Limited_Companies_Lecture_PowerPoints_PART_1_OF_2_2024-25

ACFI101 Topic 10: The Financial Statements of Limited Companies

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• Title: ACFI101 TOPIC 10 PART 1 of 2

• Attendance Code: 1

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• Companies Lectures Overview:

  • Part 1 (TUESDAY 19th NOVEMBER):

    • The nature of limited companies

    • The equity (‘capital’) section of a company’s SFP

  • Part 2 (TUESDAY 26th NOVEMBER):

    • Rights issues and bonus issues of shares

    • Company borrowing & loan notes

    • Corporation tax on company profits

    • Format/presentation of company financial statements

• Double Entry System (‘DEADCLIC’) will apply:

  • Debit entries for increases in:

    • Expenses

    • Assets

    • Dividends (not Drawings!)

    • Capital (or ‘Equity’)

  • Credit entries for increases in:

    • Liabilities

    • Income

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• The Nature of Limited Companies:

  • Separate Legal Existence:

    • Limited companies have a distinct legal identity separate from their owners, requiring more formalities and legal obligations compared to sole traders and partnerships.

  • Perpetual Life Potential:

    • Companies can potentially exist indefinitely.

  • Ownership and Shares:

    • Ownership is divided into shares; shareholders have voting rights and receive dividends.

  • Management:

    • Managed by directors elected by shareholders, who are compensated.

  • Limited Liability:

    • Shareholders' liability is limited to their investment in shares, protecting personal assets.

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• Public vs. Private Companies:

  • Public Companies (‘plc’):

    • Can offer shares to the general public and are subject to stricter regulations.

  • Private Companies (‘Ltd’):

    • Cannot offer shares to the public. Not all public companies are publicly listed.

• Public Availability of Financial Statements:

  • Company financial statements are open for public access and audited by independent accountants.

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• Statement of Financial Position (SFP):

  • Understanding Capital Sections:

    • Sole Trader Example:

      • Opening capital: £170

      • Profit: £80

      • Drawings: (£60)

      • Closing capital: £190

    • Company Equity Example:

      • Share capital: £50

      • Share premium: £20

      • Revaluation reserve: £30

      • General reserve: £10

      • Retained profits: £80

      • Total Equity: £190

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• Share Capital & Share Premium:

  • Share Definitions:

    • Par Value: Fixed nominal value of shares (e.g., 1p, £1).

    • Issued Share Capital: Shares actually issued.

    • Called-Up Share Capital: Amount requested from shareholders.

    • Paid-Up Share Capital: Amount actually paid by shareholders.

  • Issuing Shares:

    • Issued at an issue price above par value, with excess recorded in the Share Premium account.

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• Example on Share Par Value:

  • Case Study: Deliveroo shares:

    • Launched with par value of ½p and issue price of 390p.

    • Journal Entry Example:

      • Dr Cash at bank £3.90

      • Cr Share capital £0.005

      • Cr Share premium £3.895

    • Market prices after launch vary but are not recorded in company books.

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• Question 1 – Olearia plc:

  • Olearia issues 10,000 shares of par value £1 each at an issue price of £1.70.

  • Correct Ledger Entries:

    • B. Dr Cash at bank £17,000Cr Share capital £10,000Cr Share premium £7,000

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• Question 2 – Wex Ltd:

  • Issued 100,000 ordinary shares of 25p par value at £1.60.

  • Share Capital and Share Premium Balances:

    • Ordinary share capital: £140,000; share premium: £530,000.

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• Types of Shares:

  • Ordinary (Equity) Shares:

    • Voting rights; variable dividends based on company performance.

  • Preference Shares:

    • No voting rights; fixed dividends, can be irredeemable (capital) or redeemable (liabilities).

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• More on Dividends:

  • Preference dividends are contractual obligations shown as liabilities if unpaid.

  • Ordinary dividends recorded when paid, NOT as liabilities when proposed.

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• Question 3 – Lym plc:

  • Determine total dividends paid during 20X7:

    • Total: £85,000.

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• Revaluation Reserve:

  • Companies can revalue certain assets (like land & buildings) reflecting current values with unrealized gains.

  • Such gains are recorded in a Revaluation reserve, not the SPL.

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• Example of Revaluation:

  • Wyn plc revalues land from £200,000 to £500,000:

    • Double Entry:

      • Dr Land £300,000

      • Cr Revaluation reserve £300,000.

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• Question 4 – Zep Ltd:

  • Determine land valuation after revaluation:

    • Correct valuation: £154,000.

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• Revaluation in Practice:

  • Case of Veolia Water UK switching to fair values, with significant revaluation leading to increased net assets.

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• Essential Private Study for Topic 10 Part 1:

  • Complete the end-of-week quiz on Canvas and review lecture questions.

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• Recommended Additional Study:

  • Read FW 15e Chapter 35 Sections 35.1 to 35.14 and Section 35.19.

  • Work on ICAEW Workbook self-test questions and Chapter review questions.