Company Accounts

Question 1

share equity:
describe ordinary shares

Answer 1

ordinary shares allow shareholders to attend and vote at all shareholder meetings held by the company. The dividends paid to shareholders will vary and depend on the profits made by the company
- they don’t know how much money they will receive each year.

Question 2

share equity:
describe preference shares

Answer 2

unlike ordinary shares these generally carry no voting rights. Preference shareholders are paid a fixed rate of dividend e.g 5% of investment each year.

Question 3

describe a private limited company

Answer 3

• private limited companies are privately owned and shares can only be sold to relations, friends and employees.
• a minimum of 1 shareholder is required to register a private company in the UK but there is no upper limit to the number of shareholders a company can have during or after the company formation.
• they don’t have to publish annual financial statements
• ltd

Question 4

describe a public limited company

Answer 4

• can sell its shares on the stock market to the public
• recognised by plc
• no limit to the number of shareholders it may have
• they must publish their annual financial statements

Question 5

advantages of a public limited company (plc)

Answer 5

• all shareholders benefit from limited liability
• equity can be raised by selling shares on the stock market
• a plc has a legal identity distinct from shareholders and is unaffected by changes in ownership

Question 6

disadvantages of a public limited company (plc)

Answer 6

• the setting up of a plc is determined by numerous legal regulations
• a plc must publish it’s financial statements
• the provision of the company’s acts restricts the activities of the plc
• shareholders in a plc are not guaranteed a return on their investment in terms of profit

Question 7

two documents necessary to form a plc with the registrar of companies

Answer 7

memorandum of association
articles of association

Question 8

what is the purpose of a memorandum of association

Answer 8

it deals with the external regulations for the management of the proposed company

Question 9

what is the purpose of an article of association

Answer 9

it deals with the internal regulations for the management of the proposed company and is subordinate to and controlled by the memorandum of association.

Question 10

what is included in the memorandum of association?

Answer 10

• the name of the company
• a statement of its objectives
• address in the UK of the registered office

Question 11

what is included in the articles of association?

Answer 11

• the rights of shareholders
• the directors remuneration /powers
• holding of company meetings

Question 12

what are preliminary expenses?

Answer 12

preliminary expenses include legal and other expenses (printing etc) incurred when a company is formed.

Question 13

what is authorised share equity?

Answer 13

the authorised equity of a company is the maximum amount of share equity that the company is permitted by its constitutional documents used to issue to shareholders

Question 14

what does the purchase of share equity represent?

Answer 14

it represents ownership of a business.

Question 15

what is share premium?

Answer 15

share premium is a reserve which will exist when the company sells shares at a later date for a higher price than the original selling price
share premium is not available for distribution to shareholders but can be used to write off preliminary expenses or make a bonus issue of shares.

Question 16

what are the main sources of finance available to plcs?

Answer 16

ordinary shares, preference shares and debentures.

Question 17

other suitable sources of finance for all businesses including plcs

Answer 17

bank loans
government/ EU grants
mortgages

Question 18

what are debentures?

Answer 18

debentures are long term loans to a plc.
they are bought by investors who want to lend to a company and in return receive an annual fixed interest payment. - safe form of investment
debentures holders are entitled to interest regardless of whether a profit or loss is made by the company.

Question 19

what is a provision?

Answer 19

this is an amount of profit retained in the business to meet an expected loss.
they do not contain sums of money.

Question 20

what is a reserve?

Answer 20

these are not charges against profits but an appropriation of profits

Question 21

what is debenture interest?

Answer 21

debenture interest is the interest a company must pay debenture holders each year in return for the loan.
it is a fixed % of the value of the loan and can be established by looking at debenture information in the trial balance