Summary of Semester 2

Question 1

Nature of a company (5/2,2,1,1,1)

Answer 1

• A company is a separate legal entity

   - Ownership (shareholders) may be separated from management (directors)
   - Shareholders have limited liability for debts of company – ‘veil of incorporation’

• Legal aspects

  - Internal - Memorandum and Articles of Association
  - External - Companies Act 2006, accounting standards 

• Various types

  - Private limited companies (Ltd), Public limited companies (Plc) etc 

• Pros v Cons of company v sole trader

  - Limited liability, tax, transfer ownership, status v costs, compliance

• Differences for owners (company v sole trader)

  - Capital a/c v equity & reserves, profit withdrawal, tax

Question 2

Ordinary share capital (OSC) (5)

Answer 2

Ordinary share capital (OSC)

• Each share has a nominal/par value
• If shares issued above nominal/par value, then share premium is created.

Dr Bank Cr OSC par value of shares issued Cr share premium

• Rights Issue – existing shareholders given right to buy more share

J/E as above – care needed with number of shares issued

• Bonus Issue – issue to existing shareholders free of charge – utilise share premium first, then retained earnings reserve

Dr Share premium reserve, Cr OSC

• Dividends – Only show ordinary dividends paid in SOCIE not PoL

Question 3

Preference share capital

Answer 3

Preference share capital

• Irredeemable (no obligation for company to buy back)

  - Treat in same way as OSC
  - Include in equity in SOFP, include in SOCIE
  - Only account for dividends paid in the period, and then only show in SOCIE

• Redeemable (company has an obligation to buy these back)

  - Treat as long term liability in SOFP, do not include in SOCIE
  - Accrue for dividends in period, show as finance cost in PoL.

Question 4

Reserves

Examples of common reserves include (3/1,3,2)

Answer 4

• Retained earnings

  - Mainly all profits/losses since company formed 

• Revaluation

  - NCA, usually land and buildings
  - J/E – Dr NCA, Cr Revaluation Reserve 
  - Depreciate revalued amount

• Share premium

   - Created when ordinary shares are issued above the nominal/par value
   - Can be utilised on the issue of bonus shares

Question 5

Regulation of company financial statements

Regulate what?
Regulate why? (3)
Regulation of company financial statements?

IASB Conceptual Framework
Corporate Social Responsibility

Answer 5

Regulate what?

• Content, accounting concepts and presentation

Regulate why?

• Separation of control from ownership, limited liability of shareholders, social justice

Legislation & Accounting standards

• Companies Act 2006 – UK GAAP or IFRS

IASB Conceptual Framework

• Objective, qualitative characteristics, elements of financial statements ++++

Corporate Social Responsibility

• Wider stakeholders, sustainability standards, ethics

The Annual Report

Question 6

IAS 1 Presentation of Financial Statements

Financial Statements consist of; (5)

Answer 6

Financial Statements consist of;

• A statement of profit or loss (PoL)
• A statement of financial position (SOFP)
• A statement of changes in equity (SOCIE)
• A statement of cash flows (SCF)
• Accounting policies and notes

Question 7

IAS 1 Presentation of Financial Statements

IAS1 requires the statements to include
IAS1 contains guidance on the
The following formats are most widely used in practice and

Answer 7

IAS1 requires the statements to include

• A minimum level of presentation & disclosure

IAS1 contains guidance on the

• permitted formats of the statements

The following formats are most widely used in practice and

• …should be used in this module