Limited company accounts Flashcards
what is a limited company
a company owned by its shareholders
separate legal status
can sue and be sued in its own right
what two types of limited company are there
Private
public
what are the characteristics of a private limited company
has LTD after its name
minimum shareholder of one
cannot sell its shares to the public
what is a public limited company
PLC after its name
can sell shares to the general public
can be listed on the stock exchange
minmum share capital of £50,000
needs two documents
what two documents are needed to set up a PLC
Memorandum and articles of association
statutory declaration
what is nominal value
face value/ par value of shares
decided when setting up the business
what is issued capital
nominal share capital issued to share holders
total amount of money raised from selling shares at nominal value
what is share premium
finance raised from selling shares above nominal value
nominal value £1 sale price £1.5
premium= 50p
what are ordinary shares
owners of a company
most common
full voting rights
referred as equity capital
variable dividends
what are preference shares
fixed rate of dividends
entitled to repayment of capital should the company be wound up
not normally have voting rights
safer investment
what is dividends
share of companies profit paid to shareholders as a percentage of their shareholding
interim paid half through financial year
what is a debenture
bonds recording a long term loan to a limited company
pays a fixed rate of interest on debentures
interest paid whether the company makes a profit or a loss
form of loan capital
what are shareholder funds
made up of all share capital of the company plus all reserves
what is loan capital
part of the medium to long-term capital of a limited company provided by banks or debenture holders
what is share issue
additional shares are offered at market value as a method of raising finance
sell shares to anybody
what are rights issue
rising finance by selling shares at a reduced rate to existing shareholders
what are bonus issues
making it look like money is being moved around
piggy bank for uni and for car move money from uni piggy bank to car
What is the difference between a limited company income statement and a sole trader?
Profit from operations
Profit for the year before tax
Profit for the year after tax
what is profit from operations?
earnings from its core business functions for a given period, excluding the deduction of interest and taxes
what is profit before tax?
measure that looks at a company’s profits before the company has to pay corporate income tax
what is profit after tax?
amount that remains after a company has paid off all of its operating and non-operating expenses, other liabilities and taxes
what should the statement of changes in equity contain?
opening equity balances
share issue (including premium)
rights and bonus issue
dividend paid (retained earnings)
profit or loss for the year (retained earnings)
closing balances
what sub-headings will be on the statement of financial position?
current assets
non-current assets
equity
current liabilities
non current liabilities
what are the financial statements for limited companies?
income statement
statement of changes in equity
statement of financial position
statements of cashflow
schedules of non-current assets
what is an issue of shares?
Issued shares are those that the owners have decided to sell in exchange for cash, which may be less than the number of shares actually authorized
what is a rights issue?
invitation to existing shareholders to purchase additional new shares in the company
what is bonus issue?
an issue of additional shares to shareholders instead of a dividend, in proportion to the shares already held.
what are the reasons for publishing accounts?
to report the financial activity of your company at the end of its financial year
what are the benefits of published accounts?
helps show a company’s financial strengths and weaknesses.
what are the limitations of published accounts?
drawn up on a single day, it is possible to window-dress the data to mask financial problems temporarily.
what are the main elements of published accounts?
a ‘balance sheet’, which shows the value of everything the company owns, owes and is owed on the last day of the financial year
a ‘profit and loss account’, which shows the company’s sales, running costs and the profit or loss it has made over the financial year
notes about the accounts
a director’s report
what is IAS1?
complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.
what is IAS7?
requires an entity to disclose the components of cash and cash equivalents and to present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position.
What is the main purpose of IAS1?
So that companies all publish the same information which means financial situation of different companies can be compared more easily
Who are the published accounts of limited companies used by?
Shareholders/investors/prospective investors
Customers and Suppliers (Payables/receivables)
Financial analysts/ financial press
Employees/ management
Competitors
Banks and financial institutions
Government
Local community/ pressure groups
What parts of a companies published accounts will a shareholder be interested in?
Profits as the amount that might be dividends
Profits retained in reserves (expansion)
Cash flow statement
Why will a shareholder be interested in a companies accounts?
As they own a part of the business
Want to maximise financial returns
What part of the accounts will mangers be interested in?
Profit figures
Why will mangers be interested in accounts?
As this may be how performance is assessed by directors
What is a more likely way a mangers performance will be monitored from published accounts?
Performance of relevant section they’re responsible for
What is divorce of ownership from control?
Conflict between objectives of shareholders and objectives of mangers
What are the shareholders and mangers objectives?
Shareholders= maximise profits
Mangers= maximise sales
What are directors in a company?
agents of the company, appointed by the shareholders to manage the company’s day-to-day affair
Why will published accounts be useful for directors?
Presenting the form to potential investors in most favourable light
What part of the accounts will be useful for directors?
Profits to asses performance
Want profit to be as favourable as possible
What will directors want to hide?
How profits have been generated (change in depreciation policy)
Where will hidden changes to increase profit be shown?
In the auditors report to the shareholders
What part of accounts will employees be interested in?
Profits
Why will employees be interest in profit?
Workers may be in a better bargaining position to ask for a wage increase
Jobs may be more secure
Lack of profitability may increase job insecurity
What does a company share scheme allow?
Allows employees who participate to benefit from rising profit
What has become more common for employees to do over the last 20 years?
Join company share scheme
Why will receivables be interested in published accounts?
To see whether or not the firm is likely to be continuing to trade into the future
What is the main indicator that receivables will be interested in?
Profits
What might mean customers ask for better price or quality?
Is profits are favourable in business to business situation
Why will payables be interested in accounts?
To see if the firm is capable of repaying amounts owed
when will most suppliers offer credit?
will only offer to a firm after first checking the published accounts of the firm
when the firm has profits or cash resources to repay
what accounts will payables be interested in?
current assets of the statement as information about liquidity can be acquired (ability to meet short term debts)
what will banks and other financial institutions check before offering a loan?
income statement
statement of financial position
what will loan lenders examine from the statements?
profit earned in recent years
forecasted profit
liquid resources (current assets and cash)
will forecasted accounts be published?
no but might be requested by by loan lenders
why will the local community want to see the published accounts of companies?
as all business effect their local community within which they operate some positive and some negative
what are some external costs that a business has on the local community?
pollution
congestions
why will pressure groups be interested in a companies accounts?
will want to see if the company is making a profit so they can pressure them into making donations to local causes or changing some activities that impose costs on local community
why will local communities want to see the success of local firms?
for employment opportunities
multiplier effects in generating jobs in other firms that may be come suppliers
what accounts will the financial media look at?
all of them among with additional information
why are financial media interested in published accounts?
will provide forecasts and evaluations on performance to inform potential investors
what headline figures will financial media use?
profits
sales
debt
why will the government be interested in a companies published accounts?
purposes of taxation
government are decision makers and their forward economic plans are influenced by the performance of all businesses within various sectors in the economy
why will competitors be interested in published accounts?
in order to evaluate its financial condition
knowledge they gain could alter their competitive strategies.
why will customers be interested in public accounts?
order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract
What does IAS1 state a company must prepare?
income statement
statement of financial position
cash flow statement
statement showing changes in equity
statement of accounting policies and explanatory notes
What does IAS1 require documents to have?
financial statements are clearly shown separately from other information shown in corporate report
name of company shown
period covered
currency used and magnitude
no offsetting of income and expense or assets and liabilities
comparative information from previous periods
what is the use of the companies act 2006?
provide a simple, efficient and cost effective framework for the operation of companies
what did the 2006 companies act replace?
provisions contained in the 85 and 89 companies act
according to the companies act what accounts need to be published for the year?
income statement and statement of financial position
directors report
auditors report
groups accounts where applicable
statement of cash flow
notes of summary of significant accounting policies and explanatory information
how many days before the annual general meeting does every company have to send a copy of the account?
at least 20 days before
who gets sent a copy of the companies accounts before the annual general meeting?
every shareholder
every debenture holder
all persons entitled to receive copies (auditors)
companies house
what does the companies act say about authorised share capital?
requirement for authorised share capital is abolished but shares must still have a nominal value
what is the minimum authorised share capital of a public company?
£50,000
what methods can be used to communicate with shareholders under C-2006?
electronic methods- emails and websites
what is no longer needed under the C-2006?
memorandum of association
no requirement to have an object clause
what do the articles of association do?
set out the way in which a company conducts its business
what is a model for accounts provided to private limited companies?
article of association if they wish to adopt it
what must the directors report include under c-2006?
main trends and factors likely to affect future development, performance and position of business
info about environmental matters the company’s employees and social and community issues
info on contractual arrangements
how are the duties of directors controlled under C-2006?
set out in law
what is an important aim of companies act and accounting standards board?
make it easier to analyse published accounts and compare to other companies
how does C-2006 make it easier to compare and analyse?
reducing scope for inconsistency, fraud and misinterpretation
why can investors and shareholders have confidence in calculation of account figures?
as the values have been made in accordance with relevant standards and checked by auditors
who is responsible for the shareholders of the company?
the directors as they are appointed by shareholders
how are directors usually chosen?
major shareholders or voted in by shareholders
what is a directors job?
maximize profits/ returns to investors
value of share to rise (shareholder capital gain)
what happens if the business starts performing poorly? (directors)
the directors job to ensure the business returns to previous higher levels of performance
what must the directors do if they cannot return to high performance?
must give the illusion or look of good performance
window dressing
is window dressing illegal?
no
what can they not do with window dressing?
lie but can present accounts in the best way possible
why is window dressing done?
to make the business look more attractive then it actually is
what are the 2 types of director?
executive
non-executive
what is an executive director?
actively involved in running part of or all of business
what is a non-executive director?
not employees of the company and usually act as independent advisors
what are the directors responsible for?
whole process of completing the financial statements ready for publication
what factors must the directors take into account in the decision making process?
interests on employees
business relationships with suppliers and customers
impact on community and environment
need to maintain a reputation for high standards of business conduct
need to act fairly between shareholders of the company
what duties do the directors have?
act within their powers
exercise independent judgement
exercise reasonable care, skill and diligence
avoid conflicts of interest
not accept benefits form third parties
declare interest in any proposed transactions or arrangements with the company
what is the directors report?
report produced by the board of directors summarizing the main activities of the firm
commentary on current and future performance
any subsidiary firms controlled by the company
what are subsidiaries?
other firms, usually smaller, that the company owns a large proportion of the shares in
what does the directors report include details on?
Main activities of the company during the year and any changes made
Names of all directors and their interests (shareholdings)
Employees statistics/ health and safety information/ employment of people with disabilities
Donations to charitable concerns over the year (political orgs)
Dividends recommended for shareholders
Research and development activities
Any significant changes to fixed assets
what are auditors?
Independent of the company and act as unbiased checking device that declare financial information and the companies position is accurately reported