Sole Trader Stmts and Shares/Equity Flashcards
What are the steps for question of preparing financial statements?
- deal with any suspense correction or journal entries for adjustments, adjust TB as you go
- annotate TB with what stmt and category
- check TB still balances
- compile stmts, tick off TB as go
What is the layout of Stmt of Profit or Loss for Sole Traders?
Sales
Less Cost of Sales
Opening Inventory
Plus Purchases
Less Closing Inventory
Plus Other Income
Discount Received
Gross Profit
Less Expenses
Grouped by Sales and Distribution
Admin Expenses
Depn
Net Profit
What is the layout of Stmt of Financial Position for Sole Traders?
Non- Current Assets
Cost, Depreciation, Carrying amounts
Current Assets
Inventory
Receivables
Prepayments
Cash/Bank
= Total Assets
Capital
balance b/f
Profit
Less Drawings
Current Liabilities
Payables
Accruals
Overdraft
= Total Liabilities
Unlimited Liability Business
If business runs up debts that it is unable to pay, proprietors become personally liable
- if necessary would have to seek private possessions to pay
Limited Liability Business
Maximum amount that an owner stands to lose is their share of the capital
- in the event that the company becomes insolvent and cannot pay debts
Why is the advantage of a Limited Liability Business lost to small owner-managed businesses?
- Banks normally seek personal guarantees from shareholders before loans/overdraft facilities
What is the proforma for a companies statement of Profit or Loss?
Revenue
(Cost of Sales)
Gross Profit
Other Income
(Distribution Costs)
(Administrative Expenses)
(Finance Costs)
Profit before tax
(Income Tax expenses)
Profit for Year
What is the proforma for a companies statement of Financial Position?
Assets
Non-Current Assets
Property, Plant & Equiptment
Intangible Assets
Current Assets
Inventories
Trade Receivables
Other Current Assets
Cash/Cash Equivalents
Total Assets =
Equity and Liabilities
Equity
Share Capital
Share Premium Account
Retained Earnings
Revaluation Surplus
Non-Current Liabilities
Long Term Borrowings
Long Term Provisions
Current Liabilities
Trade Payables
Short Term Borrowings
Current Tax Payable
Short Term Provisions
= Total Equity and Liabilities
Authorised Share Capital
Maximum Number of shares the company may issue
- varies in each company
- can change with agreement
Issues Share Capital
Number of Shares actually issued to shareholders
- can’t exceed authorised share capital
- allotted shares
Called up Share Capital
amount of issued share capital the company has asked shareholders to pay for to date
Paid up share capital
amount of called up share capital which has been paid for
What will the balance always be on all the different classes of shares accounts?
Credit b/d balance
How is Face Value also known?
Par Value
Legal Value
Nominal Value
Ordinary Shares
- most common
- Equity shareholders
- owners of company
- usually have voting rights
- no right to fixed dividend, receive what directors decide to pay as part of profit kept in reserves
- entitled/own all profits left after payment of any preference shares
- If company wound up any surplus is shared between
Preference Shares
- fixed rate of dividend (6% £1 preference share)
- receive dividend in priority over ordinary shareholders
- on winding up, receive capital in priority
- can be redeemable or irredeemable
- not usually have voting rights
What does it mean if preference shares are cumulative?
company must pay currents year and any arrears from previous years on preference dividends before ordinary dividends
How are shares issued when company first starts?
Must be issued at face value or above
- never new shares issued below
What is the double entry for issue of new share at face value?
DR Bank
CR Share Capital
Share Premium
capital paid up in excess of par value
What is the double entry for new shares issued at a premium?
DR Bank
CR Share Capital
CR Share Premium Account
- shown separately on Financial Position Stmt
What is a bonus issue of shares?
Shares are issued to current shareholders for no cash
- done at nominal value
- reclassify some reserves as share capital
- comes from any reserve, often first premium shares and then retained earnings
What are the advantages of bonus issue shares?
- uses share premium account which not used for much else
- allow share price to fall as more on market so make shares more affordable for new investors
- increases capital w/o diluting shareholders holdings
- capitalises reserves so can’t be paid as dividends
- gives creditors greater protection
What are the disadvantages of bonus issue shares?
- rationale may not be understood by shareholders
- doesn’t raise any cash
- could jeopardise payment of future dividends if profits fall
Rights Issue of Shares
- issue of shares for cash to existing shareholders for less than market value
- they can sell them if they wish
What are the advantages of Right Issue Shares?
- more cost & time effective way for company to raise finance than fresh issue to public
- keeps reserves available for future dividends
- if all rights taken shareholders maintain existing % holdings
- as below market value, shareholders more likely to buy them
What are the disadvantages of rights issue shares?
- lack of shareholder interest may give bad press
- If don’t all take up then dilutes holdings
- unwelcome predators may try to acquire to take over
- effect on future dividends if profits policy as more shares issued than under fresh issue
- will cause share price to fall as issued below market value and more on market
What are the two types of preference shares?
Redeemable
Irredeemable
Redeemable Preference Shares
- company obliged to repay the nominal value of shares at a later date
- behave like debt- loan and interest
- as they meet the definition of a liability
How are Redeemable Preference Shares presented in statements?
- treated as a loan and interest
- non-current liability up until one year before redemption FP
- dividends treated as interest/finance costs in P/L
“redeemable 5% £1 Preference Share 2029” meaning
- the company must pay shareholders £1/share on specified date in 2029 and the shares cancelled after
- every year before that date, they will be paid 5% of the face value so 5p per share
Irredeemable Preference Shares
- the company have no obligation to repay
- treated as equity and like normal shares
- dividends are treated as appropriation of profit (comes out of it)
Reserves
- owned by ordinary shareholders who own the equity in the company
- are nearly always a CR b/d balance k
What are the different types of reserves commonly found in Limited Liability Company?
- Share Premium Account
- Revaluation Surplus
- Other Reserves- specific or general
- Retained Earnings
Share Premium Account Uses
- issue bonus shares
- write off share issue expenses (legal costs)
- can’t be distributed as dividend under any circumstances so
- maintains capital
- is security for creditors
Revaluation Surplus Reserve
- non-distributable
- represents unrealised profits on revalued assets
Other/General Reserve
- decided by individual company
- idea of saving £ for soemthing otherwise not clear why not paying out dividends
Retained Earnings
- cumulative undistributed profits less any losses
Statutory Reserves
- company required to set up by law
- not available for dividend distribution
- capital reserves- share premium/revaluation
Non-Statutory Reserves
- consist of profit
- distribute dividends if company wish
- they choose to set up
- may have specific purpose
- indicate intention to not distribute
- appropriations of profit in statements
Dividends
- sharing out/ appropriation of retained earnings to owners/shareholders
How are dividends shown in statements?
- if paid are shown in statement of change in equity
- not in P/L
- FP deducted from retained earnings
not paid only proposed = in notes
What is the double entry for dividend on ordinary shares?
Dr Retained Earnings (FP)
Cr Bank (if paid) /Dividends Payable (if declared) FP
What is the double entry for declaring/ paying irredeemable preference shares?
DR Retained Earnings FP
Cr Bank (if paid) /Dividends Payable (if declared) FP
What is the double entry for paying dividends on redeemable preference shares?
- treated as finance cost/interest
DR Finance Costs P/L
CR Bank FP
When will dividends be paid out?
- Interim (mid year)
- Final (end year)
- Directors will wait until they know company’s full year profit before declaring final dividends
Loan Notes
- Loan Stock
- Debentures
- Loan Capital
- alternative way for company to raise finance by issuing debt
- loans or redeemable preference shares
- with fixed rate of interest and pre determined redemption date
How is Loan Capital different to Share Capital?
- often secured on company’s assets
- less risk for holder of loan capital generally but income for them can’t grow
- providers are creditors not shareholders
- received fixed rate of interest not dividends
- can take legal action if not paid on time (shareholders can’t)
Finance Costs
- interest expense incurred on long term borrowing shown as expenses in P/L
- interest paid
- bank loan interest
- loan capital interest
- dividend paid on redeemable preference shares
What is the double entry for finance costs before paid and once paid?
DR interest a/c that is applicable/Finance Cost P/L
CR interest payable (FP current Liability)
DR Finance Costs (P/L)
CR Bank (FP)
Income Taxes
- tax on income/ profits
- payable after end of financial year
- so stmts include accrual for directors best estimate of tax due
How are Income Taxes shown in Statements?
- expense in P/L
- current liability in FP
What is the double entry for income taxes?
A Provision is made on best estimate
DR Income Tax Expenses (P/L)
CR Current Tax Payable (FP)
What is the point of a tax note in the statements?
- the actual amount will often be different so the over/under provision is adjusted in next financial statements
- the note explains why the tax expenses figure is not the same as the tax paid that year
How are owners taking some of the profits dealt with differently between sole traders/companies?
- Sole traders take drawings for anything including salaries
- shareholders receive profit as dividends, remainder is retained
- directors salaries are expense
What is the difference with taxation between sole traders and companies?
- Sole traders business profits are taxed in hands of proprietors using individual tax rates
- income tax is paid on company profits
UK = corporation tax
What is the difference between FP statements for sole traders, partnership and companies?
- ST opening capital, profits, drawings
- Partnership capital account has capital and current account has profit/drawings
- companies share capital and reserves
What is often included in national legislation for companies in terms of accounts?
- minimum accounting records
- annual accounts filed/available for public inspection
- minimum info to be included
What is included in sufficient accounting records?
- disclose company current FP at any time
- day to day entries of money receive/spent
- record of assets/liabilities
- for goods: inventory @ yr end, inv. count, stmts goods bought/sold and who from (not retail)
- enable managers to confirm give true/fair view
- will vary
How is the profit less any dividends shown in stmts?
Profit for year
Less: Preference Dividend
—————
Earnings
Less: Ordinary Dividend (figure/% decided on)
————————
Retained Earnings
What happens in companies account when transfer of existing shares occurs?
- nothing, does not affect companies financial position so not recorded
Why is it hard to estimate market value of shares in private companies
- don’t change hands often and so can’t see market value in practise
How are shares on stock exchange quoted?
- at market value
