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SQE1_additional > BL - 5 - Financials > Flashcards

BL - 5 - Financials Flashcards

1
Q

What is equity finance?

A

It is the issue of new shares in exchange for consideration received by a company.

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2
Q

What is another term for equity finance?

A

Share finance

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3
Q

What is the basic formula for the profit and loss account?

A

Income less expenses gives net profit.

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4
Q

What two types of financing exist?

A

(a) Equity/Share finance
(b) Debt/Loan finance

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5
Q

What is debt finance?

A

Debt finance involves borrowing money in order to financing a business

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6
Q

What is another term for debt finance?

A

loan finance

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7
Q

What is a share issue?

A

It is the process whereby new shares are allotted in exchange for consideration received by the company

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8
Q

What is capital?

A

It is the sum invested in the business by the owner(s).

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9
Q

Which directors have the authority to issue further shares of the same class by board resolution?

A

Directors of companies which:
- have model articles
- one class of shares before and after issue

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10
Q

If directors cannot issue shares by board resolution, who can and how?

A

The members by ordinary resolution or by provision in the company’s articles.

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11
Q

When is a share issue governed by the memorandum of association?

A

When the company is incorporated prior to 1 October 2009

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12
Q

What are prepayments?

A

Payments that the business has made in advance, e.g. on account of a service.

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13
Q

How can shares be issued for companies incorporated from 1 October 2009?

A

This depends on the articles. There may be restrictions that require a special resolution

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14
Q

What must the authority to issue new shares state?

A
  • the maximum number of shares directors are allowed to issue
  • the date when the authority will expire
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15
Q

If an ordinary resolution is passed to issue shares, what happens to this ordinary resolution?

A

It must - exceptionally - be filed with the Companies House.

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16
Q

What are accruals?

A

Payments the business will make in arrear, for services used in the financial year, but but yet paid (opposite of prepayment)

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17
Q

What is a pre-emption right?

A

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

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18
Q

For what period does the pre-emption right exist?

A

For 14 days

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19
Q

Is the statutory pre-emption right absolute?

A

No, it can be:
- varied/removed in articles
- disapplied by special resolution
- formally waived in relation to a specific issue

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20
Q

In principle, the pre-emption right only applies when…

A

… the new shares are issued for cash.

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21
Q

Shares may be issued … paid or … paid

A

fully | partly

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22
Q

Can shares be issued at a premium?

A

Yes, that is usually the case.

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23
Q

What is work in progress?

A

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.

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24
Q

Can shares be issued at a discount?

A

No.

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25
Q

Any premium on shares paid must be shown in the …

A

share preimum account on the balance sheet

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26
Q

What is a share transfer?

A

It involves existing shares only.

It is a transaction between the transferor and transferee, whereby ownership changes.

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27
Q

What is a share transmission?

A

It is the transfer of shares by operation of law on death, or a trustee in bankruptcy.

28
Q

When shares are transmitted to another person, that other person does not become a

A

member.

However, he can apply to be registered as a member or sell in his capacity as heir or trustee in bankruptcy.

29
Q

What is the process of a share transfer?

A

(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

30
Q

What is a doubtful debt?

A

It is a debt that is unlikely to be paid

31
Q

A dividend may only be made out of

A

“profits available for the purpose”

32
Q

Can a dividend be paid even if the company has made a loss that year?

A

Yes, if over the years, the accumulated profits exceed the accumulated losses.

33
Q

Who decides on the amount of dividends?

A

The directors first make a recommendation.

Thereafter, the members vote to pay the recommended amount or less.

34
Q

What happens to doubtful debts accounting-wise?

A

They are included as an expense in the P&L statement.

They are deducted from the debtor’s figure as a separate entry.

35
Q

Can members decide to pay themselves less than the recommended dividend amount?

A

Yes

36
Q

Can members decide to pay themselves more than the recommended dividend amount?

A

No

37
Q

What is capital maintenance?

A

Capital provided by shareholders must be maintained and must not be returned to them, as creditors rely on it.

38
Q

What is buyback from profits?

A

It is a buyback of shares that is ONLY permitted where distributable profits are available.

39
Q

What is a buyback from capital?

A

It is a buyback of shares that is only permitted to the extent that distributable profits are unavailable

40
Q

What must a company use first for a buyback of shares?

A

Distributable profits

41
Q

How can a partnership have power to borrow and give security?

A

This depends on the partnership agreement

42
Q

What is te capital account_

A

It contains the capital invested in the business by the partner. Usually kept separate from the current account.

43
Q

What is an appropriation account?

A

It is a P&L account, which shows the division of profits between partners.

44
Q

A company have power to borrow and grant security unless…

A

its articles say otherwise

45
Q

What is a revolving credit facility?

A

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.

46
Q

What is the current account?

A

It is the partner’s share of the business.

47
Q

What is a charge?

A

It provides the lender with an interest in the property, but unlike a mortgage, it does not transfer legal title

48
Q

What is a fixed charge?

A

It is a charge taken over a particular asset/assets. The borrower may only deal with the asset(s) if the lender consents.

49
Q

What is a floating charge?

A

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.

50
Q

How is the current account calculated?

A

Opening balance + net profit share - drawings

51
Q

What is crystallization?

A

It is the date when a floating charge fixes on the assets in the particular class. This usually happens upon insolvency.

52
Q

What is a key advantage of a floating charge?

A

The borrower may still deal with the assets

53
Q

What is a share capital account?

A

It shows the funds contributed by shareholders in exchange for shares at their nominal value

54
Q

What is a debenture?

A

It is a document which includes security in the form of a floating charge or sometimes both fixed and floating charges

55
Q

What is a negative pledge clause?

A

A clause in a debenture which prohibits the creation of later fixed charges without permission

56
Q

If charges of the same type are created at the same time, which one will have priority?

A

The one created first

57
Q

What is the share premium account?

A

It shows the funds contributed by shareholders in exchange for shares over their nominal/par value

58
Q

Between a fixed charge or mortgage and a floating charge, which one will take priority in prinicple?

A

the fixed charge/mortgage

59
Q

When is a floating charge given priority over a fixed charge?

A

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

60
Q

May lenders agree for a different order of priority?

A

Yes, through a deed of priority

61
Q

Is it normal to register a charge at Companies House?

A

Yes, it is routine

62
Q

What are capital reserves?

A

Capital + share premium
(= shareholder’s equity)

63
Q

Upon successful registration of a charge at Companies House, …

A

the company will receive a certificate of registration and must also update its register of charges.

64
Q

When a charge is not registered in time, …

A

it is void against a liquidator, administrator or any creditor of the company.

65
Q

Fixed charges over land must also be registered at

A

the Land Registry

SQE1_additional (14 decks)

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