Company Theory Flashcards
Definition of a company
A company is an organisation established under the corporations act 2001 as a separate legal entity. A company can enter into legal agreements in its own name, can own property and can sue and be sued in its own name
Purpose of the corporations act
- defines and gives a legal existence to a company
- sets out the duties of the directors of a company
- sets out the external audit requirements of a public company
- sets out and defines the different types of companies that are permitted to exist under the act
- requires that the financial report for a financial year of public and large proprietary companies must comply with the AASB accounting standards
Company capital
The capital of the company is divided into parts known as shares. Each share is given a money value. People purchase these shares and become the owners of the company. The owners of a company are known as shareholders or members
Companies limited by shares
One in which the liability of the shareholders for s company’s debts is limited to the amount owing on their shares
Proprietary company
Cannot raise money from the public
- at least 1 shareholder, max 50 non-employee shareholders
- at least 1 director
- word “proprietary” or “pty” included in its name
Large proprietary company
Satisfies any two of the three conditions:
- Total revenue for a financial year is $25 million or more
- Total gross assets on the last day of a financial year is $12.5 million or more
- The company at the end of the financial year had 50 employees or more
Public company
Company that is not a proprietary company
- at least 1 shareholder, no upper limit on the number of shareholders
- can ask the public to purchase shares in the company and can issue debentures to the public
- at least 3 directors
- must have word “limited” or “ltd” in its name
Preference shares
Have one or more rights attached to them that are not attached to ordinary shares
The usual rights of preference shareholders is the right to receive a fixed rate of dividend
Ordinary shares
Have no special rights attached to them. Do not have a right to a dividend at a fixed rate
Rights of ordinary shareholders
- If a company is liquidated, the ordinary shareholders are entitled to the repayment of their capital after all the creditors have been paid
- The right to vote at meetings of shareholders and to erect the directors of the company
- The right to receive a copy of the annual financial report of the company
- The right to receive a dividend once the divided has been approved for payment
List characteristics of companies
Limited liability in a company limited by shares Number of owners Number of directors Continuity of existence Separate legal entity Transfer of ownership
Limited liability in a company limited by shares
The liability of a shareholder for the debts of a company limited by shares is restricted to the amount the shareholder owes on these shares
Number of owners
A public and a proprietary company must have a minimum of 1 shareholder. There is no upper limit on the number of shareholders of a public company. A proprietary company can have a maximum of 50 non-employee shareholders
Number of directors
A public company must have a minimum of 3 directors. A proprietary company must have at least 1 director
Continuity of existence
The ownership of a company will change from time to time as shareholders die or sell their shares but the company continues to exist until it is de registered
Separate legal entity
A company is a separate legal entity. A company can own property and can enter into contracts in its own name and can sue and be sued in its own name
Transfer of ownership
A shareholder in a public company can sell their shares at any time, without restriction. A shareholder in a proprietary company may be prevented by the constitution of the company from selling their shares without the approval of the other shareholders
Company directors
The shareholders of a company direct or appoint people to act on their behalf. There representatives of the shareholders are known as directors. The directors appoint managers who are responsible for the day-to-day running of the company
Duties of directors
- Must carry out their duties with reasonable care and diligence
- Must act in the best interest of the company
- Must not make improper use of their position to gain an advantage for themselves or for another person
- Must ensure that a company does not trade when it is insolvent
Advantages of companies limited by shares
- public companies listed on the Australian securities exchange can raise large amounts of capital by issuing shares
- public companies can borrow large amounts of money from the public
- shareholders of companies limited by shares know that they have the protection of limited liability
- a company has a continuous existence. The death of a shareholder does not end the company as it is a separate legal entity
- a person who has no business skills can become a part owner of a company listed on the Australian Securities exchange. Shareholders in these companies can easily sell their shares
Dividend
Is a distribution of the profit of a company to the shareholders
Final dividend
Is usually recommended by the directors, approved by the shareholders at the annual general meeting and then paid out
Interim divided
Is declared and paid by the directors without shareholder approval. The authority to pay an interim dividend must be given to the directors in the constitution of the company
Once a dividend has been approved for payment it is said to be declared
ASIC role
The Australian Securities and Investments Commission’s (ASIC’s) role is to enforce and regulate company and financial services laws to protect Australian consumers, investors and creditors
Whilst followings set of standard known as listing rules
AASB role
The AASB accounting standards are a set of rules that companies listed on the Australian Securities Exchange and some other organisations must follow when they prepare accounting reports for their owners
FRC role
The role of the financial reporting council is to supervise the work of the Australian accounting standards board-
- monitors the process of adopting international accounting standards
- gives advice to the federal treasurer on the standard setting process
- gives advice to the Australian accounting standards board
Purpose of the AASB accounting standards
- help investors by ensuring that the accounting reports of public companies contain relevant and reliable information on the performance of the company
- assist the directors of companies in performing their duties
- give confidence to investors who want to invest their money on the Australian securities exchange
International accounting standards board role
Is responsible for the development of a set of international accounting standards. If all countries have a common set of accounting standards then investors can compare the performance of major companies in different companies
Lobby groups
The role of lobby groups is to influence the content of accounting standards in ways that favour their views
Australian securities and investment commission role
- Administer the corporations act and a number of other laws
- Enforce the AASB accounting standards
- Interpret accounting standards and issues these interpretations in documents known as regulatory guides
External auditor
Is an accountant who is not an employee of the business and can conduct an independent review of the business
Is appointed by the shareholders and re-appointed at the annual general meeting
Role of external auditor
Is to protect the external users of the general purpose financial reports prepared by the company
Gives investors confidence that the financial reports of a company accurately reflect the performance of the company
External auditor expresses an opinion as to whether or not the financial report of a company:
- gives a true and fair view of the financial position of the company
- complies with the AASB accounting standards
The external auditor must inform ASIC of any breach of he corporations act and of any failure to comply with the AASB accounting standards
