Shareholder’s Equity Accounting Flashcards
What is a company?
Companies are businesses which are separate legal entities, they have the ability to raise capital by selling shares. Shareholders are owners of companies.
What are the characteristics of a company?
Companies are owned by shareholders, who have limited liability. Shareholders can easily transfer their ownership by selling their shares. Companies are governed by stricter regulation compared to other business forms. They must pay tax as a separate legal entity. They pay out profits as dividends.
What is the company tax rate in Australia?
The company tax rate in Australia is 30% for large companies. Small companies pay 27.5%. The current government is planning to reduce the company tax rate.
What is a dividend?
A dividend is a distribution of a company’s profit to shareholders of a company. (Dr Retained Earnings, Cr Cash).
What is a share split? Why would a company engage in a share split?
A share split is when a company changes the number of shares it has on issue. For example a company with 100 shares, may decide to double the number of shares on issue so that there are 200 shares. Every current shareholder who owns 1 share, would own 2 shares after the split.
A company would engage in a share split when it wants to lower its share price. For example, when the share price of Apple got to expensive around $650 per share, they had a share split to lower the price. This enables more people to be able to afford to buy the shares.
What is a preference share?
A preference share is a type of share in a company - it often has no voting rights. Preference shares often have a guaranteed dividend payment. Preference shareholders will be paid back before ordinary shareholders in the case of a company liquidation.
What is the difference between a cumulative, and a non-cumulative preference share?
If a company that has preference shares and is unable to pay a dividend during a year, if it has cumulative preference shares, it will owe the missed payment in future years. E.g. if a preference share is expected to pay a $1 dividend each year, but the company cannot afford to pay a dividend in 2018, it will owe $2 per share in 2019. A non-cumulative preference share would not have to pay any missed dividend payments.
