Chapter 2: The Legal Framework for Companies and Partnerships

Question 1

What are the authorities that companies find themselves accountable to?

Answer 1

Regulatory bodies e.g. companies house
Tax authorities e.g. HMRC
Other industry specific authorities e.g. FCA

Question 2

What is the minimum period an organisation has to retain their accounting records for?

Answer 2

Seven years

Question 3

What is the Companies Act and what year was it introduced?

Answer 3

Companies Act 2006 is the legislation that covers the need to prepare statements and how they should be prepared

Question 4

The Companies Act 2006 requires that financial statements are produced that give a ‘true and fair’ view of the position and performance of the company.

What are the four statements that define ‘true and fair’ financial statements?

Answer 4

1. They should follow all appropriate accounting standards
2. They should contain information sufficient to satisfy expectations of the users
3. They should follow generally-accepted practice
4. They should not contain any material misstatement

Question 5

Who is responsible for financial records?

Answer 5

Financial directors are responsible for producing true and fair financial statements and they must be approved by the board of directors

Question 6

How many directors should a company have?

Answer 6

Every company must have at least one director and a public company must have at least two

Question 7

What are the four types of directors and what do they do?

Answer 7

1. Executive director - full time employee involved in management
2. Non-executive director - not an employee but exerts control over executive directors
3. Managing Director - the board directs day-to-day management to the MD
4. Chairman - responsible for ensuring procedure in meetings is followed

Question 8

What are the general duties that a director should follow?

Answer 8

• to act in good faith and promote success
• to act within and not to delegate their powers
• to exercise care and diligence
• to avoid conflicts of interest
• to not accept benefits from a third party
• to declare interest in an arrangement or decision

Question 9

What are the rights of shareholders?

Answer 9

• to be sent a copy of annual accounts
• to require directors to call and attend meetings
• to receive dividends
• to inspect company information
• to vote on company affairs

Question 10

Define an unlimited liability partnership

Answer 10

When joint owners are mutually responsible for the company’s debt, it is the default form of a partnership

Question 11

What is the partnership agreement and what is followed if a partnership doesn’t have one?

Answer 11

Partners may sign a partnership agreement when forming their firm.

In the absence of a partnership agreement, the Partnership Act 1890 is followed

Question 12

What are the two things that a partnership agreement is likely to cover?

Answer 12

1. Profit sharing agreement
2. Partners’ authority

Question 13

Define goodwill and why it arises.

Answer 13

Goodwill is the difference between the amount paid and the market value.

It arises due to factors such as reputation, location, market position, expertise and customer base