Chapter 2

Question 1

definition of a member of a company

Answer 1

someone who owns at least one share i.e. shareholder

Question 2

Criteria of a business to become a plc

Answer 2

• issued share capital of over £50k
• at least two members and two directors

Question 3

What is the first document a limited company must prepare?

Answer 3

Articles of Association

Question 4

What does articles of association lay out?

Answer 4

• constitution of the company
• regulates the affairs of the company to the outside world
• sets out rules for running the company (powers to directors and holding of company meetings)

Question 5

Two main types of shares:

Answer 5

• ordinary shares
• preference shares

Question 6

Summary of ordinary shares

Answer 6

• carry main load of risks and rewards of business profits
• receives profits in form of dividends after preference shares
• carry voting rights
• holders attend AGM and other shareholder meetings

Question 7

Summary of preference shares

Answer 7

• fixed agreement on future dividends
• paid before ordinary shares
• paid before ordinary shares in event of liquidation
• no voting rights

Question 8

Another way of saying nominal value of a share

Answer 8

Par value

Question 9

Name given to difference between purchase price of a share and the par value

Answer 9

Share premium (par value of £1.00 but sold at £1.50 results in share premium of £0.50

Question 10

Debenture (loan stock) principles

Answer 10

• formal certificate offered by large company
• fixed interest rates
• secured against business assets

Examples 5% business loan stock £100k equates to £5k a year in interest to the lender

Question 11

Two main items on statement of profit or loss that are found in limited companies but not elsewhere

Answer 11

• directors’ remuneration
• loan and debenture interest

Question 12

where would be the profit or loss of a revaluation be found in the financial statements?

Answer 12

after statement of profit or loss

Question 13

what is the purpose of the mandatory statement of changes in equity?

Answer 13

provide bridge from P&L to SoFP

Question 14

What are reserves?

Answer 14

Residual profit left over after dividends taken

Question 15

Two types of reserves:

Answer 15

• Capital reserves (property revaluation. Cannot be used to issue dividend as no cash involved. Share premium)
• Revenue reserves (retained earnings or specific or general reserves kept after dividends. Can be used for dividends)

Question 16

What is the accounting treatment to shares issued at above par value?

Answer 16

• pay value issue is recorded in issued share capital section
• premium (excess) is recorded as capital reserves

Question 17

is share premium a capital or revenue reserve?

Answer 17

Capital reserve (brought about due to revaluation and cannot be used for dividends)