Financial Statements of Companies

Question 1

What is a company and 3 things it can do

Answer 1

• A company is an organization established under Corporations Act 2001 as a separate legal entity
• It can make contracts in its own name, can own property and can sue and be sued in its own name

Question 2

4 Purposes of Corporations Act 2001

Answer 2

• Defines and give 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 - such as public + proprietary companies
• Requires that the financial report for a financial year of public and large proprietary companies must comply with the AASB accounting standards

Question 3

What is Company Capital

Answer 3

• Capital of a company is divided into parts known as shares
• Individuals purchase these shares and become the owners of the company - known as shareholders or members

Question 4

Who are directors of a company

Answer 4

• Shareholders of a company elect or appoint people to act on their behalf - known as directors
  
  • Directors in turn, appoint managers who are responsible for day-to-day running of the company

Question 5

Nature and 3 Powers of Directors

Answer 5

• Corporations Act provides that the directors are to manage the company
• The company constitution or replaceable rules set out powers of directors including:
  
  • Right to issue shares
  • To borrow money
  • To appoint and dismiss the senior managers of the company

Question 6

5 Duties of Directors

Answer 6

• Director must carry out duties with reasonable care + diligence
• Director must act in the best interest of the company
• Director must not make improper use of their position to gain an advantage for themselves or for another person
• Director must not make improper use of info obtained as a director to gain an advantage for themselves or for another person
• Director must ensure that a company does not trade when its insolvent

Question 7

What is a Company Limited by Shares

Answer 7

A company in which the liability of the shareholders for company debts is limited to the amount owing on their shares

Question 8

2 Types of Companies Limited by Shares

Answer 8

proprietary + public companies

Question 9

3 Characteristics of Propreitary Companies

Answer 9

• Cannot raise money from the public
• Proprietary company must have at least 1 shareholder and a maximum of 50 non-employee shareholders
• Must have at least 1 director

Question 10

3 Main Conditions for Large Proprietary Companies

Answer 10

• The total revenue is $50 million or more annually
• Total gross assets, on the last day of a financial year, is $25 million or more
• The company and any other entities that it controls, at the end of a financial year, has 100 employees or more

Question 11

Public Company 4 characterisitics

Answer 11

• Public company is any company that is not a proprietary company
• Must have at least 1 shareholder; no upper limit on number of shareholders
• A public company can ask the public to purchase shares in the company and can issue debentures to the public
• Must have at least 3 directors

Question 12

3 Advantages of a Company Limited by SHares

Answer 12

• A company has a continuous existence; death of a shareholder does not end company - separate legal entity
• Shareholders in these companies can easily sell their shares
• Shareholders of companies limited by shares know that they have the protection of limited liability
  
  • Liability of shareholders for company debts is limited to the amount on their shares

Question 13

What are dividends

Answer 13

distribution of the profits of a company to the shareholders

Question 14

Interim vs Final Dividend

Answer 14

Interim Dividend

• Declared and paid by the directors without shareholder approval

Final Dividend

• Usually recommended by the directors, approved by shareholders at the annual general meeting

Question 15

Explain what retained earnings are (4)

Answer 15

• Are composed of accumulated profits after tax

    - **As profit does not equal cash held then retained earnings does not represent a set amount of cash**

Question 16

Compare 3 characteristics between a public company over a large proprietary company

Answer 16

• Members - in a public company there must be at least one member with maximum whereas with a large proprietary company the minimum is 1 member but a limit of 50 is imposed
• Directors - for a public company, there must be 3 directors, 2 of which must be Australian residents, whereas, in a large proprietary there must be at least 1 director who is an Australian resident
• External Funding - a public company can issue debentures and unsecured notes to raise large amounts of funds whereas a large proprietary company are not permitted to source funds from the public
• Internal Funding - a public company can be registered on the ASX to raise funds from the public whereas a large proprietary company cannot