Capital and Reserves Flashcards
What is a Share
A Share is a unit of ownership in a company.
If an individual or financial institution buys shares in a company, how do they receive a return on their investment?
By being paid dividends (percentage of profits)
Their Shares increasing in value and then being sold.
What is a share premium and how is it calculated?
A share premium is the difference between the market value of a share and its nominal value.
What are company reserves?
Reserves are a collective term for all aspects of the shareholder’s funds, except for basic share capital.
What do increasing reserves show?
The company is well managed and growing.
Name another 3 ways to describe retained profit?
Retained Earnings
Profit and Loss Account
Profit and Loss Reserve
How do you calculate retained profit?
‘Net Profit’ from the profit and loss account minus dividend and tax payments.
What is a revaluation Reserve?
Sometimes fixed assets such as land and buildings can increase in value. If this asset is revalued and the market value is shown to be greater than the previous balance sheet value, a revaluation reserve arises.
On a balance sheet, all the items under ‘capital and reserves’ are added together to give the totals of what?
Shareholders’ Funds
or
Capital employed.
What are the 3 main sources of finance for a business?
Loan Capital
Share Capital / Equity Capital
Retained Profits
When does Loan Capital have to be repaid?
By a specific date + Interest
Who does Equity Capital belong to and what are the general rules on repayment
Belongs to the shareholders but not required to be repaid within a fixed timescale.
What do retained profits represent?
Represent profits not distributed as dividends - but the amount on the balance sheet is not necessarily available to spend. This figure is a value calculation and the money may have been invested in the company, eg. on fixed assets.
What 3 things are shown under the capital section of a sole trader balance sheet?
Owners Capital (Opening Capital)
Net Profit (from profit and loss account)
Drawings (Money withdrawn for personal use)
What is the formula for calculating closing capital?
Opening Capital + Net Profit = [amount]
[amount] minus drawings = [Closing capital amount].
