week 9

Question 1

what are the characteristics of limited liability companies

Answer 1

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

Question 2

what is a public limited company (PLC)

Answer 2

shares tradable on exchanges
public can purchase these shares
usually purchased from existing shareholders not from the company direct

Question 3

what is a private limited company (Ltd)

Answer 3

not permitted to make a public offer of shares for sale

Question 4

what are the characteristics of ordinary (equity) shares

Answer 4

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

Question 5

what are the charactersitics of preference shares

Answer 5

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

Question 6

what are the characteristics of debentures/loan stock

Answer 6

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

Question 7

what are overheads divided into

Answer 7

distribution costs
admin expenses
other expenses
allocation of these is a matter of judgement

Question 8

how is taxation recorded

Answer 8

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

Question 9

what is the statement of comprehensive income

Answer 9

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

Question 10

what are the differences in a company SOFP

Answer 10

assets - no major differences
liabilities - companies have additional liabilities eg provisions and contingencies
capital - different legal form of ownership of the entity

Question 11

what is a liability

Answer 11

a present obligation of the entity to transfer an economic resource as a result of past events

Question 12

what are examples of current liabilities

Answer 12

bank loans and overdrafts
loan stock and debentures
current income tax liability
debenture and loan interest accrued
short term provisions

Question 13

what are examples of non-current liabilities

Answer 13

loan stock and debentures maturing in 12 months+
provisions
deferred tax liabilities

Question 14

what are the two types of uncertain liabilities

Answer 14

provisions and contingent liabilities
for provisions the liability is probable, for contingent liabilities the liability is possible

Question 15

what are provisions

Answer 15

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

Question 16

what are contingent liabilities

Answer 16

depend upon the occurrence of an uncertain future event

Question 17

how do you account for provisions

Answer 17

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

Question 18

what are examples of provisions

Answer 18

provision for doubtful debt
reorganisation provisions
abandonment provisions for nuclear power stations
provisions for repairs under guarantees or warranties

Question 19

what is a contigency

Answer 19

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

Question 20

what are examples of contingent losses

Answer 20

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

Question 21

how do you account for contingent liabilities

Answer 21

disclosed in a note to the financial statements, except when remote

Question 22

what are contigent assets

Answer 22

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

Question 23

what is issued share capital

Answer 23

the number of shares issued x the nominal value per share

Question 24

what is a share premium account

Answer 24

the amount at which shares were issued above their nominal value

Question 25

what are retained earnings

Answer 25

cumulative profits earned - cumulative dividends paid to shareholders

Question 26

what is revaluation reserve

Answer 26

the cumulative amount of increases in asset values on revaluation

Question 27

what is nominal value per share

Answer 27

an unvarying face value for every share established when the company was formed

Question 28

what is net asset value per share

Answer 28

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

Question 29

what is market value per share

Answer 29

the price you need to pay to buy a share on the stock market

Question 30

what is creative accounting

Answer 30

use of the flexibility in accounting rules to mislead users of accounts about the true position and performance of the company

Question 31

what is under-recognition of liabilities

Answer 31

companies show lower liabilities
significant problem in creative accounting
profits are overstated, liabilities are understated so net assets are overstated

Question 32

where can creative accounting occur

Answer 32

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