Definitions Chapter 4

Question 1

Limited company

Answer 1

A form of business unit hat is granted a separate legal existence from that of its owners.
The owners of this type of business are liable for debts only up to the amount that they have agreed to invest

Question 2

Shares

Answer 2

Portions of ownership, or equity, of a company

Question 3

Limited liability

Answer 3

The restriction of the legal obligation of shareholders to meet all of he company’s debts

Question 4

Public limited company

Answer 4

A limited company for which the directors cannot restrict the ownership of its shares

Question 5

Private limited company

Answer 5

A limited company for which the directors can restrict the ownership of its shares

Question 6

Corporation tax

Answer 6

Taxation that a limited company is liable to pay on its profits

Question 7

London Stock Exchange

Answer 7

A market centred in London where new finance is raised by private businesses and public bodies and where share and loan notes, already in issue, can be bought and sold

Question 8

Directors

Answer 8

Individuals who are appointed (normally by being elected by the shareholders) to act as the most senior level of management of a company

Question 9

Corporate governance

Answer 9

Matters concerned with directing and controlling a company

Question 10

UK Corporate Governance Code

Answer 10

A code of practice for companies listed on the London Stock Exchange that deals with corporate governance matters

Question 11

Reserves

Answer 11

Part of the owners’ claim (equity) of a limited company that has arisen from profits and gains, to the extent that these have not been distributed to the shareholders or reduced by losses

Question 12

Nominal value

Answer 12

The face value of a share in a company. Also called par value

Question 13

Revenue reserve

Answer 13

Part of the owners’ claim (equity) of a company that arises from realised profits and gains, including after-tax trading profits and gains from disposals of non-current assets

Question 14

Dividend

Answer 14

The transfer of assets (usually cash) made by a company to its shareholders

Question 15

Ordinary shares

Answer 15

Shares of a company that entitle the owners to the residue of profits after all other stakeholders have been satisfied

Question 16

Preference shares

Answer 16

Shares of a company that entitle their owners to the first part of any dividend that is paid

Question 17

Splitting

Answer 17

Changing the nominal value of shares to a lower figure (from, say, £1.00 to £0.50) and then issuing sufficient shares so that each shareholder has the same total nominal value of shares as before

Question 18

Consolidating

Answer 18

Changing the nominal value of shares to a higher figure (from, say, £0.50 to £1.00) and then reducing the number of shares in issue so that each shareholder has the same total nominal value of shares as before

Question 19

Capital reserves

Answer 19

Reserves that arise from unrealised profits from the revaluation of non-current assets or gains from the issue of shares above the nominal value

Question 20

Share premium account

Answer 20

A capital reserve reflecting an amount paid for shares by shareholders, which is over and above their nominal value

Question 21

Bonus shares

Answer 21

Reserves that are converted into shares and issued ‘free’ to existing shareholders

Question 22

Issues share capital

Answer 22

The part of the share capital that has been issued to shareholders.
Also known as alloyed share capital

Question 23

Fully paid shares

Answer 23

Shares for which the shareholders have paid the full issue price

Question 24

Called-up share capital

Answer 24

The part of a company’s share capital for which the shareholders have been asked to pay he agreed amount

Question 25

Paid-up share capital

Answer 25

The part of he share capital of a company that has been called and paid

Question 26

Profit before taxation

Answer 26

The result when all of the appropriately matched expenses of running a business have been deducted from the revenue for the year, but before the taxation charge is deducted

Question 27

Statement of comprehensive income

Answer 27

A financial statement, requires by IAS1, which extends the conventional income statement to include other gains and losses that affect shareholders’ equity

Question 28

Statement of changes in equity

Answer 28

A financial statement, requires by IAS1, which shows the effect of gains/losses and capital injections/withdrawals on the equity base of the company

Question 29

International Financial Reporting Standards

Answer 29

Transnational accounting rules that have been adopted, or developed, by the International Accounting Standards Board and which should be followed when preparing the published financial statements of listed limited companies

Question 30

Auditors

Answer 30

Professionals whose main duty is to make a report to shareholders as to whether; in their opinion, the financial statements of a company show a true and fair view of performance and position and comply with statutory and financial reporting standard requirements

Question 31

Directors’ report

Answer 31

A report containing information of a financial and non-financial nature that the directors are legally obliged to produce as part of the annual financial report to shareholders

Question 32

Strategic report

Answer 32

A narrative report by the directors that helps users assess the performance and position of the business, as well as understand the principal risks and uncertainties facing the company

Question 33

Creative accounting

Answer 33

Adopting accountancy policies to achieve a particular view of performance and position that preparers would like users to see rather than what is a true and fair view