Chapter 2 - Introduction to Limited Company Financial Statements Flashcards
Limited Company
A separate legal entity owned by shareholders and managed by directors.
Limited Liability
Shareholders of a company are liable for company debts only to the extent only to the extent of any money unpaid on their shares.
Shareholder
A person who owns at least one share in a limited company; a shareholder is also a member of a company.
Public Limited Company
A company, registered as a plc, with an issued share capital of over £50,000 and at least two members and at least two directors, it may raise funds on the stock markets.
Private Limited Company
Any limited company with share capital that is not a public company.
Articles of Association
The document that provides the constitution of the company, regulates the affairs of the company to the outside world, and sets out the rules for running the company.
Ordinary Shares
Commonly issued type of shares which take a share in the profits of a company, in the form of dividends, but which carry the main risks.
Preference Shares
Shares which carry a fixed rate of dividend paid, subject to sufficient profits, in preference to ordinary shareholders.
Debentures
Issued by companies raising long-term finance; debenture interest is a finance cost in the statement of profit or loss.
Nominal Value
The par value of the shares entered in the financial statement.
Issue Price
The price at which shares are issued to shareholders by the company.
Market Value
The price at which shares are traded.
Directors Renumeration
Amounts paid to directors as employees of the company; an overhead in the statement of profit and loss.
Corporation Tax
Tax paid by a company on its profit.
Statement of Changes in Equity
Statement which shows how the profit for the year has been distributed and provides a link to retained earnings figure shown in the statement of financial position.
Dividends
Amounts paid to shareholders from the profit of the company; an interim dividend is paid just over half-way through a financial year; a final dividend is paid early in the following year.
Issued Share Capital
The classes and numbers of shares that have been issued by the company.
Reserves
Profits retained by the company; there are two main types;
- Capital reserves, created as a result of non-trading activities, are non-distributable.
- Revenue reserves, e.g. retained profits from the statement of profit or loss, are distributable.
Revaluation Reserve
Capital reserve created by the upwards revaluation of a non-current asset, most usually property; cannot be used to fund dividend payments.
Share premium account
Capital reserve created by the issue of shares at a price higher than nominal value, the excess being credited to share premium; it cannot be used to fund dividend payments.
Advantages to forming a Limited Company
- limited liability; shareholders can only lose the value of their investment
- separate legal entity from its owners
- ability to raise finance (eg shares)
