the financial year, and cannot be relied upon as an objective assessment of the company’s fortunes because the Chair is likely to present the company in the best light possible.

Question 14

Director’s Report: who must prepare one and what is it

Answer 14

The Directors’ Report contains factual information about the company and a review of the company’s business, as well as confirmation that the auditors (where relevant) have been given all relevant information.

• The requirements of a Directors’ Report are set out in s 416 CA 2006.
• Failure to comply with those requirements is a criminal offence (s 418 CA 2006).
• Small companies do not need to include some of the statutory information.

Question 15

Failure to Comply with the requirements of a Director’s Report: Penalties

Answer 15

Failure to comply with those requirements is a criminal offence (s 418 CA 2006).

Question 16

What is an auditor’s report?

Answer 16

This report is prepared by the company’s auditors, and in it, the auditors are required to state whether, in their opinion, the accounts give a true and fair view of the financial state of the business.