Chapter 1 - Types Of Businesses And Shares

Question 1

All businesses need financial statements. What are the 4 general aims of financial statements?

Answer 1

1) to identify how well the business has performed
2) to identify the value of the assets and the liabilities of the business
3) to help understand the cash flow position of the company.
4) to communicate these things to the users of the accounts in as clear a manner as is possible

Question 2

Who is a sole trader owned by?

Answer 2

The proprietor (only one)

Question 3

Who is a partnership owned by?

Answer 3

More than one partner/proprietors

Question 4

Who is a limited company owned by?

Answer 4

Shareholders but cannot invite members of the public.

Question 5

Who is a plc owned by?

Answer 5

The shareholders, can be the public, shares often sold on the stock exchange

Question 6

Who is a sole trader managed by?

Answer 6

The proprietor

Question 7

Who is a limited company managed by?

Answer 7

The directors

Question 8

Is a sole trader a separate legal entity?

Answer 8

No, the proprietor will enter into any contracts but must keep personal and business transactions separate

Question 9

Is a limited company a separate legal entity?

Answer 9

Yes, the company itself enters into contracts in its own right.

Question 10

Does a sole trader have limited or unlimited liability?

Answer 10

Unlimited, the proprietor is personally responsible for the debts of the business

Question 11

Does a limited company have limited or unlimited liability?

Answer 11

Limited liability, the shareholders can only lose the value they invested in the shares. The company is responsible for its own debts

Question 12

How is tax different for sole trader and limited company?

Answer 12

Sole trader = personal tax

Limited company = corporation tax

Question 13

What are the advantages of a limited company?

Answer 13

Limited liability status - lose max of their investment
Easier to raise finance - issuance of shares and other securities
Company continues to operate regardless of ownership
Taxed under corporation tax

Question 14

What are the disadvantages of limited companies?

Answer 14

Accounts submitted to companies house and anyone can access them
More regulation to comply with (Companies Act 2006)
Accounts of larger companies must be audited
Issues of shares are highly regulated

Question 15

What does a sole trader have to include in their financial statements?

Answer 15

Profit and loss account/statement of profit and loss

Balance sheets/statement of financial position

Question 16

What is included in company accounts?

Answer 16

Statement of profit and loss
Statement of financial position 
Statement of changes in equity
Statement of cash flows
Notes to the financial statements

Question 17

What is the difference on a statement of financial position of a sole trader to a limited company?

Answer 17

The sole trader funds the business through injecting capital. This is shown under the proprietors interest section in the statement of financial position.

Question 18

What is nominal value of shares?

Answer 18

Nominal or ‘par’ value is the face value of shares e.g. £1 per share.

Question 19

What is the market value of shares?

Answer 19

The value at which existing shares can be traded e.g. the price the owner of the shares will charge someone else to buy them.

Question 20

What is the allotted share capital?

Answer 20

The shares which have actually been issued.

Question 21

What are ordinary shares?

Answer 21

These are shares which are in the equity section of the statement of financial position:
Can be called equity shares
Can receive a dividend
Holders of these shares are entitled to vote in a general meeting.

Question 22

What are preference shares?

Answer 22

Two different types: redeemable and irredeemable.
They carry the right to a fixed rate dividend.
Dividend must be paid before any dividend to ordinary shareholders.
Do not have voting rights.

Question 23

Where can redeemable preference shares sit in the financial statements?

Answer 23

As they have to be redeemed in cash they may be classified as a liability rather than a part of equity section.

Question 24

What is the double entry when shares are issued?

Answer 24

Dr Bank

Cr Share capital