15. Company Accounts Flashcards
What are the two ways that shareholders can obtain shares?
Subscribing for original shares from the company or buying existing shares from other members
What are the two ways of financing a business?
Equity (shares) and loans
What is paid by the business to shareholders?
Dividends
What is paid by the business to loan issuers?
Interest
What are ordinary shares?
Shares that carry voting rights but give no automatic rights to dividends
What are preference shares?
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)
What is the ‘cost of share capital’?
The amount of dividend paid on the shares
What is issued share capital?
The share capital actually issued by the company, recorded at the nominal (face) value
What is share premium?
The amount over and above the nominal value that shares are issued for - credit to the share premium account
What is the market value of a share?
The value that shares are actually issued for (nominal + premium). Shares may be issued for above nominal value but not below.
What are redeemable preference shares?
Shares that the company promises to buy back at a set future date
How are redeemable preference shares recorded on the SFP?
As a long term liability (think of like a loan, where the dividends are like interest)
How are loan notes or bonds recorded on the SFP?
As long term liabilities
Who is paid as priority - banks owed interest or shareholders owed dividends?
Loan issuers
At what point in the statement of profit or loss is bank interest paid?
Out of pre-tax profits
How is interest recorded in the financial statements?
As an expense on the P&L
How are reserves recorded in the financial statements?
As equity on the SFP
What are retained earnings?
Accumulated profits, after appropriation of dividends
What does the quality of being fully distributable mean in regards to retained earnings?
Even if a company makes a loss in one year, it may still pay a dividend out of retained earnings from previous years
What is the double entry for clearing profit for the year onto the SFP?
Dr Statement of Profit or Loss
Cr Retained Earnings
What is the revaluation surplus reserve?
The equity surplus created when a company revalues its non current assets upwards
Is the revaluation surplus distributable?
No - not realisable
What is a general reserve?
A reserve created when the company makes a transfer from retained earnings - fully distributable
When does the sale or issue of shares appear on the SFP?
When the company issues new shares, not when existing shares are sold (just update register of shareholders)
What is the double entry for the issue of shares at a premium?
Dr Cash
Cr Share Capital
Cr Share Premium
What can the equity in the share premium account be used for?
Issue of bonus shares, and the transaction costs of issuing shares
What is a bonus issue of shares?
An issue of ‘free’ shares, made to reduce the value of shares and increase their marketability
What must be the value of bonus issue shares?
Nominal value
What is the double entry for issue of bonus shares?
Dr Share Premium
Cr Share Capital
What is a rights issue of shares?
Offer to existing shareholders the right to buy more shares for less than the full market price (to raise more finance)
What are dividends?
An appropriate of profit - not an expense in the P&L.
When are dividends paid?
Out of post tax profits, can be interim (during year) or final (at year end)
What does a dividend of 8% mean?
8% of nominal share value to be paid to shareholder
Where are dividends paid shown in the financial statements?
In the Statement of Changes in Equity (and SFP)
How do we record dividends declared or proposed after year end?
Disclosed in a note
What is the double entry for dividend payment?
Dr Retained Earnings
Cr Cash
What are the categories within the statement of changes in equity?
Share Capital, Share Premium, Revaluation Surplus, Retained Earnings
What items might you see on the statement of changes in equity?
Comprehensive income for the year, dividends paid, issue of share capital
What makes up total comprehensive income?
Profit (retained earnings) and revaluation gains
What is recorded in the disclosure notes for non current assets?
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
What 3 things should the disclosure notes state about inventories?
- Method for measuring inventories
- Total carrying amount for inventories split appropriately
- Carrying amount of inventories at NRV
What is the double entry for the estimated tax bill at year end?
Dr Tax Expense (on the P&L)
Cr Tax Liability (SFP)
What is the double entry for paying the tax bill?
Dr Tax Liability
Cr Cash
Plus any entry for clearing the difference between estimated and actual tax bill
