14: Company Financial Statements

Question 1

Difference between private and public companies?

Answer 1

Private - Ltd - shares not available to general public

Public - plc - shares available to the general public. Often traded on the stock market (ie. listed)

Question 2

Difference in entities between LLCs and Sole Traders?

Answer 2

A limited company is a seperate legal entity and is distinct from its owners

A sole trade is legally not separate from their business, even though they are treated as such for accounting purposes

Question 3

Difference in liability between LLC and sole trader?

Answer 3

A company is fully liable for its own debts. If the company goes into liquidation, the shareholders are liable for amounts that they have not yet paid for own shares, but no more. Limited liability.

A sole trader is personally liable for outstanding debts of the business

Question 4

Difference in ownership and management between LLCs and sole traders?

Answer 4

Company is owned by shareholders.
Managers are directors, appointed by shareholders.
Directors may or may not be shareholders.
Most shareholders do not play a part in the day-to-day running of the company.

Sole trader is generally the owner and manager of their business.

Question 5

Differences in formalities between LLCs and sole traders?

Answer 5

For LLCs, formalities require public availability of financial statements and an annual audit by qualified auditors. Varies by country.

No formalities exist for sole traders.

Question 6

What is revenue?

Answer 6

Income arising from the ordinary activities of an entity.

Recognised when the entity has transferred the promised goods or services to the customer.

Detailed in the IFRS Revenue from Contracts with Customers

Question 7

What are the 5 steps of revenue?

Answer 7

1. Identify contract with customer
2. Identify separate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when a performance obligation is satisfied

Question 8

What are the three types of expenses?

Answer 8

Cost of Sales
Distrubution
Administration

Some expenses can be split across all three categories

Question 9

What are Cost of Sales expenses and what do they include?

Answer 9

Represent the cost of the goods/service being sold.

Includes:
- purchases plus carriage inwards, adjusted for opening and closing inventory, and substantial losses on inventory

• in a manufacturing company, wages of production staff, and maintenance and depreciation of non-current assets, plus losses ok their disposal
• even more for service companies

Question 10

What are distribution expenses and what do they include?

Answer 10

Expenses relating to selling or delivering products or services

Includes:
- wages of marketing and distribution staff
- sales commission
- distribution expenses such as vehicle running costs and carriage outwards
- depreciation of motor vehicles used for distribution, and marketing costs such as advertising and promotion, and any loss on disposal
- dep of other non current assets used by distributions ops
- the cost of advertising and selling activities

Question 11

What are administrative expenses and what do they include?

Answer 11

All expenses not classified within CoS or distribution

Includes:
- wages of admin staff
- dep of non-current assets used by non-production and non-distribution operations
- amortisation of intangible assets
- expense of substantial loss of inventory
- IDE
- impairment loss

Question 12

What is carriage, inwards, outwards

Answer 12

Carriage - delivery costs
Inwards - purchase delivery costs
Outwards - sales delivery costs

Question 13

What are ordinary shares?

Answer 13

They own share capital and reserves of the company. Pay for these shares

Voting rights are attached

May receive a dividend of profits, which can vary

Expressed as pence per share

Preference share dividends get given first!

Question 14

What are preference shares?

Answer 14

Shareholders own the preference share capital of the company

Do not carry voting rights

Receive a fixed dividend calculated as a % of the nominal value

Paid out in priority to ordinary dividends

Two kinds:
- redeemable preference shares. Repayable by the company. Classified as a debt (current liability) in the SFP, and as finance costs in the P&L.
- irredeemable preference shares. Can’t be bought back by the company. They are equity, and paid out of retained earnings.

Question 15

What are the three share capital values?

Answer 15

Nominal or par value (actual worth. Ordinary shares generally issued at this)

Issue price (how much the share is actually issued at. Normally more than nominal)

Market value (fluctuates depending on success of company. Does not feature in financial statements)

Question 16

The double entry to record a share issue?

Answer 16

Dr Cash = Issue price x no. of shares

Cr Share Capital = nominal value x no. of shares

Cr = Share Premium = excess over nominal value x no. of shares

Both capital and premium are on the SFP

Question 17

What is a Rights Issue?

Answer 17

The offer of new shares to existing shareholders IN PROPORTION to their existing shareholding

Accounted for in the same way as a normal share issue

Question 18

What is a Bonus Issue?

Answer 18

Bonus (or capitalisation or scrip) issues are new shares to existing shareholders in proportion to their existing shareholding. No cash is exchanged - free!

Funded from reserves. Take from share premium first, then retained earnings.

Dr Share Premium (or other reserve if that runs out)
Cr Share Capital

Question 19

What are the four share capital terms?

Answer 19

Authorised share capital: the nominal value of the maximum number of shares that a company can have in issue at any time

Issued share capital: the nominal value of the shares that that actually been issued to shareholders. Used in calc of dividends.

Called up share capital: the amount of the nominal value of issued share capital that has been issued from shareholders. Shows on SFP.

Paid up: the amount of the nominal value of the called up that has been paid by the shareholders.

Differences between called up and paid up are a receivable.

Question 20

What 5 things make up equity on the SPL?

Answer 20

Share capital: ordinary shares
Share capital: irredeemable preference shares
Share premium
Retained earnings
General reserve (extension of retained earnings. Company may choose to transfer some of their retained earnings to this)

Question 21

What are Retained Earnings and how is the balance calculated?

Answer 21

A reserve, including all the retained profits of the company up to that SFP

Retained earnings b/f
Net profit (bottom of P&L)
(Dividends)

= Retained earnings c/f

Question 22

Where are the two places that dividends go in the statements?

Answer 22

Dividends from ordinary shares and irredeemable preference shares
= retained earnings on SFP

Dividends from redeemable preference shares
= deduced from profits in the P&L as finance costs

Question 23

What is a statement of changes in equity and what’s in it?

Answer 23

Shows how the balances making up equity in the SFP have changed over the course of the year

Rows:

Balance start of period

Profit/(loss) for the year
Issue of share capital
Transfer to general reserve
(Dividends paid)

Balance end of year

Columns:

Share capital
Share premium
General reserve
Retained earnings
Total

Question 24

How do long term liabilities work in statements? And what are they?

Answer 24

Loan notes = someone giving (loaning) money to the organisation. Org needs to pay interest annually. May be called bonds or debentures.

To record the issue of a loan note:
Dr Cash
Cr Non-current liabilities (SFP)

To record the annual interest:
Dr Finance Cost (paying of interest; expense in SPL)
Cr Cash/accrual

Question 25

What are provisions? What are some examples? And under what conditions is one recognised?

Answer 25

A provision is a liability to a third party where either the amount or the timing of the payment is not yet certain.

Ie. Warranty claims, refunds for returned goods, litigations.

Judgement is used to determine the best estimate of the provision

To recognise a provision, the liability needs:
- to represent a present obligation
- to be probable (more than 50% likely) that the expenditure will be incurred

Question 26

How do you account for provisions?

Answer 26

To record a provision:

Dr Relevant Expense Account
Cr Provision (liability on SFP)

When the expenditure is incurred:

Dr Provision (SFP)
Cr Cash

If the provision is too high or low, any difference is taken to the P&L as either an expense or income

• expense if expenditure exceeds provision
• income if expenditure is less than provision

Question 27

What are the entries for paying tax (assuming correct estimates)?

Answer 27

At the year end:
- a company calculates net profit
- it estimates its tax liability
- Dr Tax Expense
- Cr Tax Payable (current liability)

During the next year:
- the company submits a tax return with the actual tax liability
Dr Tax Payable
Cr Cash

Question 28

What accounts do you enter if you’ve under or over provided on tax?

Answer 28

Underpaid:
Dr Tax Expense
Cr Tax Payable

Over paid:
Cr Tax Expense
Dr Tax Payable

Question 29

What are the steps to doing a tax ledger for a year end?

Answer 29

1. Bring in the opening balance on the tax payable ledger account
2. Record cash paid to HMRC
3. Usually different to estimate; under/over provision. Transfer the under/over provision as appropriate
4. Record this year’s tax estimate in payables and expense
5. Close off the ledger accounts to get the expenses and payables

In short, the P&L charge is:
Tax liability for this year
Under/(over) provision in the prior year
= total

Question 30

How to deal with land as an asset?

Answer 30

Take this amount off the asset carrying value at the start, and add it back on at the very end

Question 31

What’s the double entry to get rid or provisions, and how best to do this?

Answer 31

Dr Provisions (get rid of all of it, like suspense accounts)
Cr Cash (the cash that left)
Dr/Cr P&L as appropriate!

Best to write this out in T accounts

Question 32

What is an accrual in terms of loans and dividends?

Answer 32

If there are any outstanding amounts of loans or dividends that are yet to be paid for this year, that would fall under accruals

Question 33

What tax liabilities need to go in the SPL and the SFP

Answer 33

SPL: the under/over provision for the previous year PLUS estimated liability for next year

SFP: just the estimated liability for next year. Leave out any under/over provision

Question 34

Best way to approach shares questions?

Answer 34

Make T accounts whenever possible