Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

A2 - Intermediate Financial Accounting > Share Capital, Reserves and Inventory > Flashcards

Share Capital, Reserves and Inventory Flashcards

1
Q

Capital

2 definitions

A

‘The original fund with which a business was started and over time represents the claim by the business owner(s) over the net assets of the business’.

Original investment (made in return for shares) plus changes in net assets (accumulated reserves) made through profits and gains

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Total Owners’ Equity

What is the conceptual framework definition:

A
  • Share capital stated at nominal (or par) value
  • Non-distributable and distributable reserves

The conceptual framework definition:

Equity is the residual interest in the assets of the entity after deducting all its liabilities

Proof: Assets = Liabilities
- Assets = Equity + liabilities
- Therefore Equity = Assets - liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Distributable reserves

What is it?
Who does it belong to?
Where do they arise from?
Most…?
Where is it seen?

Why is it distributable and what does it depend on?

A

Retained earnings

  • Belongs to ordinary shareholders
  • Arises due to generating revenue
  • Most important source of new finance
  • Shown separately to share capital
    - On Statement of Financial Position

Dividend can be paid from distributable reserves but will depend on:

  • Availability of cash
  • Finance required for investment
  • Expectations of shareholders

might want profits to be lower so less dividends expected

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Non-distributable reserves

Capital reserves arise due to (2)?

Where are they shown?
Not…?

A

Capital reserves arise due to:

  • Issuing shares above nominal value = share premium reserve
  • Upwards revaluation of non-current assets = revaluation reserve

Both reserves shown separately

  • On the Statement of Financial Position
  • Not available to distribute as a dividend to shareholders
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Regulation over capital
3 risks?

A

There is a risk to creditors who deal with limited liability companies

  • Business risk i.e. the company will be unsuccessful
  • Company will pay shareholders rather than creditors
  • Creditors can only claim against the assets of the company (contrast with a sole trader)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Financial capital maintenance (2)

A
  • Companies Act 2006 determines where dividends can be paid from (i.e. distributable vs. non-distributable reserves)
  • Capital maintenance = the requirement to retain net assets within the company equal to the non-distributable reserves

no massive negartive retained earnings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Reminder of excess depreciation transfer

What option do we have?

Double entry?

What does this protect?

A
  • When revaluing an asset, there is an option to transfer excess depreciation per IAS 16

Debit revaluation reserve, credit retained earnings

  • This journal protects distributable reserves (retained earnings) which are available for dividend payments, whereas capital reserves such as revaluation are not
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Minimum Share capital

Minimum that plc can have?

Minimum that ltd can have?

A
  • Public limited companies = £50,000
  • Private limited companies – no minimum
  • Capital reduction – only permitted in certain controlled conditions
    e.g. purchase of own shares
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Types of share issue (recap)

A

Standard/ at a premium:

Dr cash, Cr share capital/ share premium

Rights issue:

Dr cash, Cr share capital/ share premium
but work out how many shares would be issued and split between share capital/ share premium

Bonus issue:

Dr share premium (use first), Dr retained earnings (if share premium used up), Cr share capital

rights = owners pay for more
bonus = free for owners

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Treasury shares

What is it?
What does it do to equity?
What does it sit as?

A
  • Sometimes a company may choose to repurchase its own shares
  • This reduces shareholders’ equity
  • Sits as a negative reserve within equity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Shareholders’ equity summary

4, are they distributable or non-distributable?

A

Non-distributable

  • Treasury shares
  • Revaluation reserve
  • Share capital (ordinary share capital, share premium)

Distributable

  • Retained earnings
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q
A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

50,000 share capital has been introduced

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Oscar Manufacturing Ltd wishes to expand and in order to raise the necessary £15,000 decides to issue 12,500 new shares at £1.20 each on 1 December 20X4.
The share price reflects the fact that the value of the company has increased and net assets now = £60,000
Required
Show the journal entries to be made to reflect the share issue and the Statement of Financial Position once the issue has been made.

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

IAS 2 Inventories

How are they different to normal assets?
What can they be (2)?

A

Inventories are assets:

  • Held for sale in the ordinary course of business
  • In the process of production for such a sale
  • In the form of materials and supplies to be consumed in the production process or in the rendering of services
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Impact of valuation on profits

What does affect?
How do we work out the valuation of inventories

A

Inventory valuation affects both

  • Statement of comprehensive income
  • Statement of financial position

Valuation of inventories =
lower of cost and net realisable value (NRV)

17
Q

Valuation of inventories

Net Realisable value is?
Adjustment to COS expense for (3)?

Journal entry?

A

Net Realisable Value:

  • Estimated selling price less
    - Estimated costs of completion and estimated costs to make the sale

Adjustment to Cost of Sales expense for:

  • Carrying value of inventories sold
  • Amount of write down of inventories to NRV
  • Amount of any losses of inventories

Journal entry:

- Dr expense
- Cr inventory

Write down of inventories

18
Q

Cost of inventory is defined by IAS 2 Inventories as:

Examples (9)

A

Cost of inventory is defined by IAS 2 Inventories as:

“Comprising all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.”

  • Purchase price, import duties and other taxes, transport costs to the current location
  • Deduct trade discounts, rebates and subsidies
  • Manufacturing – direct materials, direct labour and appropriate overhead
19
Q

IAS 2 Inventories

Disclosure Requirements: (7)

A
  • Accounting policy adopted in measuring inventories
  • Total inventory, analysed into categories
  • Amount of inventory carried at NRV
  • Amount of inventory recognized as an expense in period (cost of sales)
  • Amount of any inventory write-down
  • Carrying amount of inventory pledged as security for liabilities
  • Amount of any reversal of inventory write-down

A2 - Intermediate Financial Accounting (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions