Chapter Four Flashcards
Definition of small company
Defined as companies meeting two of the following three:
1. less than 50 employees
2. turnover less than 10.2m
3. assets less than 5.1m
What is a close company?
One which is under the control of five or fewer people or under the control of its directors
What is a loan repayment shown as?
A reduction in assets and a reduction in liabilities, having no impact on the income statement
How is a capital expense defined?
It is ‘capitalised’ and shown on the balance sheet, such as the purchase of property
Can the share premium account reserve be used to pay a dividend?
No
What is a permitted use of a share premium account reserve?
Write-off of expense incurred in rights issue of shares
Non-current assets + working capital equals?
Non-current assets + current assets = current liabilities + non-current liabilities + shareholders’ funds
Working capital = current assets - current liabilities
Non-current assets + current assets - current liabilities = non-current liabilities + shareholders’ funds
What do non-current liabilities include?
Long-term loans and provisions
Would a revaluation of non-current assets directly affect reserves?
Yes
Which accounting concept gives rise to the inclusion of depreciation in accounting statements?
Accruals
What is the accruals/matching concept?
It states that costs should be allocated to the periods where revenues are generated
What does depreciation involve?
Allocating the costs of a non-current asset over its useful economic life
Shareholders funds in the accounting equation?
Share capital + reserves
If a company makes a provision for the first time against the estimated amount of doubtful debts, this will?
Reduce reported profits for the year
What is authorised share capital?
The share capital that the company is allowed to issues. Since some of it may have been retained for future issues, it may not all be shown on the balance sheet
A business may make a profit during a period but have less cash in the bank at the end of the period. Why could this be?
Receivables are taking longer to pay than previously
What are post-balance sheet events?
Events which occur between the balance sheet date and the date on which the directors approve the accounts
How can post balance sheet events be classified?
Either as adjusting or non-adjusting depending on whether the events are based on an existing conidition at the balance sheet date or a new event since the statement date
Where would accruals and deferred income be found?
Current liabilities
What are arruals?
They are liabilities owed for services used during the chargeable accounting period, but not yet paid for eg gas bill which is outstanding
What is true about inventory?
It is a current asset and is the least liquid of current assets
What are legal requirements for a large company’s annual accounts?
- True and fair
- Comply with the companies act 2006
- Responsibility of the directors
- They must be audited
The effect on a company’s accounts of borrowing money would be to?
Increase assets and liabilities
A purchase of a non-current asset on credit will have what effect on a company’s account?
No effect of net assets; no effect on shareholderer’s funds
If a company increases the value of an asset over its inital cost on the balance sheet, the surplus will be shown as part of?
Revaluation reserve. The revaluation reserve will be increased by the same amount, increasing shareholders’ funds
What is treated as cash in a company’s cash flow statement?
- Cash from a bank overdraft
- Foreign currency overdrafts
- Foreign currency bank balances with 24 hours’ notice
Where are prepayments found?
Current assets
What are prepayments?
They occur if a company has paid for a service, but not yet had the benefit during the accounting period. The service owed to the company is shown at the year-end as a current asset
Is an increase in inventory good cash flow perspective?
It suggests the company is spending cash on increasing this asset and so this is bad from a cash flow point of view
Is a decrease in accounts receivable good cash flow perspective?
Yes, as the company is receiving cash from those debtors
Is an increase in accounts payable good cash flow perspective?
Then the company is not paying those creditors as quickly as they maybe should be which is good
Is depreciation being charged on assets good from a cash flow perspective?
Yes, from a cash flow perspective it is good as the company is not actually spending any money on depreciation, it is an accounting entry only
Why would the purchase of a new computer not qualify as a revenue expense?
The purchase of computer equipment is regarded as capital expenditure and is capitalised on the balance sheet.
Net book value of non-current assets assuming the cost model is applied?
Non-current assets(original cost) minus accumulated depreciation at year end
Are guarantees/warranties and an outstanding litigation case shown in the accounts?
No as they are both examples of contingent liabilities and not shown in the accounts
Why is bad debt included in the accounts?
Bad debt provisions represent an amount likely to be written off by the company and is included in the accounts
Why may a company repurchase shares?
Pay back surplus cash back to shareholders and increase share price
Current ratio
Current assets/current liabilities
Working capital formula
Net current assets, i.e. current assets - current liabilities
How is a significant influence accounted for?
Associate
How is control accounted for?
Subsidiary
What do high stock levels result in?
High current assets and therefore a higher current ratio
How can a firm increase its interest cover ratio?
Interest cover is EBIT/interest expense. This ratio can be increased by either increasing EBIT or decreasing interest expense. If the company reduce their non-current liabilities, there would be less interest so lower interest cover.
What is interest cover?
Interest cover is EBIT/interest expense
Define the quick ratio (acid test)
Receivables, cash and deposits divided by payables and short-term borrowings
How does a company include another company in its balance sheet when it controls 75%?
The balance sheet will record the group’s share of the net assets of the subsidiary company. This is carried out by recording 100% of the subsidiary assets and then making a deduction to reflect a minority interests
What is gearing?
The ratio of debt to equity
A company with a low gearing ratio will?
Have a high level of equity or a low level of debt
What is capital employed?
Shareholder funds plus long-term liabilities. It does not include current liabilities
What is true about preference shareholders?
They have preference on capital repayment on liquidation and on receipt of dividends. This is generally cumulative in that preference dividend arrears must be paid before any ordinary dividends
Types of preference shares
- Participating share
- Redeemable
- Convertible
What type of share is A-share?
Ordinary
Do ordirnary shareholders share votes and dividends?
Yes they do
Do MTFs reduce trading costs?
Yes they are expected to
What is true about stamp duty and SDRT?
Stamp duty is payable on certified purchases and SDRT is payable on electronic dematerialised transfers of shares
What are preference share dividends classed as?
Franked investment income
What is true about convertible preference shares?
A fixed preference dividend is paid now, but the investor has the opportunity to convert those preference shares into ordinary equity shares in the future
Do preference shares experience an increase in value as the company grows?
No, so would be unlikely to deliver capital gain, whereas capital gains would be a possibility with ordinary equity shares
Is there a risk that preference shares make a capital loss
Yesm if the company goes into liquidation
Criteria of a medium-sized company?
Must meet 2 out of 3:
1. Turnover less than 36m
2. Balance sheet less than 18m
3. Average no. of employees less than 250
How are pension scheme assets measured?
They are measured at market value, whilst liabilities are calculated using the projected unit method
What is the projected unit method?
Discounts back the liabilities using an AA rated corporate bond
What is classified as an available-for-sale financial asset?
An investment in shares that has a quoted price, and that is not held for trading
How are derivatives classified and recorded?
They are classified as financial assets and liabilities and they should be recorded in the balance sheet at fair value
How should gains and losses be recorded for a derivative?
If they are freestanding, they should be recorded in the profit and loss account. If they are being used as a risk management tool to hedge another assett then they are reported in other comprehensive income
How are preference shares reported?
Normally they are reported in equity with the dividend reported in the Statement of Change in Equity
How is a redeemable preference share shown?
The nominal value to be repaid is shown as a liability and the dividend reported as an interest expense
How are preference shares normally reported?
They are normally reported in equity with the dividend reported in the Statement of Change in Equity
How are redeemable preference shares reported?
The nominal value to be repaid is shown as a liability and the dividend is reported as an interest expense (profit and loss)
When will firms offering defined benefit schemes show pension plan assets on their balance sheet?
If the plan assets are greater than the PV of the liabilities
If the PV of the liabilities is higher than the value of plan assets what do firms report?
They will report a liability
Who does not report any asset or liability?
Firms offering defined contribution schemes do not report any asset or liability
How are contributions paid to a DC scheme reported?
In the firm’s profit and loss account
How are dividends paid reported?
In the Statement of Change to Equity
How are actuarial gains/losses reported?
In Other Comprehensive Income
How are gains/losses and changes in the fund assets reported?
In other comprehensive income
How are gains/losses in the value of hedging instrumens reported?
In other comprehensive income
How do firms offering DB pensins report?
As an expense the service cost and net interest
What should be added to the trading profit figure to arrive at the correct cash flow figure?
An increase in inventory will reduce cash, so this is deducted. A decrease in trade receivables gives rise to an increase in cash so we add any decrease in receivables. An increase in payables arises as cash has been retained, so we add any increase in payables. Depreciation does not directly result in a cash flow and should be added back to the trading profit.
What is a financial asset?
Any asset that is either cash, or an equity instrument of another entity. A financial asset can also be a contractual right to receive cash or another financial asset from another entity, or exchange financial assets or financial liabilities with another entity under conditions that are potentiall favourable to the entity
What is a financial liability?
Any liability that is a contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity
What is included in the statement of changes in equity?
- The issue of new share capital
- The amount of net income retained during the year
- Any movement in the reserve for changes in foreign exchange gains and losses
What is not included in the statement of changes in equity?
The purchase of property, plant, and equipment is not included, however the amount by which property, plant, and equipment is valued up or down is included
