Week 6: Introduction To Published Financial Statements And Intro To Governance Flashcards
Business Decisions
- Investing
- Financing
- Operating
- Distribution
Financing
Where funds are obtained
- Equity and debt
Equity funding
Equity = Internal source of financing which refers to share capital or retained earnings (reserve that contains the accumulated profits of the business that have even retained over the years of operating)
Process:
- Issuing shares in the business for ownership in the business — Ordinary shares and preferences shares, amongst others
- Using owners equity (when owner makes contribution i cash or sets)
- Making use of the accumulated profits (retained earnings)
Debt funding
External sources of funding. Use of loans, debentures or bonds. There will be principal repayment as well as interest repayments. NO EXCHANGE OF OWNERSHIP
Share capital
- Having voting rights attached to the,, but no fixed dividend (ordinary)
- Having no voting rights attached to them, but shareholders are entitled to a fixed dividend annually (preferred shares)
Investing decision
The decisions made around around the long term assets, namely, buying and selling assets.
[Expected to last more than 1 year]
Require a large amount of financing to purchase but the acquisition of these items do not take place regularly. They are necessary to operate the business and are used in operating decisions.
Financial Statements
Used to provide decision useful info to the users of financial statement.
They show:
- WHat assets they use? (Investment)
- How much debt they have and how many issued shares? (Financing)
- If the business has made profit or loss (operating)
Statements
Financial position: Assets, Liabilities and equity at a particular point
Comprehensive income: Incomes and expenses, profit or loss. (Called F performance)
Statement of cash flows: shows the actual cash movement over a period of time
Statement of changes in equity: shows the movement in equity during the year. Movements in share capital and retained earnings.
Notes of financial statements: these notes provide more detail and further elaborate on the info in FS
Classification of organizations
Business or non business.
Profit vs other reasons
Sole proprietorship
- One owner who is responsible for all the assets and liabilities
- The individual and the business are treated as the same person in terms of the law. The business is not a separate legal entity
- No limited liability: a loan is taken out in the owners name. If the business fails, creditors can go directly to the owner to get their Money or take their personal possessions.
- Taxed together
Partnerships
- Multiple owners enter into a particular agreement
- Partnership agreement outlines duties and how profits are to be shared
- no limited liability: partners are jointly and severally liable for debts
- external entities interact with the partnership
Companies
Governed by the companies act 71 of 2008
Public or private
Public - listed on JSE or sell shares to the public
Private - no publicly listed on JSE and the sale of shares is restricted to limited individuals
What is a Juristic Person?
When there is an agreement, it is between the company and the supplier. Even if the owner/directors sign the agreement, they are signing on behalf of the company. The company is separate legal entity from directors, employees and shareholders.
Limited liability
Directors are only responsible for the debts of the company to the extent of their shares in the company, if the company goes bankrupt, the directors the directors and shareholders are safe. (Can’t come after personal assets)
Perpetual succession
The continuation of the company, despite the death of directors. As the company is its own person, even if all d, fou, shareh chabe or die, the company survives. Sole trader = closed down.
Companies act
Exists so all companies FS are consistent, comparable and prepared in accordance with the legal requirements.
I.e need to be audited - risk that companies lie, fraud, errors.
Material misstatements
When there are errors in financial statements
Audited process
Hire an external auditor, who confirms whether the claims that the company has made in its financial statements are true or not. Auditors report then drawn up. Will be addressed to the shareholders and will express the auditors opinion on whether the financial statements are for MM
They se samples to test basis - with Tech and obtain RESOANABLE ASSURANCE.
Integrated report
Another repot prepared by companies which provides additional info to the users that is not presented in the published financial statements. Shows:
- How an entity creates value over time through 6 capitals
- The entities stately direction and vision
- Forces companies to think in an integrated way(impact on environment and society)
Main purpose: SHow how an entity creates value over time through the 6 capitals/
6 Capitals
Financial C -> Manufacturing C -> Intellectual C -> Natural C -> Human C -> Social and Relationship C
F = pool of funds available
M = Things human created, production oriented equipment/tools
I = Expenditure on R&D
H = skills, experience, knowledge of stakeholders
S = Relationship with stakeholders
N = effect on the environment
Structure of a company
- Company
- Directors and Shareholders
- Managers
- Employees
Directors duties
- At a very high level
- To set strategic plan
- Approve policies and planning
- To oversee and monitor management
- To ensure accountability of organizational performance
Corporate governance
How a company’s performance is directed and controlled. Who steers or manages the business.
Balancing interest of stakeholders, Customers, Suppliers, environment, government, shareholders
HOW YOU ACHIVE THE GOA
Why do we need corporate governance?
- Entities are run by people with lots o power; very easy for unethical directors to misuse their power and mis-use funds
- Weak link between executive compensation and the company performance. The way directors are evaluated could be linked to share price. Since bonuses are linked to share price they may do whatever it takes to increase share price even if its fraud.
- Creative accounting - risk that statements aren’t faithfully represented
- Private sector usually economic force of society. It they fail it could affect society.
