Chapter 11 - Company financial statements Flashcards
Limited Companies
- Separate legal existence to its owner shareholders
- Can be sued
- Liable to corporation tax
- Public (plc) - have shares available for sale to the public but suffer stricter regulations. Not all public companies are “quoted” (traded on a stock market).
- Private (ltd) - shares to friends and family
What is nominal value? What are other names for this
A company’s initial capital is divided into shares which have a ‘par’, ‘nominal’ or ‘face’ value. This can be any amount (1p, 50p, £1). This will not change.
This is the share capital
Share Capital Formula?
Where does this sit in DEADCLIC?
SC = No of shares x Nominal Value
It sits in capital in DEADCLIC
So CR increases it and DR decreases
What is share premium? formula?
Where does this sit in DEADCLIC?
SP = No of shares x (Amount sold for - Nominal Value)
Share premium: set up with amount received over par value of issued share capital (equity and irredeemable preference shares).
The only time we can DR or decrease this account is with a bonus issue.
Tight restrictions on this due to companies act law
Illegal to pay dividend from share premium
It sits in capital in DEADCLIC
So CR increases it and DR decreases
How can I calculate the amount of cash I have from my shares?
Cash = No of shares x Amount sold for
What is equity? Which statement is it from?
Equity is the same as capital but we call it equity when dealing with ltd companies, called capital for independent businesses.
Found in SOFP
Types of shares?
- Equity (ordinary shares)
- Preference shares
a) Redeemable
b) Irredeemable
Equity (ordinary) shares
- Not owed a dividend (directors decide if shareholders get a dividend)
- Dividend charged to retained earn
- Dividends expressed as p per share or % of nominal value
- Carry voting rights at AGM (annual general meeting)
- Treated as capital in equity section (what company owes shareholders) in SOFP
- Issued share capital
> Given share certificates to shareholders
> 1000 x £1 = £1000 - Called up share capital
> Asked share holders for cash
> 1000 x £0.75 = £750. Still owe £250 - Paid share capital
> Amount paid
> 900 x £1 = £900. Still owe £100
What is the journal for equity/ordinary shares when they are paid in the period
DR Retained Earning (Capital)
CR Cash
What is the journal for equity/ordinary shares when they are declared/announced before the period ends
DR Retained Earning (Capital)
CR Accrual
What are the types of preference shares?
- Set entitlement to dividend, usually expressed as % of nominal value. e.g. 4% of a NV (£1) so £0.04
- Usually no voting rights
a) Redeemable
b) Irredeemable
Redeemable preference shares
- It is a liability
- Treat it like a loan - sam repayment terms etc
- Have to be paid
- When dividends are issued we debit our interest expense or financial charge account
- Relates to SOPL
Journal
DR Interest expense/Finance Charge
CR Cash
What is the journal for redeemable preference shares when they are paid in the period
Journal
DR Interest expense/Finance Charge
CR Cash
What is the journal for redeemable preference shares when they are declared/announced before the period ends
Journal
DR Interest expense/Finance Charge
CR Accrual
Irredeemable preference shares
- This is capital in our SOFP
- When dividends are issued we debit our retained earnings
- Company does not have to pay them treated like ordinary shares
What is the journal for irredeemable preference shares when they are paid in the period
DR Retained Earning (Capital)
CR Cash
What is the journal for redeemable preference shares when they are declared/announced before the period ends
DR Retained Earning (Capital)
CR Accrual
When a sole trader puts money into a business what is the journal?
DR Cash
CR Capital
When a company puts money into a business what is the journal?
DR Cash
CR Share Capital
CR Share Premium
What are Retained earnings?
Accumulated profits and loss over time - instead of profit going to shareholder capital as it does for sole traders it goes into this pot.
Built up with each reporting period’s profits, depleted by dividends and losses. Amounts may also be transferred to or from other reserves or reclassified as share capital in a bonus issue.
b/f balance + net profit for the period - dividends - transfer to general reserve = Retained earnings (c/f balance closing SOFP)
How can you calculate retained earnings?
b/f balance + net profit for the period - dividends - transfer to general reserve = Retained earnings (c/f balance closing SOFP)
What is a general reserve?
Putting profits aside in another reserve, we do this as we can’t pay this as dividends
Rights Issues
- Offered only to existing shareholders - in exam qs we will assume all have taken up this
- A way for a company to raise new cash
- New shares are offered to existing owners in proportion to their existing shareholding,
usually at a discount to the current market price - A rights issue is somewhat like saying, “If you already own 5 shares, you have the option to buy 1 more at a lower price.”
So, in a “1-for-5 rights issue”:
For every 5 shares you own, you can buy 1 new share at a discounted price.
The discount is the key benefit, since you’re getting the new shares cheaper than what they’re currently selling for on the stock market.
It’s like a special offer just for existing shareholders, but it’s completely optional—you can take the offer or not!
How would you calculate how many new shares have been established after a right issue?
For example, a company with 20 million shares in issue makes a “1 for 4” rights issue
No of new shares = No of existing shares x Y for Z
For example, a company with 20 million shares in issue makes a “1 for 4” rights issue, which would mean issuing another 5 million shares.
20 million existing shares x 1/4 = 5 million new shares