BL - 5 - Financials Flashcards
What is equity finance?
It is the issue of new shares in exchange for consideration received by a company.
What is another term for equity finance?
Share finance
What is the basic formula for the profit and loss account?
Income less expenses gives net profit.
What two types of financing exist?
(a) Equity/Share finance
(b) Debt/Loan finance
What is debt finance?
Debt finance involves borrowing money in order to financing a business
What is another term for debt finance?
loan finance
What is a share issue?
It is the process whereby new shares are allotted in exchange for consideration received by the company
What is capital?
It is the sum invested in the business by the owner(s).
Which directors have the authority to issue further shares of the same class by board resolution?
Directors of companies which:
- have model articles
- one class of shares before and after issue
If directors cannot issue shares by board resolution, who can and how?
The members by ordinary resolution or by provision in the company’s articles.
When is a share issue governed by the memorandum of association?
When the company is incorporated prior to 1 October 2009
What are prepayments?
Payments that the business has made in advance, e.g. on account of a service.
How can shares be issued for companies incorporated from 1 October 2009?
This depends on the articles. There may be restrictions that require a special resolution
What must the authority to issue new shares state?
- the maximum number of shares directors are allowed to issue
- the date when the authority will expire
If an ordinary resolution is passed to issue shares, what happens to this ordinary resolution?
It must - exceptionally - be filed with the Companies House.
What are accruals?
Payments the business will make in arrear, for services used in the financial year, but but yet paid (opposite of prepayment)
What is a pre-emption right?
When new shares are issued, they must first be offered tot he existing members, on the same or more favourable terms, in proportion to their shareholding
For what period does the pre-emption right exist?
For 14 days
Is the statutory pre-emption right absolute?
No, it can be:
- varied/removed in articles
- disapplied by special resolution
- formally waived in relation to a specific issue
In principle, the pre-emption right only applies when…
… the new shares are issued for cash.
Shares may be issued … paid or … paid
fully | partly
Can shares be issued at a premium?
Yes, that is usually the case.
What is work in progress?
It is for services that have not been billed in the current financial year.
Included as income in the profit and loss account and as a current asset on the balance sheet.
Can shares be issued at a discount?
No.
Any premium on shares paid must be shown in the …
share preimum account on the balance sheet
What is a share transfer?
It involves existing shares only.
It is a transaction between the transferor and transferee, whereby ownership changes.
What is a share transmission?
It is the transfer of shares by operation of law on death, or a trustee in bankruptcy.
When shares are transmitted to another person, that other person does not become a
member.
However, he can apply to be registered as a member or sell in his capacity as heir or trustee in bankruptcy.
What is the process of a share transfer?
(1) Stock transfer form between transferor (seller) and transferee (buyer)
(2) Buyer pays stamp duty
(3) Buy sends stock transfer form to company
(4) Directors approve/reject transfer (their absolute discretion)
(5) Transfer is registered and new share certificate sent to buyer
(6) update of details of shareholders annually on confirmation statement
What is a doubtful debt?
It is a debt that is unlikely to be paid
A dividend may only be made out of
“profits available for the purpose”
Can a dividend be paid even if the company has made a loss that year?
Yes, if over the years, the accumulated profits exceed the accumulated losses.
Who decides on the amount of dividends?
The directors first make a recommendation.
Thereafter, the members vote to pay the recommended amount or less.
What happens to doubtful debts accounting-wise?
They are included as an expense in the P&L statement.
They are deducted from the debtor’s figure as a separate entry.
Can members decide to pay themselves less than the recommended dividend amount?
Yes
Can members decide to pay themselves more than the recommended dividend amount?
No
What is capital maintenance?
Capital provided by shareholders must be maintained and must not be returned to them, as creditors rely on it.
What is buyback from profits?
It is a buyback of shares that is ONLY permitted where distributable profits are available.
What is a buyback from capital?
It is a buyback of shares that is only permitted to the extent that distributable profits are unavailable
What must a company use first for a buyback of shares?
Distributable profits
How can a partnership have power to borrow and give security?
This depends on the partnership agreement
What is te capital account_
It contains the capital invested in the business by the partner. Usually kept separate from the current account.
What is an appropriation account?
It is a P&L account, which shows the division of profits between partners.
A company have power to borrow and grant security unless…
its articles say otherwise
What is a revolving credit facility?
It is a hybrid between a loan and an overdraft. The business can borrow up to a certain amount and may repay and re-borrow, when needed.
What is the current account?
It is the partner’s share of the business.
What is a charge?
It provides the lender with an interest in the property, but unlike a mortgage, it does not transfer legal title
What is a fixed charge?
It is a charge taken over a particular asset/assets. The borrower may only deal with the asset(s) if the lender consents.
What is a floating charge?
It is a charge taken over a particular class of asset(s) owned from time to time (e.g. tangible stock). The borrower can deal with the assets without the lender’s consent.
How is the current account calculated?
Opening balance + net profit share - drawings
What is crystallization?
It is the date when a floating charge fixes on the assets in the particular class. This usually happens upon insolvency.
What is a key advantage of a floating charge?
The borrower may still deal with the assets
What is a share capital account?
It shows the funds contributed by shareholders in exchange for shares at their nominal value
What is a debenture?
It is a document which includes security in the form of a floating charge or sometimes both fixed and floating charges
What is a negative pledge clause?
A clause in a debenture which prohibits the creation of later fixed charges without permission
If charges of the same type are created at the same time, which one will have priority?
The one created first
What is the share premium account?
It shows the funds contributed by shareholders in exchange for shares over their nominal/par value
Between a fixed charge or mortgage and a floating charge, which one will take priority in prinicple?
the fixed charge/mortgage
When is a floating charge given priority over a fixed charge?
when:
(i) it contains a negative pledge clause;
AND
(ii) the later fixed chargee has notice of his porhibition at the time when it takes its charge
May lenders agree for a different order of priority?
Yes, through a deed of priority
Is it normal to register a charge at Companies House?
Yes, it is routine
What are capital reserves?
Capital + share premium
(= shareholder’s equity)
Upon successful registration of a charge at Companies House, …
the company will receive a certificate of registration and must also update its register of charges.
When a charge is not registered in time, …
it is void against a liquidator, administrator or any creditor of the company.
Fixed charges over land must also be registered at
the Land Registry
