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ICAEW - CERTIFICATE LEVEL 1 - ACCOUNTING > Chapter 11 - Company financial statements > Flashcards

Chapter 11 - Company financial statements Flashcards

1
Q

Limited Companies

A
  • 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
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2
Q

What is nominal value? What are other names for this

A

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

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3
Q

Share Capital Formula?
Where does this sit in DEADCLIC?

A

SC = No of shares x Nominal Value

It sits in capital in DEADCLIC
So CR increases it and DR decreases

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4
Q

What is share premium? formula?
Where does this sit in DEADCLIC?

A

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

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5
Q

How can I calculate the amount of cash I have from my shares?

A

Cash = No of shares x Amount sold for

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6
Q

What is equity? Which statement is it from?

A

Equity is the same as capital but we call it equity when dealing with ltd companies, called capital for independent businesses.

Found in SOFP

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7
Q

Types of shares?

A
  1. Equity (ordinary shares)
  2. Preference shares
    a) Redeemable
    b) Irredeemable
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8
Q

Equity (ordinary) shares

A
  • 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
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9
Q

What is the journal for equity/ordinary shares when they are paid in the period

A

DR Retained Earning (Capital)
CR Cash

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10
Q

What is the journal for equity/ordinary shares when they are declared/announced before the period ends

A

DR Retained Earning (Capital)
CR Accrual

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11
Q

What are the types of preference shares?

A
  • 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

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12
Q

Redeemable preference shares

A
  • 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

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13
Q

What is the journal for redeemable preference shares when they are paid in the period

A

Journal
DR Interest expense/Finance Charge
CR Cash

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14
Q

What is the journal for redeemable preference shares when they are declared/announced before the period ends

A

Journal
DR Interest expense/Finance Charge
CR Accrual

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15
Q

Irredeemable preference shares

A
  • 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
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16
Q

What is the journal for irredeemable preference shares when they are paid in the period

A

DR Retained Earning (Capital)
CR Cash

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17
Q

What is the journal for redeemable preference shares when they are declared/announced before the period ends

A

DR Retained Earning (Capital)
CR Accrual

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18
Q

When a sole trader puts money into a business what is the journal?

A

DR Cash
CR Capital

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19
Q

When a company puts money into a business what is the journal?

A

DR Cash
CR Share Capital
CR Share Premium

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20
Q

What are Retained earnings?

A

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)

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21
Q

How can you calculate retained earnings?

A

b/f balance + net profit for the period - dividends - transfer to general reserve = Retained earnings (c/f balance closing SOFP)

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22
Q

What is a general reserve?

A

Putting profits aside in another reserve, we do this as we can’t pay this as dividends

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23
Q

Rights Issues

A
  • 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!

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24
Q

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

A

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

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25
Q

If the question gives you the share capital value b/f and NV how can calculate how many existing shares we have?

A

No of existing shares = Share Capital/NV of 1 share

26
Q

Value of new share formula

A

Value of new share = No of new shares x price 1 of x

27
Q

Bonus Issue

A
  • Bonus issue (or capitalisation issue or scrip issue)
  • An issue of fully paid shares to existing owners, free of charge, in proportion to their existing shareholdings.
  • A bonus issue does not involve any cash inflow for the company. The company converts some of its reserves (share premium or retained earnings or both) into a new fully paid share capital issued at its par value.
  • This might be down when the company does want to pay cash sp they give the shareholders more cash in the form of shares

The double entry for the par value of the bonus shares issued is:
DEBIT Share premium or Retained earnings or both £X
CREDIT Share capital £X

Once there is no more balance in share premium when then DR retained earnings. SP can not be -ve it is illegal

28
Q

What is debt capital/finance?

A

Companies can also raise cash finance by borrowing, either from a bank (bank loans) or other parties (debenture loans or bonds). This is usually called debt finance and includes redeemable preference shares.

Anything under 12 months is a non current liability
Interest is usually payable on non-current liabilities and must be accrued for if it remains unpaid at the year end.

29
Q

On issue of debt journal

A

When we borrow

Dr Cash
Cr Non-current liabilities

30
Q

On repayment of debt journal

A

Dr Non-current liabilities
Cr Cash

31
Q

Interest paid journal

A

Dr Interest expense (finance cost)
Cr Cash

32
Q

Outstanding interest owed journal

A

Interest is usually payable on non-current liabilities and must be accrued for if it remains unpaid at the year end.

Dr Interest expense (finance cost)
Cr Accruals

33
Q

What is repayment of a loan with shares
What is the journal

Answer this question
Lizzie Ltd has an outstanding loan of £20,000 with Bank & Co. The bank has agreed to accept 5,000 £1 shares in Lizzie Ltd in full and final settlement of this amount.
What is the correct journal to account for the redemption of the loan.

A

Very rare in real life

In the exam you may be told that a loan is repaid through the issue of shares. In this case the outstanding loan at redemption is effectively the proceeds from the issue of shares

DR LOAN
CR SC
CR SP

SOLUTION
Dr Loan £20,000 (to clear)
Cr Share Capital £5,000 (the nominal value of the additional shares issued)
Cr Share Premium £15,000 (a balancing figure)

34
Q

What is a Provision? Example

A

A provision is a type of liability (something the company owes), but the exact amount or timing of when the payment is needed isn’t certain yet.
An example is a warranty provision, where a company expects to pay for repairs or replacements in the future under warranty, but it doesn’t know exactly how much or when.

35
Q

Creating a Provision Journal

A
  • When a company knows it will probably have to pay for something in the future (like warranty claims), it creates a provision to account for this cost.
  • The company will make its best estimate of how much it expects to pay.

In accounting, the company records this estimate by making two entries:
Dr Expense (SPL): This means the company records the expense in its Profit and Loss account (also called the Statement of Profit or Loss).
Cr Provision (SoFP): This means the company sets aside the estimated amount in its Statement of Financial Position (also called the Balance Sheet) as a liability.

36
Q

Incur expenditure Journal

A

When the Company Pays the Actual Amount:
- When the company actually pays the warranty claims, it reduces the provision.

Dr Provision (SoFP): This reduces the liability (provision) because the payment is made.

If the actual amount paid is greater than what was provided for (the estimate was too low), the company needs to record an extra expense:

Dr Expense (SPL): The extra cost is recorded as an expense.
Cr Cash: The payment is made in cash, so the company reduces its cash balance.

37
Q

Remove excess provision Journal

A

If the company ends up paying less than what was provided for (the estimate was too high), the leftover amount in the provision is no longer needed. This “extra” provision is released:

Dr Provision (SoFP): This removes the leftover provision.
Cr Expense (SPL): The unused amount is added back to the profit (because it wasn’t needed).

38
Q

Proforma for calculating c/f provision

A

b/f provision x
increase/(decrease) x/(x)
———————–
c/f provision x
———————–

39
Q

Journal for INCREASE in provision

A

Dr Expense £ the required increase
Cr Provision £ the required increase

40
Q

Journal for DECREASE in provision

A

Dr Provision £ the required decrease
Cr Expense £ the required decrease

41
Q

How to calculate provision

A

Expected provision = Sales(Revenue) x % of …. x how much you would have to pay to fix

42
Q

What is the journal for when the tax charge is estimated for a period

A

Dr Tax expense
Cr Tax payable (current liability)

43
Q

What is the journal for when a payment is made for tax

A

Dr Tax payable (current liability)
Cr Cash

44
Q

If my opening TB has a CR on tax payable what does this mean?

A

I have made an OVER provision on my tax in the prior year
Paid LESS than expected
So when I pay this in the following year I have a a REDUCTION in my tax expense

45
Q

If my opening TB has a DR on tax payable what does this mean?

A

I have made an UNDER provision on my tax in the prior year
Paid MORE than expected
So when I pay this in the following year I have a INCREASE in my tax expense

46
Q

Tax expense calculation

A

Directors estimated tax for the year
(given in a note to the trial balance= tax payable in SOFP)
+/-
Under/over provision from prior year (tax figure found in the trial balance)

= TAX EXPENSE IN SOPL

47
Q

What is revenue according to IFRS 15?

A

Revenue is income arising in the ordinary course of an entity’s activities, including the sale of goods or services, both on credit and cash, net of discounts, refunds, and VAT.

48
Q

THROWBACK What is the journal of VAT on sale to a customer on credit

A

DR TR 1200
CR Income/Sales 1000
CR Tax 200

49
Q

THROWBACK What is the journal for a refund

A

Dr Trade Rec
Cr Cash

50
Q

THROWBACK When looking at revenue net of discounts how is this calculate for
1. Trade discount
2. Early settlement discount

A
  1. Trade discount
    Always deduct
  2. Early settlement discount
    Only deduct if we expect customer to pay within that period
51
Q

When should revenue generally be recognised according to IFRS 15?

A

Revenue should be recognised when the entity has transferred the goods or services to the customer and control has passed to them.

52
Q

How is revenue received in advance treated according to IFRS 15?

A

Revenue received in advance is treated as deferred income (liability) until the control of the goods or services is transferred to the customer.

53
Q

What items are not included in revenue under IFRS 15?

A

Revenue does not include:
- Profit on disposal of tangible non-current assets (since it does not arise from ordinary activities).
- Interest received and dividends from investments, which are presented as finance income or investment income in the statement of profit or loss.

54
Q

Q: What is the main goal of IAS 8?

A

A: The goal of IAS 8 is to enhance the usefulness of financial statements by ensuring that entities clearly disclose their accounting policies and limit unnecessary changes in accounting policies.

55
Q

Q: How does IAS 8 ensure consistency across financial statements?

A

A: IAS 8 ensures that changes in accounting policies, accounting estimates, and errors are treated in the same way across different entities, with appropriate disclosures made.

56
Q

Q: Why are company financial statements regulated?

A

A: Company financial statements are regulated to protect investors who use them to make economic decisions and to ensure that all statements are comparable for meaningful analysis.

57
Q

Q: What are the main aspects that the rules and regulations apply to in financial statements?

A

A: Rules and regulations apply to:

Content: What information must be included.
Accounting concepts: How figures should be prepared.
Presentation: The layout of the final accounts.

58
Q

Q: What are the main sources of regulations for company financial statements?

A

A: The main sources are the Companies Act 2006 and accounting standards such as IFRS Standards and specifically IAS 1 (revised) for presentation of accounts.

59
Q

Q: What ethical values must underpin the regulatory structure to maintain public confidence?

A

A: The regulatory structure must be:

Honest and truthful
Transparent and adaptable
Legally compliant
Consistent

60
Q

How to calculate retained earnings (end of the year)

A

retained earnings balance will comprise: opening balance + profit for the year – bonus issue – dividends

ICAEW - CERTIFICATE LEVEL 1 - ACCOUNTING (16 decks)

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