Ch 1: Financial Accounting Of Companies (Concepts, Unique Ledger Accounts, Bookkeeping) Flashcards
Characteristics of a company
- has shareholders
- separate legal entity
- bound by Companies Act
- profit belongs to business and is paid out to shareholders through dividends
- limited liability
- managed by board of directors
- Memorandum of Incorporation and Notice of Incorporation
What does a legal entity have the legal capacity to do?
- enter agreements/contracts
- assume obligations
- incur and pay debts
- sue and be sued
- own assets
- pay tax
- be held responsible for its actions
Describe the formation of a company
- MOI and NOI submitted to Registrar of Companies
- Registrar then:
• approves name
• enters info in Companies Register
• endorse MOI and NOI - registration certificate is issued to commence business
- prospectus is compiled
What is an executive director?
Involved in day-to-day management of company and/or in full-time salaried employment of the business
What is a non-executive director?
Independent of management on all issues (strategy, performance, sustainability resources, transformation, employment equity, etc.)
What is an independent director?
Not employed by company in any way during the previous 3 and should be totally independent from any business relationship with the company, since their role is to bring independent judgement and broad business experience to the Board
Roles and functions of the board of directors
- provide strategic direction and approve strategic plans
- retain full and effective control of the company
- ensure the business complies with laws and regulations
- delegate to management and monitor them on an ongoing basis
- identify and monitor key risks and ensure the business has internal control measures
- identify and monitor key performance areas for the board and management
Show the flow of management
- CEO
- Chairperson
- Board of directors
- Managers
- Employees
Describe the characteristics of independent auditors
- registered independent auditors are appointed at every AGM
- audit committee must verify independence of the individual
- auditors must be rotated every 5 years
- auditor expresses opinion on financial statements and indicates whether the user can rely on the statements
Describe the characteristics of the audit and risk committee
Shareholders appoint an audit committee at the AGM, consisting of 3 directors who may not be:
- involved in day-to-day management
- a full-time executive employee for the past 3 financial years
- a material supplier/customer so that outside parties could think that person’s judgement would be affected by that relationship
- related to anyone who falls within the above criteria
Describe the duties of the audit and risk committee
- nominating independent auditor
- determining audit fee
- ensuring appointment of auditors complies with Companies Act and relevant legislation
- determining nature and extent of non-audit services
- preparing report to be included in annual financial statements describing how committee carried out its functions, stating whether auditor was independent, and commenting on financial statements, accounting practices and internal control measures of the company
- receiving and dealing with relevant complaints
- making submissions to board regarding company’s accounting principles, financial controls, recording and reporting
- evaluating company’s exposure and responses to significant business, strategic, statutory and financial risks
- ensuring effective communication between directors, management, and internal and external auditors
- reviewing compliance with JSE listing requirements and King IV
Rights of shareholders
- voting power on major issues at AGM (1 vote per share)
- entitlement to dividends
- ownership in portion of the business (share in final distribution of net assets upon liquidation)
- opportunity to inspect books and records
What is transacted during an AGM?
- presentation of directors’ report, audited financial statements and report of an audit committee
- election of directors
- appointment of auditor and audit committee
- any matters raised by shareholders
What is corporate governance?
Corporate governance refers to the systems, principles, and processes by which a company is directed and controlled.
True or False: Corporate governance only involves the board of directors.
False
Fill in the blank: The primary purpose of corporate governance is to protect the interests of __________.
shareholders
Which of the following is NOT a key principle of corporate governance? A) Accountability B) Transparency C) Secrecy D) Fairness
C) Secrecy
Name one benefit of effective corporate governance.
One benefit of effective corporate governance is increased investor confidence.
What is the full name of the JSE?
Johannesburg Stock Exchange Limited ( JSE Ltd )
True or false:
The JSE is the largest stock exchange in Africa
True
What are the characteristics of the JSE
-bound by Stock Exchange Control Act 1 of 1985 (SECA) to look after interests of investing public and its members
- JSE prescribe all rules and regulations in the form of Listing Requirements with which all member companies and directors must comply, including that companies should adopt IFRS in financial statements, requirements in respect of auditors, requirements regarding corporate governance, etc
How does the business raise funds?
- selling shares to shareholders
- generating profit (internal source)
- loans (external source)
What classes of shares can businesses issue?
- ordinary shares
- preference shares
What are preference shareholders?
- have preference over ordinary shareholders in the event of the business being liquidated
- ordinary shares are riskier for investor, but outperform preference shares on stock markets
What are ordinary shareholders?
- not guaranteed to receive dividends as they depend on the profitability of the business and it’s cash flow, whereas preference shareholders receive a fixed percentage dividend annually
What are authorised shares?
Maximum number of shares the business’s MOI permits it to issue
What are issued shares?
Price for which shares are sold
What is reserve/unissued share capital?
The difference between authorised share capital and issued share capital
What is the primary purpose of income tax in South Africa?
To generate revenue for government expenditure and public services.
What is the tax year in South Africa?
The tax year runs from March 1 to the end of February the following year.
Fill in the blank: Individuals earning above a certain threshold must register for ______ in South Africa.
income tax
What is the maximum personal income tax rate in South Africa as of 2023?
45%
List one type of income that is exempt from income tax in South Africa.
Certain types of interest income, such as interest on tax-free savings accounts.
Multiple Choice: Which of the following is NOT a type of income subject to tax in South Africa? A) Salary B) Capital Gains C) Inheritance D) Rental Income
C) Inheritance
What is the process called where taxpayers can claim deductions to reduce their taxable income?
Tax deductions or allowable expenses.
True or False: South African residents are taxed on their worldwide income.
True
How does SARS calculate a business’s income tax amount?
The business submits a tax return form
How does SARS calculate a business’s income tax amount?
The business submits a tax return form
