week 9 Flashcards
what are the characteristics of limited liability companies
separate legal entity - sole trader business is seperate accounting entity not separate legal entity
perpetual existance
liability of shareholders is limited to the nominal value of their equity shares
ownership is legally seperate from management
unlimited number of shareholders
what is a public limited company (PLC)
shares tradable on exchanges
public can purchase these shares
usually purchased from existing shareholders not from the company direct
what is a private limited company (Ltd)
not permitted to make a public offer of shares for sale
what are the characteristics of ordinary (equity) shares
vote at general meetings
receive variable dividend (can be 0)
own net assets after preference share capital is deducted
repaid after all liabilities and preference shares
what are the charactersitics of preference shares
cannot vote at general meetings
receive a fixed dividend (can be 0)
own face value of preference shares
repaid after all liabilities including loan stock
what are the characteristics of debentures/loan stock
cannot vote at general meetings
receive an agreed interest rate, must be paid even if profits are 0
own face value of debentures/loan stock
repaid before share capital, might be secured on specific assets
what are overheads divided into
distribution costs
admin expenses
other expenses
allocation of these is a matter of judgement
how is taxation recorded
included as an expense, so is deducted from profit
company is a separate legal entity, must account for the tax incurred on its profit
not a separate legal entity, pay tax on all income together, no income tax recorded
what is the statement of comprehensive income
records more complex types of adjustments to figures in the statement of financial position that do not belong in the statement of profit and loss
statement not needed if there are no items to report in any one year
what are the differences in a company SOFP
assets - no major differences
liabilities - companies have additional liabilities eg provisions and contingencies
capital - different legal form of ownership of the entity
what is a liability
a present obligation of the entity to transfer an economic resource as a result of past events
what are examples of current liabilities
bank loans and overdrafts
loan stock and debentures
current income tax liability
debenture and loan interest accrued
short term provisions
what are examples of non-current liabilities
loan stock and debentures maturing in 12 months+
provisions
deferred tax liabilities
what are the two types of uncertain liabilities
provisions and contingent liabilities
for provisions the liability is probable, for contingent liabilities the liability is possible
what are provisions
a liability of uncertain timing or amount - differ from accruals and other payables because of the uncertainty about timing/amount
application of prudence - the business shouldnt take account of potential liabilities if they arent sure how much that will be paid
what are contingent liabilities
depend upon the occurrence of an uncertain future event
how do you account for provisions
only recognise a provision if
an obligation has arisen as a result of a past event
payment is probable
the amount can be estimated reliably
what are examples of provisions
provision for doubtful debt
reorganisation provisions
abandonment provisions for nuclear power stations
provisions for repairs under guarantees or warranties
what is a contigency
a condition which exists at end of the reporting period, where the outcome will be confirmed only on the occurrence or non-occurrence of one or more uncertain future events
what are examples of contingent losses
possible liabilities arising from bills of exchange received that have been discounted
corporation tax disputes
failure by another party to pay debt which the reporting entity has guaranteed
a pending legal action against the company
how do you account for contingent liabilities
disclosed in a note to the financial statements, except when remote
what are contigent assets
a possible asset that arises from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity
not recognised in financial statements but disclosed as a note
what is issued share capital
the number of shares issued x the nominal value per share
what is a share premium account
the amount at which shares were issued above their nominal value
what are retained earnings
cumulative profits earned - cumulative dividends paid to shareholders
what is revaluation reserve
the cumulative amount of increases in asset values on revaluation
what is nominal value per share
an unvarying face value for every share established when the company was formed
what is net asset value per share
total net assets of the company divided by the number of shares it has issued
represents the amount of the company’s assets notionally owned by an owner of 1 share in the company
what is market value per share
the price you need to pay to buy a share on the stock market
what is creative accounting
use of the flexibility in accounting rules to mislead users of accounts about the true position and performance of the company
what is under-recognition of liabilities
companies show lower liabilities
significant problem in creative accounting
profits are overstated, liabilities are understated so net assets are overstated
where can creative accounting occur
change cost flow assumptions between FIFO, AVCO and LIFO
mis-state inventory counts under periodic inventory systems
mis-state obsolete inventory write downs
mist-state overhead allocations to manufacturing inventory
