Chapter 2 - Introduction to Limited Company Financial Statements

Question 1

Limited Company

Answer 1

A separate legal entity owned by shareholders and managed by directors.

Question 2

Limited Liability

Answer 2

Shareholders of a company are liable for company debts only to the extent only to the extent of any money unpaid on their shares.

Question 3

Shareholder

Answer 3

A person who owns at least one share in a limited company; a shareholder is also a member of a company.

Question 4

Public Limited Company

Answer 4

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.

Question 5

Private Limited Company

Answer 5

Any limited company with share capital that is not a public company.

Question 6

Articles of Association

Answer 6

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.

Question 7

Ordinary Shares

Answer 7

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.

Question 8

Preference Shares

Answer 8

Shares which carry a fixed rate of dividend paid, subject to sufficient profits, in preference to ordinary shareholders.

Question 9

Debentures

Answer 9

Issued by companies raising long-term finance; debenture interest is a finance cost in the statement of profit or loss.

Question 10

Nominal Value

Answer 10

The par value of the shares entered in the financial statement.

Question 11

Issue Price

Answer 11

The price at which shares are issued to shareholders by the company.

Question 12

Market Value

Answer 12

The price at which shares are traded.

Question 13

Directors Renumeration

Answer 13

Amounts paid to directors as employees of the company; an overhead in the statement of profit and loss.

Question 14

Corporation Tax

Answer 14

Tax paid by a company on its profit.

Question 15

Statement of Changes in Equity

Answer 15

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.

Question 16

Dividends

Answer 16

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.

Question 17

Issued Share Capital

Answer 17

The classes and numbers of shares that have been issued by the company.

Question 18

Reserves

Answer 18

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.

Question 19

Revaluation Reserve

Answer 19

Capital reserve created by the upwards revaluation of a non-current asset, most usually property; cannot be used to fund dividend payments.

Question 20

Share premium account

Answer 20

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.

Question 21

Advantages to forming a Limited Company

Answer 21

• limited liability; shareholders can only lose the value of their investment
• separate legal entity from its owners
• ability to raise finance (eg shares)