15. Company Accounts

Question 1

What are the two ways that shareholders can obtain shares?

Answer 1

Subscribing for original shares from the company or buying existing shares from other members

Question 2

What are the two ways of financing a business?

Answer 2

Equity (shares) and loans

Question 3

What is paid by the business to shareholders?

Answer 3

Dividends

Question 4

What is paid by the business to loan issuers?

Answer 4

Interest

Question 5

What are ordinary shares?

Answer 5

Shares that carry voting rights but give no automatic rights to dividends

Question 6

What are preference shares?

Answer 6

Shares that attract a fixed dividend, paid in priority to ordinary shareholders, however still there is no automatic right to dividend. (Carry no voting rights)

Question 7

What is the ‘cost of share capital’?

Answer 7

The amount of dividend paid on the shares

Question 8

What is issued share capital?

Answer 8

The share capital actually issued by the company, recorded at the nominal (face) value

Question 9

What is share premium?

Answer 9

The amount over and above the nominal value that shares are issued for - credit to the share premium account

Question 10

What is the market value of a share?

Answer 10

The value that shares are actually issued for (nominal + premium). Shares may be issued for above nominal value but not below.

Question 11

What are redeemable preference shares?

Answer 11

Shares that the company promises to buy back at a set future date

Question 12

How are redeemable preference shares recorded on the SFP?

Answer 12

As a long term liability (think of like a loan, where the dividends are like interest)

Question 13

How are loan notes or bonds recorded on the SFP?

Answer 13

As long term liabilities

Question 14

Who is paid as priority - banks owed interest or shareholders owed dividends?

Answer 14

Loan issuers

Question 15

At what point in the statement of profit or loss is bank interest paid?

Answer 15

Out of pre-tax profits

Question 16

How is interest recorded in the financial statements?

Answer 16

As an expense on the P&L

Question 17

How are reserves recorded in the financial statements?

Answer 17

As equity on the SFP

Question 18

What are retained earnings?

Answer 18

Accumulated profits, after appropriation of dividends

Question 19

What does the quality of being fully distributable mean in regards to retained earnings?

Answer 19

Even if a company makes a loss in one year, it may still pay a dividend out of retained earnings from previous years

Question 20

What is the double entry for clearing profit for the year onto the SFP?

Answer 20

Dr Statement of Profit or Loss

Cr Retained Earnings

Question 21

What is the revaluation surplus reserve?

Answer 21

The equity surplus created when a company revalues its non current assets upwards

Question 22

Is the revaluation surplus distributable?

Answer 22

No - not realisable

Question 23

What is a general reserve?

Answer 23

A reserve created when the company makes a transfer from retained earnings - fully distributable

Question 24

When does the sale or issue of shares appear on the SFP?

Answer 24

When the company issues new shares, not when existing shares are sold (just update register of shareholders)

Question 25

What is the double entry for the issue of shares at a premium?

Answer 25

Dr Cash
Cr Share Capital
Cr Share Premium

Question 26

What can the equity in the share premium account be used for?

Answer 26

Issue of bonus shares, and the transaction costs of issuing shares

Question 27

What is a bonus issue of shares?

Answer 27

An issue of ‘free’ shares, made to reduce the value of shares and increase their marketability

Question 28

What must be the value of bonus issue shares?

Answer 28

Nominal value

Question 29

What is the double entry for issue of bonus shares?

Answer 29

Dr Share Premium

Cr Share Capital

Question 30

What is a rights issue of shares?

Answer 30

Offer to existing shareholders the right to buy more shares for less than the full market price (to raise more finance)

Question 31

What are dividends?

Answer 31

An appropriate of profit - not an expense in the P&L.

Question 32

When are dividends paid?

Answer 32

Out of post tax profits, can be interim (during year) or final (at year end)

Question 33

What does a dividend of 8% mean?

Answer 33

8% of nominal share value to be paid to shareholder

Question 34

Where are dividends paid shown in the financial statements?

Answer 34

In the Statement of Changes in Equity (and SFP)

Question 35

How do we record dividends declared or proposed after year end?

Answer 35

Disclosed in a note

Question 36

What is the double entry for dividend payment?

Answer 36

Dr Retained Earnings

Cr Cash

Question 37

What are the categories within the statement of changes in equity?

Answer 37

Share Capital, Share Premium, Revaluation Surplus, Retained Earnings

Question 38

What items might you see on the statement of changes in equity?

Answer 38

Comprehensive income for the year, dividends paid, issue of share capital

Question 39

What makes up total comprehensive income?

Answer 39

Profit (retained earnings) and revaluation gains

Question 40

What is recorded in the disclosure notes for non current assets?

Answer 40

Changes in cost/valuation for the year and changes in depreciation for the year, resulting in the net carrying amount change for the year, split by NCA type

Question 41

What 3 things should the disclosure notes state about inventories?

Answer 41

1. Method for measuring inventories
2. Total carrying amount for inventories split appropriately
3. Carrying amount of inventories at NRV

Question 42

What is the double entry for the estimated tax bill at year end?

Answer 42

Dr Tax Expense (on the P&L)

Cr Tax Liability (SFP)

Question 43

What is the double entry for paying the tax bill?

Answer 43

Dr Tax Liability
Cr Cash

Plus any entry for clearing the difference between estimated and actual tax bill