Business Finance Flashcards
Which of the following is least likely to be a feature of a floating charge?
Each asset which is subject to the charge is specifically identified in a list.Option C is the correct answer. Assets subject to a floating charge are usually referred to generically as they may be bought and sold by the company. An example is stock. It is therefore very unlikely that the assets covered by a floating charge will be specifically identified.
Option C is the correct answer. Assets subject to a floating charge are usually referred to generically as they may be bought and sold by the company. An example is stock. It is therefore very unlikely that the assets covered by a floating charge will be specifically identified.
All the other answers are common features of floating charges. More specifically:
Option A: Floating charges are most useful for covering assets which are fluid in nature and will be owned by the company on a short-term basis.
Option B: This is a crucial element of floating charges: having to ask permission to sell would make such a charge unworkable (and bear the features of a fixed charge).
Option D: Although most useful for fluid items such as stock or book debts, they are usually worded as covering the company’s ‘whole undertaking’. This would include the premises.
Option E: Floating charges rank behind registered fixed charges when they cover the same asset such as premises.
A private company proposes to allot ordinary shares to a new investor in exchange for premises owned by the investor. The company was incorporated in 2014 with the Model Articles for a private company limited by shares. The most recent share allotment by the company was six years ago, when it allotted ordinary shares and preference shares. The company has three existing ordinary shareholders. One of those shareholders owns all the preference shares. There are no relevant provisions in the company’s articles which relate to the allotment of shares. The company has not passed any resolutions which relate to the allotment of shares in the last six years.
Which of the following statements best describes the resolution or resolutions which the company’s shareholders must pass in order for the proposed allotment to proceed?
A-An ordinary resolution to grant the directors authority to allot the shares.
B-An ordinary resolution to grant the directors authority to allot the shares and a special resolution to dis-apply pre-emption rights.
C-A special resolution to increase the number of shares the company can allot, an ordinary resolution to grant the directors authority to allot the shares and a special resolution to dis-apply pre-emption rights.
D-An ordinary resolution to grant the directors authority to allot the shares, a special resolution to dis-apply pre-emption rights and a special resolution to allot the shares.
E-An ordinary resolution to grant the directors authority to allot the shares, a special resolution to dis-apply pre-emption rights and an ordinary resolution to allot the shares.
Option A is correct because the company has more than one class of share and the pre-emption rights do not apply to the allotment. There are no special articles dealing with share allotment. The directors do not have automatic authority to allot the shares under Companies Act 2006, s550. The shareholders need to pass an ordinary resolution to grant the authority, under s551. The ordinary shares are equity securities and the articles do not vary the s561/ s562 pre-emption rights. However statutory pre-emption rights do not apply because the consideration for the shares is other than 100% cash – s565.
Option B is wrong because, although the ordinary shares are equity securities and the articles do not vary the s561/ s562 pre-emption rights, the statutory pre-emption rights do not apply where the consideration for the shares is other than 100% cash.
Option C is wrong because there is no constitutional restriction on the number of shares a company can allot, unless contained in a special article, and the statutory pre-emption rights do not apply.
Option D is wrong because the statutory pre-emption rights do not apply and it is a board power to allot shares, subject to the above considerations.
Option E is wrong because the statutory pre-emption rights do not apply and it is a board power to allot shares, subject to the above considerations.
The directors of a private limited company hope to recommend a dividend of 20p per ordinary share. The company has 100,000 ordinary shares and 50,000 6% fixed cumulative preference shares. The preference shares carry the right to receive, out of the profits of the company available for distribution and resolved to be distributed and in priority to other shareholders, a fixed cumulative preferential dividend at the rate of 6% per annum on the capital paid up on that share. All the shares have a nominal value of £1 each. The company has a healthy cash-flow and is able to raise the cash for the anticipated dividend. The company has adopted the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association.
The balance sheet has recently been drawn up and the ‘Capital and Reserves’ section is reproduced below:
Capital and Reserves £
Share Premium 500,000
Profit & Loss 20,000
670,000
Share capital 150,000
Which of the following statements best explains the rights of the ordinary and preference shareholders to a dividend?
A-Based on the figures in the balance sheet, each ordinary shareholder will be entitled to receive a dividend of 20p per share.
B-Based on the figures in the balance sheet, each preference shareholder will be entitled to receive a dividend of 6p per share.
C-The preference shareholders will always have the right to receive their annual dividend when it is first due regardless of any of the figures in the balance sheet.
D-Based on the figures in the balance sheet, each ordinary shareholder will be entitled to receive a dividend of 20p per share provided the shareholders declare it by resolution.
E-Based on the figures in the balance sheet, each ordinary shareholder will be entitled to receive a dividend of 20p per share provided the directors recommend it.
Option B is correct because there are sufficient distributable profits (s830 Companies Act 2006) to pay the preferential dividend, which is paid in priority to the dividend to the ordinary shareholders. The calculation is:-
6% x £1 (the nominal value of each share) = 6p x 50,000 (the number of shares) = £3,000.
The amount of the distributable profits is £20,000.
Option A is wrong because there are insufficient distributable profits available to pay the ordinary dividend. The calculation is:-
100,000 (number of ordinary shares) x 20p = £20,000.
After the preferential dividend has been paid there will only be £17,000 distributable profits left to pay the dividend to the ordinary shareholders.
Option C is wrong because it is unlawful to pay any dividend unless there are profits available for the purpose (s830 Companies Act 2006).
Option D is wrong because, whilst shareholders are required to declare the dividend recommended by the directors (model article 30) by ordinary resolution, there are insufficient distributable profits available to pay the dividend. It cannot, therefore, be declared by the members.
Option E is wrong because, whilst the directors are required to recommend a dividend (model article 30), there are insufficient distributable profits. It cannot, therefore, be recommended by the directors.
A company has 200,000 x £1 ordinary shares in issue and proposes to pay a dividend of 10p per share. The company’s accounting periods run from 1 January to 31 December. As at 31 December the company:
has £5,000 drawn and outstanding under its overdraft;
has £70,000 drawn and outstanding under a five-year term loan. The entire £70,000 is repayable to the lender in one instalment in 18 months’ time;
has £18,000 in cash;
is owed £10,970 by a customer for supplies made;
has £80,000 in the profit and loss reserve;
incurred distribution and administration expenses of £55,000 in running the business during the accounting period.
Which of the following statements is correct concerning how the balance sheet will reflect the company’s financial position as at 31 December?
A-‘Amounts Falling Due after more than 1 Year’ will include the £5,000 outstanding under the overdraft.
B-‘Amounts Falling Due within 1 Year’ will include the £10,970 owed by a customer for supplies made.
C-‘Amounts Falling Due within 1 Year’ will include £55,000 for distribution and administration expenses.
D-The company could recommend a dividend of 10p per share to its shareholders.
E-‘Amounts Falling Due within 1 Year’ will include £70,000 outstanding under the term loan.
Option D is correct because the profit and loss reserve in the balance sheet shows that there are sufficient profits available to make the distribution. The company can borrow to fund the dividend payment if cash is insufficient for the purpose.
Option A is wrong because amounts due under an overdraft can be requested by the lender on demand, hence within 12 months of the balance sheet date and not after more than one year.
Option B is wrong because the sum owed by the customer will appear as a current asset on the balance sheet and not as a current liability.
Option C is wrong because this information would be provided in the profit and loss account (income statement), not the balance sheet.
Option E is wrong because the £70,000 is a long-term liability due more than 12 months after the balance sheet date.
A private electrical goods distribution company was incorporated in 2019 and has the Model Articles of Association with no amendments. It has an issued share capital of 100,000 ordinary £1 shares. The directors of the company propose to allot 10,000 ordinary shares for cash consideration. The company has not passed any resolutions concerning the allotment of shares to date.
Which of the following statements best explains why the shareholders of the company do not need to pass an ordinary resolution to give the directors authority to allot the shares?
A-Because shareholder approval is never needed to allot ordinary shares.
B-Because the company only has 100,000 shares so no authority is required to allot more.
C-Because directors are permitted to allot up to 10,000 shares without shareholder approval.
D-Because the shares to be allotted fall within the definition of equity securities.
E-Because the company is a private company with one class of shares so the directors already have permission to allot shares.
Option E is correct. The company was incorporated after the Companies Act 2006 (‘CA 2006’) came into force and is a private company with only one class of shares – this must be the case because it has the Model Articles and no resolutions relating to allotment have been passed, so there cannot be any other types of shares. No amendments have been made to the articles that might restrict the directors’ authority to allot. The directors therefore already have authority to allot the shares under s 550 CA 2006. Option A is wrong because sometimes directors do need permission to allot shares, depending on the company’s articles, the type of shares and company, and when it was incorporated. Option B is wrong because how many shares the company already has is irrelevant. Option C is wrong because there is no such rule that directors can allot up to 10,000 shares without shareholder approval. Option D is wrong because the shares are equity securities but this is only part of the reason why no authority to allot is needed.
A private company incorporated in 2018 has the Model Articles of Association with no amendments. It has two shareholders, a travel agent and a pilot. The travel agent holds 50,000 ordinary shares and the pilot holds 25,000 ordinary £1 shares. The shareholders have agreed in principle that the company will buy back 20,000 shares from the travel agent for £25,000. The company’s distributable profits are £133,000 and its net assets are £485,000.
Assume that the shareholders have not passed any relevant resolutions.
Which of the following best describes what shareholders’ resolutions would be required to effect the buyback described above?
A-No shareholders’ resolutions would be required because the company has the Model Articles of Association.
B-One ordinary resolution, to authorise the buyback.
C-One ordinary resolution to authorise the buyback and one special resolution to authorise the use of capital.
D-One ordinary resolution to authorise the buyback and a second ordinary resolution to authorise the use of capital.
E-Two special resolutions, one to authorise the buyback and one to change the company’s articles of association.
Option B is correct. This is clearly a buyback out of profits, not capital, because the company’s distributable profits of £133,000 are enough to cover the agreed price for the buyback (£25,000). The net assets figure does not change the position. Accordingly, only one ordinary resolution is needed (s 694 CA 2006) to authorise the buyback. Option A is wrong because the Model Articles do not mention buyback. Options C and D are wrong because this is not a buyback out of capital. Option E is wrong because no changes to the articles of association are needed.
A large trading company has an accounting period which ends on 31 March. In July 2020 it buys plant and machinery costing £900,000. At the start of that financial year it had a pool of plant and machinery worth £700,000. Assume that the company always claims the maximum capital allowances available and that the rates for capital allowances remain the same as for the previous financial year.
Which ONE of the following statements best describes the capital allowance the company can claim in the accounting period ending 31 March 2021?
A-£900,000
B-£1,000,000
C-£1,126,000
D-£1,026,000
E-£126,000
Option D is correct. For the accounting period ending 31 March 2021, the £900,000 expenditure on new plant and machinery all falls within the AIA of £1,000,000. It can also claim 18% of the existing pool of £700,000, that is, £126,000.
This gives total capital allowances for the accounting period of £900,000 + £126,000 = £1,026,000.
Capital Allowances” refers to the value of certain capital items that can be written down to reduce a business’s taxable trading profits.
Allowance:The value of plant and machinery will be written down by 18% year on year.
The Annual Investment Allowance (AIA):This is an additional capital allowance given in the first year of owning an asset.
- Up to £1,000,000 of expenditure on plant and machinery in the current tax year will be deductible (2023/24).
- If the asset is worth more than £1,000,000, you need to add the remaining value of the asset to the existing pool of plant and machinery and write the total pool down by 18% using the CAA 2001 allowance.
The following information is from the accounts of a business:
Sales
150,000
Fixed assets
300,000
Current assets
50,000
Current liabilities
15,000
General expenses
40,000
Long-term liabilities
100,000
Net profit
67,000
Which of the following best describes the value of the business’s net current assets and net assets?
A-The business’s net current assets are 250,000 and its net assets are 67,000.
B-The business’s net current assets are 35,000 and its net assets are 235,000.
C-The business’s net current assets are 35,000 and its net assets are 235,000.
D-The business’s net current assets are 50,000 and its net assets are 250,000.
E-The business’s net current assets are 35,000 and its net assets are 335,000.
Option B is correct. Net current assets are calculated by subtracting current liabilities from current assets, so the calculation is 50,000 – 15,000, resulting in a figure of £35,000 for net current assets. Net assets are calculated by subtracting both current and long-term liabilities from fixed and current assets. The calculation is (300,000 + 50,000) less (15,000 + 100,000), that is, 350,000 – 115,000, resulting in a net assets figure of 235,000
A client, who is a sole trader, gives you the following information about their business over the course of the financial year:
(a) It has a trading profit of £170,000; and
(b) The client has received a bill from their accountant in the sum of £500 but has not yet paid it.
Which of the following best describes where the figures listed in (a) and (b) above will appear on the client’s balance sheet and/or profit and loss account?
A-Both items will appear on both the profit and loss account but not the balance sheet.
B-Item (a) will appear on the profit and loss account only, and item (b) will appear on the balance sheet as a liability.
C-Item (a) will appear on the balance sheet as income, and item (b) will appear on the profit and loss account as a prepayment.
D-Item (a) will appear on both the profit and loss account and on the balance sheet, and item (b) will appear on the balance sheet as an accrual.
E-Item (a) will appear on the balance sheet as profit, and item (b) will appear on the balance sheet as an expense.
Option D is correct. Trading profit is shown at the end of the profit and loss account – this is what the profit and loss account is designed to calculate. It is also shown on the balance sheet under ‘capital employed’. The bill will be shown as an accrual on the balance sheet because it has been received but not yet paid.
A private limited company was incorporated on 2 January of this year. It has an issued share capital of 100 ordinary £1 shares. There are two directors. One of the directors is also a shareholder in the company. There is one other shareholder, who is not a director. The shareholders hold 50 shares each. The directors wish to allot another 100 ordinary £1 shares to an investor.
The company has Model Articles for private companies limited by shares. There is no evidence that the shareholders have passed any special resolutions since the company was set up.
Can the directors issue the new shares without the involvement of the shareholders?
A-Yes, because the company is a private limited company with one class of share.
B-Yes, because the Model Articles do not contain any restrictions on the allotment of shares.
C-Yes, because ordinary shares are not equity securities.
D-No, because a special resolution of the existing shareholders is needed to allot the shares as their shareholding will be reduced to less than 50%.
E-No, because the statutory pre-emption rights will apply to the allotment.
Option E is correct. There is no constitutional restriction on the transfer (the Model Articles do not contain any such restriction) and, as this is a private limited company with one class of share (ordinary shares), the directors have authority to allot under s.550 of the Companies Act 2006 (‘the Act’). However, the statutory pre-emption rights contained in s.561 of the Act have not been disapplied. There is nothing in the Model Articles disapplying the pre-emption rights and no special resolution to do so has been passed. Therefore the company must offer the shares to the shareholders first or obtain shareholder approval by special resolution to disapply the pre-emption rights. This means that the shareholders must be involved before the allotment can take place.
Options A and B are wrong. Neither fully reflects the position as they do not take into account the statutory pre-emption rights.
Option C is wrong. Ordinary shares come within the definition of ‘equity securities’ in s.560 of the Act.
Option D is wrong. Shareholder approval to allot the shares is not required regardless of the fact that the shareholdings of the existing shareholders are diluted. However, they do have the protection of the statutory pre-emption rights unless these have been disapplied.
A farmer has a substantial business growing, picking and selling soft fruit. The business is very seasonal, and the business income fluctuates significantly. During the picking season he needs to hire expensive picking and packing machinery. He operates as a sole trader. The business has a substantial overdraft and the bank are not prepared to extend the overdraft. The farmer would like access finance to fund the hire of the machinery each year.
What kind of borrowing would best suit the farmer in this situation?
A-An overdraft facility.
B-A debenture. (a loan agreement in writing between a borrower and a lender that is registered at Companies House.)
C-A short-term loan.
D-Equity finance.
E-A revolving credit facility.
Option E is the best answer because of the fluctuating nature of the farmer’s income, and the need to use the facility on an annual basis. A revolving credit facility would be the best option for the farmer.
Option A is wrong because the bank will not extend the existing overdraft facility.
Option B is wrong because only companies and LLPs can enter into debentures.
Option C is wrong because the farmer is likely to want to borrow money in future years, so a one-off loan with short term repayment is not suitable.
Option D is wrong because the farmer is a sole trader and there are no shares in the business; equity finance is therefore not possible.
Quick Q:
A company wishes to expand its business. It is a private company limited by shares and has adopted the Model Articles without amendment. The current issued share capital is 6,000 £1 ordinary shares. The board have considered how they will finance the expansion and have unanimously agreed to allot 15,000 £15 preference, cumulative and non-participating shares.
In preparation of the members meeting, the directors need to know what type/s of shareholders decisions are required to do this.
Which of the following correctly sets out the numbers and types of shareholder resolutions required?
One ordinary resolution and one special resolution.
Option D is the correct answer because the company has adopted the Model Articles without amendment and therefore the directors have authority to allot where there is only one class of share (s550). However, the company will now have two classes of shares (ordinary and preference) and therefore the shareholders’ authority (ordinary resolution) is required under s551.
At common law, all shares in the capital of a company will be treated as ranking pari passu unless any separate class rights are clearly documented. It is therefore important that the rights attached to the new class are recorded in a document to which the company and its shareholders are bound. Therefore, the Articles will need to be amended to reflect the rights attached to the preference shares. This is a constitutional change and requires a special resolution.
Quick Q:
A company has today, March 1, executed and entered into a security debenture with a bank. The company agreed to a first fixed charge being granted over their corporate HQ Building in return for a £1.2M loan to be repaid over seven years.
Which is the last day to register the fixed charge at Companies House?
22 March
To be valid and fully enforceable a charge must be registered at Companies House within 21 days of the creation of the charge starting the day after the creation (s859A&E CA 2006). Here the final day for registration would be 22 March.
Quick Q:
A private limited company with the Companies (Model Articles) Regulations 2008 (‘the Model Articles’) as its articles of association, wishes to raise further equity finance. It currently has just two equal shareholders who hold ordinary £1 shares in the company. The current shareholders agree to invest a further £50,000 cash each in return for 12,500 ordinary shares of £1 each and a new investor has agreed to sell warehouse premises worth £200,000 to the company in return for 50,000 £1 ordinary shares. As a term of the investment, the investor has requested that the allotment to the existing shareholders will take place a month earlier than the allotment to the investor.
The company has not passed any resolutions in connection with the allotment of shares.
Will the directors of the company be able to allot the shares without recourse to a shareholders’ meeting?
Yes, because the company is issuing just one class of share and there are no pre-emption rights.
Option A is correct because when the initial investment occurs the company is a private limited company with only one class of share before and after the allotment, there is no restriction on the number of shares and pre-emption rights will not need to be lifted (the division of shares on allotment is in accordance with the shareholders existing 50:50 proportions). The allotment to the investor will be subject to the same rules but here the reason that there are no pre-emption rights is because of the non-cash consideration exception. (ss550, 565 Companies Act 2006 (CA 06) and the Model Articles).
Option B is wrong because existing shareholders rights of pre-emption do not apply if the consideration for the shares is not cash (s565 CA 06).
Option C is wrong because there is no need to suspend / remove the pre-emption rights as the allotment to the existing members is in the existing proportions (s561 CA 06).
Option D is wrong because, whilst this company has no restrictions on the number of shares it can issue, pre-emption rights may well apply if not allotted to the existing shareholders in the proportions in which they currently hold shares. Also, the company could propose to allot shares of a different class, and, if so, authority to allot would be required from the shareholders (ss550, 551 CA 06).
Option E is wrong because there is no stipulation on the type of consideration required for the purchase of shares. In addition, this is not a substantial property transaction because, whilst the warehouse (a non-cash asset) is of substantial value (£200,000), the transaction is not between the company and its director. There is nothing on the facts to suggest the investor is a director.
Quick Q:
A company’s latest balance sheet, prepared within the last month, shows that the company holds £30,000 in cash, has net assets of £750,000 and distributable profits of £250,000. The company has agreed to buy back 10,000 ordinary £1 shares from one of its shareholders for the price of £5 per share.
What are the documents that the company will need to file with the Registrar of Companies as a result of the buyback?
A return of purchase of own shares and a notice of cancellation of shares.
NO ORDINARY RESOLUTION NEEDS TO BE FILED
Option A is the correct answer because whilst an ordinary resolution will be needed to authorise the buyback, this does not need to be filed with the Registrar of Companies. A return of purchase of own shares and a notice of cancellation of shares need to be filed at Companies House within 28 days (ss694, 707, 708 Companies Act 2006).
Option B is wrong because the ordinary resolution does not need to be filed with the Registrar of Companies.
