Understanding Income Statement and Balance Sheet

Flashcards covering the key concepts from the lecture.

What is limited liability?

Investors are not required to contribute further funds if the company becomes insolvent.

What is a private limited company (Ltd)?

A company that doesn't make shares available to the public.

What is a public limited company (Plc)?

A company that makes its shares available to the public and is listed on a stock exchange.

What is a requirement for a Plc?

Minimum authorized share capital of £50,000.

What are types of shares?

Ordinary (equity) shares and Preference (Non-equity) shares.

What value are ordinary shares given?

Nominal value (face value).

What is the reason for issuing new shares?

To raise capital for expansion.

What is the reason for bonus share issues?

Give out free shares to managers or shareholders

What are rights issues?

Similar to new issues but with a discount element improving gearing position.

What is a reason for a company to repurchase shares?

To increase the value of shares remaining in the stock market.

What are reserves?

Past surpluses that belong to the equity shareholders.

What is share premium reserve?

The surplus from the issue of shares.

What is revaluation reserve?

The surplus from the revaluation of fixed assets.

What is retained earnings reserve?

The sum of all the undistributed profits in the P&L each year since the company was created.

Besides shareholders what other methods do companies borrow money?

Long-term loans, debentures, or bonds.

Why do Company accounts tend to be more detailed than sole traders?

Must be made to comply with regulatory requirements.

What are directors responsible for?

Responsible for producing financial statements showing a ‘true and fair view’ of the business.

What is the basis for Corporation Tax?

Based on the company’s accounting profit for a particular financial year.

How is gross profit calculated?

Sales revenue minus the cost of sales.

What is a non-current liability?

Long-term loan.

What are examples of current liabilities?

Trade payables, accruals, tax, other payables.

What are examples of current assets?

Inventory, trade receivables, cash at bank.

What are examples of non-current assets?

Premises, motor vehicles, furniture, and fixtures.

What are the two main methods of depreciating assets?

Straight line and reducing balance.

How does straight line depreciation work?

Equal amount written off each year.

How does reducing balance depreciation work?

Percentage amount written off each year from a reduced balance.