written elements Flashcards
what is the difference bwteeen authorised capital and issued capital
authorities capital - the maximum number of shares allows to be issued according to the company’s memorandum of association, this figure can only be exceeded if existing shareholders approve, must be shown in the published accounts of a plc. It could be used as an additional source of finance-if all of the authorised capital has not been previously used
issued capital - issued capital cannot exceed authorised capital
, any previously issued existing capital forms the balance b/d in the ordinary share capital account: this is the capital figure used to calculate: capital employed, share dividends and ratios
should you use authorised or issued capital in calculations
only use issued capital for all calculations
explain the importance of the auditors report
- required by companies act 2006
- carried out by independent auditors
- the concept of prudence must have been followed
- confirms/denies that the accounts give a true and fair view of the company’s affairs
- shareholders and potential investors will make financial decisions based on the accounts of the company
what is the purpose of notes to the accounts
final accounts give brief summary information. ‘notes to the accounts’ are additional pages in the annual report attached to the final accounts in order to give more detailed information such as:
1. depreciation policy
2. details of sources of income if the company sells a range of products/services
3. details of employees and directors pays and pensions
4. non-current assets - schedule of NCA (SONCA)
where may profit be distributed in the statement of changes in equity
the soCE of a limited company has the following columns:
1. ordinary share capital
2. share premium
3. revaluation
4. retained earnings
what are liabilities
amounts owed for goods/services supplied to the business, they are known as amounts and can be calculated with accuracy
example: trade payables
what are provisions
amounts set aside out of profits for a known expense, the amount cannot be calculated with accuracy
example: provision for doubtful debts
what are reserves
any amounts set aside by the directors that cannot be described as provisions
example: capital reserves
ALL RESERVES BELONG TO THE ORDINARY SHAREHOLDERS
note about reserves
reserves are not reserves of cash, no bank entries are made, there’d been no inflow of money
what are revenue reserves
made up of retained profits which have arisen through revenues derived from normal trading activities
they CAN be transferred to the statement of changes in equity
they CAN be paid out as dividends
example of revenue reserves
retained earnings balance c/f
uses of revenue reserves (4)
- pay dividends to shareholders
- reduce profits available for dividend payments
- fund a bonus share issue
- strengthen the financial position of the company
what are capital reserves
HAVE NOT BEEN created from trading activities of profits, they CANNOT be transferred to the statement of changes in equity, company law states that they cannot be paid out as dividends, this conserves cash and therefore protects the payables of the company
examples of capital reserves (3)
- share premium (reserve)
- revaluation reserve
- capital redemption reserve
what can the share premium account be used for (2)
- to fund a bonus share issue
- to write off ‘preliminary expenses’ (the expenses incurred in the initial formation of a limited company)
what is a revaluation reserve
NCA’s may change in value over time and should be valued appropriately
without reval land/buildings would be shown in the SOFP at historical cost(original) which would not reflect the true up to date asset value to the company
revaluations increase the net asset value of thr business and must be shown as an increase in the reserves on the SOFP
what is a capital redemption reserve (capital reserve)
when a company buys back it’s shares, it must make a tryna fee of the buy-back amount to the CRR from the P&L account, this transfer will reduce the amount of profit available to be appropriated to shareholders as a dividend, reducing the dividend keeps more cash in the company, thus more cash is available to pay the creditors of the company, so the interests of the creditors are protected
what is the capital structure of a limited company
it’s shown by the contents of the ‘capital and reserves’ equity section of the SOFP
it should include the following:
(O) ordinary share capital
(S) share premium
(R) revaluation reserve
(C) capital redemption reserve
(P) retained earnings
what is a rights issue
offered only to existing shareholders - based on their existing shareholdings
creates a cash inflow - bank assets increase by value of share
cheaper for shareholders than a general share issue
cheaper for company to administer than a general share issue
why do directors issue bonus issue shares given that no cash is received from shareholders
- the company may have insufficient liquidity(not enough cash) to pay a dividend
- they may want to reward the loyalty of existing shareholders
- the company may have large capital reserves
- bonus shares may be used to reward mangers of the business as part of a bonus system
- they may wish to dilute the market value of the shares to make them more attractive
bonus shares
- always issued at the PAR price
- issued to existing shareholders in proportion to the number of shares they hold
- no cash will flow in because they are FREE
- will lower the market share price of the share - means the company’s shares may therefore become more attractive to investors
- improves liquidity if given instead of cash dividend
what can a bonus share issue be funded from
share premium account, retained earnings balance or revaluation reserve
where funds the bonus issue if the company wants to maintain reserves in their most distributable form
share premium first and the revaluation reserve
rights share issue features
- generates cash inflows from selling shares to existing shareholders
- only possible if “issued capital’ has not exceeded ‘authorised capital’
