Introduction to limited company financial statements Flashcards
What is a limited company?
Separate legal entity, owned by shareholders and managed by directors. Statements open to public viewing.
What are advantages of forming a limited company?
Limited liability
Separate legal entity
Ability to raise finance is easier
Company has memebers
What is limited liability?
Shareholders can only lose the amount of their investment, meaning if the company went bust personal assets unless pledged can not be used to pay the companies liabilities.
What is meant by the term separate legal entity?
A limited company is a separate legal entity from its owners, meaning legal action proceeds against the company and not the shareholders.
How is it easier to raise finance for a limited company?
Can raise substantial funds from issue of shares and debentures.
Name an advantage of a limited company over a sole trader/partnership?
Limited companies are usually much larger businesses and therefore has a larger status in the business community allowing it to benefit from economies of scale and making it of sufficient size to employ specialists for its functions.
Name the differences between a public limited company (PLC_ and a private limited company (Ltd)?
PLC:
Issued share capital over £50,000
At least two members and two directors
Shares can be sold on stock market.
Ltd:
No minimum requirement for issued capital
At least one member and one director
Shares are not traded publicly.
What is an ordinary share?
Most common issue class of share, carries main risks and rewards of the business. Risks are losing part of or all value of shares if the business loses money, rewards are taking a share of the profits in from of dividends.
What is a preference share?
Carries fixed percentage rate of dividend - for example 5% of nominal value. Only paid dividends if the company makes a profit, preference shares fo not carry voting rights.
In the event of the business going bust, preference shareholders will also receive repayment of capital before the ordinary shareholders.
What is nominal value?
The value of which shares are issued at by a company. Bears little relationship to the market value.
What is the market price of a share?
Market value is the price at which issued or secondhand shares are traded.
Market price share prices are quoted in the financial times and other business newspapers.
What is issue price
The price of shares when issued to shareholders by the company - either when the company is being set up or at a later date when the company needs to raise more funds.
The issue price is either nominal value or above nominal value.
What is meant by the term share premium?
The difference between nominal value and issue price - for example, nominal value is £1; issue price is £1.50 and therefore share premium is 50p
What are debentures?
Formal certificates issued by companies to raise long-term finance from lenders and investors. They are commonly secured against an asset which can be sold incase the company goes bust so that the debenture holders can be repaid.
The debenture is issued for a fixed period which is then repaid at the end of this period, on top of a fixed rate if interest which is paid every year.
Where are loan and debenture interest shown in the financial statements?
SPL under finance costs
Name two overheads which are found in the Pnl of a limited company but not found in the pnl of a sole trader or partnership?
Directors renumeration - directors employed by the company means the amount paid to them appears amongst the overheads of the company - Admin expenses
Loan and debenture interest - Interest which have to be repaid at a fixed rate for debentures and loans are showed under finance costs
What does the statement of changes in equity show?
How the profit has been distributed, also provides a link to the SFP
What do dividends include on the statement of changes in equity?
Interim dividends - paid just over half-way through the financial year
Final dividends - proposed at the end of the previous year but paid early in the current year.
What are two advantages and two disadvantages of loans?
Advantages:
Not giving additional share away in the business, money quicker to obtain from the bank
Disadvantages:
Interest rates
Tied in for a fixed period of time.
What is the double entry for obtaining the initial loan and recording the annual payment of the loan?
Recording initial loan:
Dr - Bank
Cr - Non-Current Liabilities
Recording Annual Payment:
Dr - Loan
Dr - Interest charges
Cr - Bank
What is the double entry for the initial loan, annual payments and final payments for a debenture?
To record initial loan:
Dr - Bank
Cr - Loan
Annual Payment:
Dr - Interest charges - Finance costs
Cr - Bank
Record final payments
Dr - Intereste charges
Dr - Loan
Cr - Bank
What is the double entry for share premium?
Dr - Bank
Cr - Ordinary Share Capital
Cr - Share premium
Why might a company pay out dividends?
Made a loss
Directors have decided to reinvest to meet their long-term objectives.
What items are included under the heading ‘Equity” on the SFP?
Retained earnings
Share Capital
Revaluation Reserve
Share premium
What item will usually be finance cost on the PnL?
Bank interest
What will bank loan be included under on the SFP
Non-Current Liabilities
At what value will the shares be valued at on the SFP?
Nominal Value
Name two types of reserves?
Capital reserves - created as a result of non-trading activities
Revenue reserves - include retained earnings
Name examples of capital reserves?
Revaluation reserve/surplus - When a non current asset is revalued upwards, the amount of the revaluation is recorded as other comprehensive income and placed in a revaluation surplus on the SFP.
Share premium
What are revenue reserves?
Profits generated from trading activities. Includes the balance of retained earnings.
May be specific revenue reserves such as general reserves or reserve for replacement of equipment.
Not cash funds but a book adjustment.
What makes up trade and other receivables?
Receivables + Prepayments
minus doubtful receivables
How to work out Trade and other payables?
Trade payables
Accruals
Interest Accrued
