Accounting for Business 1 Flashcards
what are the 3 different types of business entities
sole traders
partnerships
limited companies
what are the to types of limited companies
private limited
public limited
private limited companies are notated by
Ltd
public limited companies are notated by
PLC
Features of a soletrader
one business owner who take total responsibility for the failure or success of their business
examples of sole traders
taxi drivers
sports coaches
barristers
hairdresers
is there a limit on liabilities for sole traders
no
what is a partnership
two or more individuals running a business together
in partnerships do all partners take an equal part in running the business
yes
do partnerships have limited liabilities
no
examples of partnerships
bricklayer and plasterer
accounting firm
what does it mean to say that a limited company has its own legal identity
it is regarded as separate to the people that own and manage the company
it has its own distinct name, in which it can enter into contacts and be sued
how can a limited liability company be formed
pay a registration fee and register to the Registrar of Companies
cash used to pay for shares in a company change the sofp how
increase cash in the company
increase share capital
what is capital introduced
this is how sole traders and partnerships put their own money into their business
to buy shares means you buy
part ownership of that compan
what is share capital
cash financed by selling shares
what is the perpetual life of most sole traders and partnerships
usually dies with owners
what is the perpetual life of limited companies
shares are passes onto beneficiaries and directors are always assigned.
The business is quite separate from the people who own it so it has a much longer life
can private limited companies sell shares to the public
no
can public limited companies sell shares to the public
yes
what does LSE stand for
london stock exchange
what does NYSE stand for
new york stock exchange
what is a negative effect of being in a public limited liability company
stock exchange rules
corporate governance codes to improve ethics and accountability
more complex financial reporting regime
under pressure to do well and extreme scrutiny by journalists and financial analysts
example of public limited companies
shell
aviva
kerry group
what does AGM stand for
annual general meeting
what happens at an AGM
directors present annual report to shareholders
shareholders come together an appoint a new director
What do voting rights at annual AGMs depend on
the number of shares held
one share = one vote
what is the role of an auditor in a limited liability company
appointed by shareholders and are not involved in the day to day running of the company
They verify the annual report
what is the role of an auditor in a limited liability company
appointed by shareholders and are not involved in the day to day running of the company
They verify the annual report
What is the role of a director in a limited liability company
run the day to day operations
What is the function of the stock exchange
to enable companies to raise new finances
to enable investors to sell their securities
what does EGM stand for
extraordinary general meeting
do sole traders and partnerships have to get their accounts audited or publish them publically
why do these companies prepare annual reports
no
theses companies only prepare annual reports to determine tax on profits and present to banks to apply for loans
What would happen if financial statements weren’t regulated by auditors
directors could provide shareholders with false or misleading statements about the company’s financial situation which may lead users to make poor economic decisions
How is finance introduced into sole traders and partnerships
capital introduced
(start up capital to buy non current assets eg machinery amd meet the day to day expenses before revenue starts to flow in from sales)
What three things make up equity
share capital
share premium
retained earnings
the potential rewards available to shareholders reflect
the risk that they are willing to take
what are ordinary shares
the primary shares in a company
may only receive from profits once all of the company’s other claims have been settled
what are the advanatges of having ordinary shares
potential for very high dividends
potential for value of shares to rise many times over
carries votes in the compnay meetings
what are the limitations of owning ordinary shares in a company
very high risk
may receive no dividends at all
may lose their entire value in a liquidation
what are preference shares
shares that guarantee when dividends are paid, these shareholders will receive theirs first before any dividends are paid to ordinary share holders
what is a negative of being a preference shareholder
THey have a fixed dividend rate
this means that even if profits are higher, they can only receive a maximum amount of dividends
which means that an ordinary share holder could receive more than a preference share holder at times
on winding up or liquidation, how do preference shareholders get preference
once all creditors have been paid, preference shareholders receive their capital back before ordinary share holders
what are the restrictions on preference shareholders
fixed dividend rate
no right to vote in general meetings
who decides on the nominal (par value) of shares
the owners
does the par value of a share need to be permanet
no
why might splitting and consolidating of shares be used
to make shares more marketable
what is splitting shares
eg halving the value of shares
issuing each shareholder twice as many shares with half the original nominal value
what is consolidating of share
eg doubling the price of shares
to increase the price of shares
consolidating
to decrease the price of shares
splitting
what are reserves
Reserves are profits and gains that a company has made and which still form part of the shareholders’ equity.
revenue reserves are also known as
reatined earnings
what are revenue reserves
the company’s trading profits as well as gains on the disposal of non-current assets.
what are capital reserves
earnings made from issuing shares at above their nominal value
revaluing (upwards) non current assets
what is share premium
any amount over and above the par value of the shares issued
when are bonus issues issued
when there is a large surplus on retained earnings not yet distributes to shareholders as dividends
what are bonus earnings
when retained earnings are capitalised by turning distrubtable earnings into non distributable share capital
why might a company issue bonus issues
to save profits
what does a 2 for 5 bonus issue mean
for every 5 shares an existing shareholder has, 2 are given free
what are rights issues
new shares are issued to raise cash
these shares are issued to the existing shareholders
why are rights issues in place
to prevent the dilution of existing shareholders’ interests in a company’s share capital
at what price are rights issues sold at
discount to the market price
why are rights issues sold at a discount to the market price
to encourage existing shareholders to take up their rights and subscribe more cash
is issuing shares at a discount (below par value) legal
no
what are dividends
distribution of profits to shareholders
are dividends an expense
no
is there a legal obligation to pay dividends
no
where are dividends deducted from
directly from retained earnings in SOFP
if a company has made a loss can they pay dividends
no
example of a short term finance option for a business
bank overdraft
can a bank demand for overdrafts to be repaid on demand
yes
how might a business finance itself in the medium to long term
bank loans
What is the function of the stock exhange
to enable companies to raise new finances
to enable investors to sell their securities
what are limited liability companies
once shareholders have paid what they agreed to pay inshares, and the companies creditors are satisfied, shareholders have no further liabilities for the debts of their company
The liability of the shareholders is restrcited to the amount they have subscribed to in shares
what is markup
Markup is the difference between a product’s selling price and cost as a percentage of the
cost.
