Accounting for Different Organisations Flashcards
Week 10
1
Q
What is a Partnership?
A
- 2-20 People on business together, to make a profit
- Similar to Sole Trader- as it is easy to set up
- Have a “Partnership Agreement”; Not necessarily a paper agreement
2
Q
What is included in a Partnership agreement?
A
- Capital contributions
- Profit Sharing Ratio
- Interest on capital before profits
- Interest charged on drawings
- Salaries and wages
- Dissolution of disputes
3
Q
Why would you start a Partnership?
A
- More capital can be raised
- Higher skill levels and expertise
- Responsibility of Management is shared
- Access a bigger network of contacts
4
Q
What is the difference between Partners and Sole Traders?
A
- SOFP shows the Capital Contributions of each partner
- Appropriation Account at the bottom of the Income Statement tells us the share of Profit
- Each Partner has two separate DEBK accounts
- Capital- Each Persons contributions
- Current- Balance of Profits, Drawings, Interest from capital or on drawings and salaries
5
Q
What are some issues with a Partnership?
A
- Profit is shared
- Control is Diluted
- Possibility of disputes
- Unlimited liability- no ring-fencing between business and person
6
Q
What are Limited Companies
A
- ‘Artificial’ Legal Person- separate from the individual
- Capital Divided into shares
- Owners become members/shareholder
7
Q
Why would you start a LLC?
A
- Perpetual Life- LLCs don’t end after someone dies
- Limited Liability- only the invested amount is lost
- Cheap and Easy to set up
- Good for bigger firms
- Substantial capital can be raised
- Delegation of management
8
Q
Explain the process of setting up a LLC
A
- Register with the Registrar of Companies (incorporation)
- Application must state name, type and HQ of the company
- Application to be accompanied by – Memorandum of Association, Articles of Association, Statement of Capital
9
Q
What is a PLC?
A
- Can go Public on the Stock Exchange
- Require minimum capital of £50,000
- Need at least 2 shareholders
- Must hold an AGM
10
Q
What is a Ltd firm?
A
- Cannot offer shares to the public
- Owner/director type companies
- Can have one or more shareholders
11
Q
What are some issues with a Limited Company?
A
- Ltd companies are subject to strict legal control
- Publicity- Lack of Confidentiality, hence you lose the competitive advantage
- Delegation of management to a few can be detrimental
12
Q
What is management and what are the responsibilities?
A
- Management is the running of a company being delegated to directors
- They are responsible for keeping proper books of accounts and providing shareholders with financial statements (STEWARDSHIP)
13
Q
What do Shareholders receive and how can they receive it?
A
- Shareholders receive money as dividends
- Director promises dividends at AGM but must be agreed by shareholders
- Dividends paid out of reserves
14
Q
What are the 2 Types of Reserves?
A
- Revenue Reserves
- Capital Reserves
15
Q
What are Revenue Reserves?
A
- Revenue reserves are created out of revenue profit from normal business operations
- Available to shareholders for dividend payments & help to strengthen position
16
Q
What are Capital Reserves
A
- Capital reserves are created out of capital profit, which is profit on disposals
- These are used to meet capital losses
17
Q
What is the order of Dividends Payments?
A
- Share capital- at par value
- Capital reserves- share premium
- Revenue reserves- retained profits
- Only 3 is available for dividends
18
Q
What is a Strategic Report?
A
- Should provide a company’s shareholders with a holistic and meaningful picture of a company’s business model
- Strategy, risks, development, performance, position and prospects including non-financial information
19
Q
Describe the function of Annual Strategic Reports
A
- Ensures the accountability of the firm
- Takes forms of SOFP, Income Statement, Cash Flow Statement and CSR concerns
- True and Fair view of company affairs; must be open and transparent
- Auditors report- assessment by an accountant to guarantee shareholders
20
Q
What is the Statement of changes in Equity?
A
- It is an account of what has been done with the profits
- Follows an Income Statement for a limited company
- It includes Share Capital, Share Premium, Revaluation Reserve, Translation Reserve and Retained Earning
21
Q
What is the UK Corporate Governance?
A
- Established in 2018
- Applies to all companies who wants to list on the UK Stock Exchange
- Employs a “Comply or Explain” strategy
22
Q
What are the 5 areas of the UK Corporate Governance?
A
- Board Leadership & Company Purpose
- Division of Responsibilities
- Composition, Succession & Evaluation Board of Director
- Audit, Risk and Internal Control
- Remuneration-sharing profits
23
Q
Which Principles of Accounting is the UK Corporate Governance based on?
A
- Accountability
- Transparency
- Probity
24
Q
Why do they employ Corporate Governance?
A
- Businesses need funding from investors to expand and grow
- The have to signal to investors that they are responsible and stable, hence investors will want to invest
- Important to reduce risk, stimulate results, better access to capital and showing good CSR
25
Q
What is the difference between Corporate Governance and Management?
A
- Governance is Board of Directors designed to be accountable & to decide policies
- Management is the day-to-day running of an operation by CEOs or such
26
Q
What are the 6 core Characteristics to committing to CSR?
A
- Understanding the impact on security
- Building capacity & working with others
- Questioning ‘business as usual’ to improve
- Stakeholders relations and working with them
- Strategic view, ensuring that CSR is adhered to
- Harnessing Diversity and Employment Practice
27
Q
What are the differences between Business Risk and Financial Risk?
A
- Business Risk; Industry-specific, usually applies to all, some variation for size an diversity
- Financial Risk; Firm-Specific (due to debt), Financial specific determines risk
28
Q
What are the Sources of Business Finance?
A
- Short-Term (up to 1yr)
- Medium-Term (1-10ish yrs)
- Long-Term (indefinitely)
29
Q
What are the Examples of Short-Term Finance?
A
- Factoring (3rd Parties)
- Invoice Discounting (You chase them up)
- Bank Overdraft
- Trade Credit
30
Q
Explain Factoring in more detail
A
- Financial institution takes over company collection of TR
- Pay 80-85% of invoices in cash upfront
- Other 15-20% comes when TR pays factor
- Fixed fee (2-3% of sales) for TR management service
- % charge for cash advanced to company (interest)
- Frees personnel to run the business, not chase debts
- Good as makes Finances more certain
- Bad as it makes it seem they cannot finance business operation
31
Q
Explain Invoice Discounting in more detail
A
- Similar to factoring, but cheaper
- Costs around 0.2-0.3% of Turnover
- Pay 80-85% of invoices in cash upfront
- Company agrees to pay ID company within 60-90 days regardless of whether TR have paid them
- Company retains responsibility for collecting TR
- Confidential service
32
Q
What are the Examples of Medium-Term Finance?
A
- Loan
- Hire Purchase
- Lease (Operating{rental}/Finance{Long-term})
33
Q
What are the Examples of Long-Term Finance?
A
- Debt (Long-Term Loans)
- Equity (Comes from Shareholders)
34
Q
If a firm liquidates, what is the order in which the repayments are made?
A
- Lenders/TP
- Preference Share (Fixed Dividends, no AMG)
- Ordinary Share (Riskier, but more control)
35
Q
What is Gearing?
A
- The same as Leverage
- The ratio between Debt and Equity
- Increased debt, Increase risk, Increased Gearing
36
Q
What are some Advantages of Gearing?
A
- ‘Gearing Effect’ can be used if borrowing exceeds interest charges. Surplus can go to dividends
- Lower required returns; Interest Vs. Dividends (based on liquidation time-frame)
- Asset Matching- Match Loan ∝ Asset Life
- No dilution of control - Each shareholders shares remain
37
Q
What are some Disadvantages of Gearing?
A
- Financial Risk- Obligation to pay interest and make capital repayments
- Loan Covenants- Protect investors investment- some restrictions are put on
- Shareholder returns- Shareholders may demand higher returns for the generated risk
38
Q
Why does timeframe matter?
A
- Matching: Is it appropriate to match asset to liability?
- Flexibility
- IR
- Refunding and Cost
