Company accounts

Question 1

How can companies be financed?

Answer 1

Equity (shares), loans or both.

Question 2

What are the two types of share capital?

Answer 2

Ordinary shares and Preference shares

Question 3

What is the difference between ordinary shares and preference shares?

Answer 3

Ordinary shares carry out voting rights but no automatic right to dividend.

Preference shares attract a fixed dividend, paid in priority to ordinary dividend but no automatic right to a dividend. No voting rights.

Question 4

What is the “cost” of share capital?

Answer 4

The amount of dividend paid on the shares. Shareholders are members of the company.

Question 5

What are loan notes (aka bonds)?

Answer 5

Long term liabilities which accrue interest, normally at a fixed rate. Holders of loans are creditors of the company.

Question 6

Why are loan notes deemed less risky than shares, despite carrying no voting rights?

Answer 6

They receive fixed interest.

Question 7

True of False: Loans are typically repayable/redeemable at a future date?

Answer 7

True

Question 8

What is the “cost” of loan capital?

Answer 8

The amount of interest paid on the loan notes.

Question 9

How is the interest on loans paid out and charged?

Answer 9

Interest is paid out of pre-tax profits + it is charged to the profit or loss account as an expense (when it falls due, rather than when it is actually paid - companies may need to accrue interest costs at the year end).

Question 10

How is the interest charge calculated if loan stock in purchased or sold mid-way through the accounting period?

Answer 10

The charge is calculated according to the number of months the loan notes were in issue.

Question 11

What are the major reserves you might see in SoFP?

Answer 11

Retained earnings
Revaluation surplus
Share premium

Question 12

What are retained earnings?

Answer 12

The accumulated retained profits, after payment of dividends, of the company.

Question 13

Retained earnings are fully distributable. What does this mean?

Answer 13

The company can pay a dividend up to the level of their retained earnings, even if the company makes a loss that year.

Question 14

Every year, a company will clear the profit made for the year from the P+L account to the retained earnings balance in the SoFP. What is the double entry for this?

Answer 14

Dr Profit or loss account (£final profit)
Cr Retained earnings (£final profit)

Question 15

When is a revaluation surplus created?

Answer 15

When a company re-values its non-current assets upwards.

Question 16

Why are revaluation reserves non-distributable?

Answer 16

The company can’t distribute the assets represented by these reserves to its members because the gain represented by the revaluation has not been realised.

Question 17

When might a share premium arise?

Answer 17

When shares are issued for more than their nominal value.

Question 18

What accounting entries are required when existing shares are purchased/sold between existing shareholders?

Answer 18

Trick question - no entries are required for existing shares, only new ones.

Question 19

What account entries are required for when a company issues new shares?

Answer 19

The accounts need to reflect increase in capital -> rise in entries in the nominal ledger.

Question 20

Where are shares issued at nominal value recorded?

Answer 20

The share capital account.

Question 21

If shares are issued for > their nominal value, where is the excess recorded?

Answer 21

The excess is credited to the share premium account.

Question 22

What is the double entry for 100 £1 shares sold at £1.50?

Answer 22

Dr Cash £150
Cr Sales capital (NV) £100
Cr Share premium £50

Question 23

What is the purpose of a bonus issue?

Answer 23

To reduce the value of shares to increase their marketability
E.g., Investors may be more inclined to buy 2,000 shares at £10 than 1,000 shares at £20.

Question 24

What is the value of a bonus issue?

Answer 24

They are always made at the nominal (face) value.

Question 25

Where is the bonus issue debited to?

Answer 25

Either the share premium or retained earnings account (at the company’s discretion).

Question 26

What is a rights issue?

Answer 26

Existing shareholders are offered the right to acquire more shares.

Question 27

Go over examples of rights issue / bonus issue

Answer 27

Page 69

Question 28

What are dividends?

Answer 28

An appropriation of profit, NOT an expense in the profit or loss account.

Question 29

What is the double entry for dividends payments?

Answer 29

Dr Retained Earnings
Cr Cash

Question 30

When must financial statements for company accounts be completed, so that the information is more useful?

Answer 30

Within 9 months of the year end.

Question 31

In the SoP/L, under what heading would be most appropriate for the expense of carriage inwards to be included?

Answer 31

Cost of sales

Question 32

In the SoP/L, under what heading would be most appropriate for the expense of carriage outwards to be included?

Answer 32

Distribution costs

Question 33

In the SoP/L, under what heading would be most appropriate for the expense of irrecoverable/doubtful debts to be included?

Answer 33

Administration expenses

Question 34

Help visualise financial statements

Answer 34

Pages 70-72

Question 35

When is an extended trial balance required?

Answer 35

When a business needs to make additional journal entries at the year end.

Question 36

What might be included in an extended trial balance?

Answer 36

Corrections of any errors
Adjustments for depreciation, prepayment and accruals