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LIMITED COMPANIES. LIMITED LIABILITY Owners (Shareholders) liability is limited to the amount of money they invest in the company Public Limited Company (plc): 2 or more owners Minimal share capital of £50,000. Sells shares on the stock market to the general public
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LIMITED COMPANIES LIMITED LIABILITY • Owners (Shareholders) liability is limited to the amount of money they invest in the company Public Limited Company (plc): • 2 or more owners • Minimal share capital of £50,000. • Sells shares on the stock market to the general public Private Limited Company (ltd): • Company name must be followed by letters Ltd • Can sell shares to family and friends • Authorised Share Capital cannot exceed £50,000
Memorandum of Association Contents: Company Name Company Address Address of the Company Authorised Share Capital Statement of Limited liability Articles of Association Contents: Rights and duties of the director The procedure for election of directors Procedure for calling a General Meeting Declaration and payments of dividends Keeping of Accounts and Audits Appointment of Secretary DOCUMENTS
LIMITED COMPANIES • Ownership • Owned by the SHAREHOLDERS • Dividend • A reward given to each shareholder for investing in the company. • An interim dividend is one that is paid during the financial year • Control • Run by a BOARD of DIRECTORS who have been elected by SHAREHOLDERS at the AGM • Directors are get paid for their work, which is deducted in the Profit and Loss Account • Annual General Meeting (AGM) • Must be held by law • Informs shareholders how the business is doing • Allows shareholders to express their views
Issuing Shares • Authorised Share Capital • The amount of shares a company is allowed to sell. • Issued Share Capital • The amount of shares a company actually sold • TYPES OF SHARES • Preference shares • Entitled to a certain percentage of the Net Profits • Rank for payment before ordinary shares • Don’t carry voting rights • Ordinary Shares • Most risky type of investment • Dividend will depend on Net profit of the year • Get paid after preference shares • Carry voting rights FINANCE
FINANCE • DEBENTURES • A debenture is a bond or loan These are normally issued in attempt to raise capital by plcs • Characteristics: • Certificates representing a long term loan to the firm • Fixed rate of interest charged over the term of the loan • Debenture interest must be paid regardless of profit or loss • Secured debentures guaranteed repayment upon liquidation • Debenture owners are creditors and not shareholders to a limited company
FINANCE • Reserves • A build up of profits in the following categories: • Unappropriated Profit • General Reserve • Can be reduced by losses, issue of bonus shares, pay off or write off goodwill • General Reserve • Contains profit that are transferred from the P&L appropriation account • The General Reserve is not identified for a particular purpose • Annual Transfer is identified by Directors • General Reserve is the property of the shareholder
£ £ £ Sales x LESS COST OF GOODS SOLD Opening Stock x ADD Purchases x LESS Purchases Returns x x ADD Carriage In x ADD Warehouse Expenses x x LESS Closing Stock x Cost of Goods sold -x GROSS PROFIT x Add any GAINS (rent comm, disc, Investment received) x Add any DECREASED Prov for BD +x x LESS EXPENSES Debenture Interest x Wages x Rates x Insurance x Advertising x Depreciation x Inc in Prov for BD xx Net Profit Before Corporation Tax x Trading P& L Acc of xxxx for y/e xxxxxx
Trading P& L Acc of xxxx for y/e xxxxxx £ £ £ Net Profit Before Corporation Tax x Less Corporation Tax x Net Profit After Corporation Tax x Add unappropriated profit (trial balance) +x x Less Appropriations: All interim Dividends (in trial balance) x Preference Dividends (in notes) x Ordinary Dividends (in notes) x General Reserve (notes) x Goodwill written off x x Unappropriated Profit x
£ £ £ FIXED ASSETS Cost Dep NBV Properties x x x Fittings x x x Investments x Goodwill (intangible asset) x x CURRENT ASSETS Stock x Debtors x (LESS prov for bad debt) x x Prepayments x Bank x Cash x Investment Dividends Received x x CURRENT LIABILITIES Creditors x Bank overdraft x Accrued Expenses x Debenture Interest Due x Corporation Tax x Proposed Dividends x VAT x-x Working Capital x NET ASSETS x Balance Sheet of xxxx as at xxxxxx
£ £ £ FINANCED BY Authorised Share Capital xxxxxxxx Ordinary shares x xxxxxxxx ? Preference shares x x Issued Share Capital xxxxxxx Ordinary Shares x xxxxxxxx ?% Preference Shares x x Reserves and Provisions Profit and Loss Account x General Reserve x Share Premium Reserve x Revaluation Reserve x x ADD Long Term Liabilities Debentures +x NET WORTH x Balance Sheet of xxxx plc as at xxxxxx
Exercise 1 – Taylor plc Notes Prepayment Marketing Expenses Original figure 5,800 Less Prepayment 340 5,460
£ £ £ GROSS PROFIT 63,500 LESS EXPENSES Electricity 8,090 Marketing Expenses 5,460 Telephone 3,650 Rates 2,700 Advertising 2,200 Depreciation F&F 1,20023,300 Net profit 40,200 +unappropriated profit at 31/12/09 0 40,200 Transfer to General Reserve 15,000 Ordinary Share Dividend 8,000 Preference Share Dividend 14,00037,000 Unappropriated Profit 31/12/10 3,200 P& L Acc of Taylor plc for y/e 31/12/10
Jinky plc Appropriation Acc for Y/e 30/4/11 £ £ £ Net profit 46,000 +unappropriated profit at 30/04/10 4,000 50,000 Transfer to General Reserve 3,000 Ordinary Share Dividend 4,000 Preference Share Dividend 1,0008,000 Unappropriated Profit 31/12/11 42,000 Ex 2 JINKY PLC
£ £ £ FINANCED BY Issued Share Capital 100,000 £1 Ordinary Shares 100,000 20,000 5% £1 Pref Shares 20,000 120,000 Reserves and Provisions Profit and Loss Account 42,000 General Reserve 35,000 77,000 ADD Long Term Liabilities Debentures 50,000 NET WORTH 247,000 Balance Sheet of Jinky plc as at 30/4/11
Ex 3 – App Acc of Kippininn plc for y/e 31/1/11 £ £ £ (000) (000) (000) Net Profit 35 Add Unappropriated Profit +26 61 Transfer to General Reserve 5 Interim Dividends Ordinary 4 Preference 3 7 Proposed Dividend Ordinary (full % plusInterim) 8 Preference 412 -24 (3000 already paid deducted) Unappropriated Profit 31/1/11 37
£ £ £ FIXED ASSETS Cost Dep NBV Premises 160 Office Equipment 65 18 47 207 CURRENT ASSETS Stock 62 Debtors 13 VAT 6 Bank 21 102 CURRENT LIABILITIES Creditors 18 Proposed Ordinary Dividend 8 Proposed Preference Div 4 Wages Accrued 737 Working Capital 65 NET ASSETS 272 Balance Sheet of Kipininn plc as at 31/1/11
£ £ £ Issued Share Capital 80,000 £1 Ordinary Shares 80 100,000 7% £1 Preference Shares 100 180 Reserves and Provisions Profit and Loss Account 37 General Reserve 55 92 ADD Long Term Liabilities Debentures 0 NET WORTH 272 Balance Sheet of Kipininn as at 31/1/11
PROPERTY REVALUATION RESERVE • Property usually appreciates in value (goes up) over the assets lifetime • Revaluation occurs when there is a difference in value between the revaluation figure and the net book value. • It should be recorded as follows: Dr Asset in Balance Sheet, Cr Revaluation Reserve • The reserve cannot be distributed to shareholders • The reserve cannot be used to write off goodwill • The reserve can be used to finance a bonus share issue • If the asset depreciates then it should be written off against the profits HIGHER THEORY
HIGHER THEORY • SHARE PREMIUM • Shares and debentures may be issued at PAR ie. At a price equal to their nominal value e.g. £1 share issued at £1. • Shares may be issued at a PREMIUM (at a price ABOVE their nominal or face value i.e. £1 share issued at £1.25. • A premium on the issue of shares must be treated as CAPITAL RESERVE that can only be used for the following purposes: • Issuing fully paid bonus shares • Writing off preliminary expenses • Writing off commission paid or discounts allowed on shares or debentures
HIGHER THEORY • EXAMPLE • 100,000 ordinary shares were £1 each and are now being sold as a premium price of£1.50 • The financed by section should be updated as follows: Issued Share Capital Ordinary Shares (100,000 at £1) £100,000 Reserves General Reserve 10,000 Revaluation Reserve 15,000 Share Premium Reserve (100,000@50p) 50,000 75,000 175,000
HIGHER THEORY • BONUS ISSUE • If reserves increase beyond the level thought to be needed then shares can be issued to existing shareholders free of charge. • Unlike a Rights Issue, no additional money is received. Share Certificates however are issued.
HIGHER THEORY • EXAMPLE • It is proposed to give Ordinary shareholders a bonus issue of 1 share for every 6 held. • This issue is to be financed from the share premium account. • The value of issued ordinary shares is £36,000 (36,000 at £1 each) and the amount in the share premium account is £10,000. • If 36,000 ordinary shares were sold and 1 in every six is to be issued as a bonus then that would be 36,000/6 = 6,000 shares • 6000 shares at £1 each = £6,000.
HIGHER THEORY Issued Share Capital Ordinary Shares (36,000+6,000) 42,000 Reserves Share Premium Reserve (10-6) 4,000
HIGHER THEORY • Preliminary/ Issue Expenses • These include legal and other expenses incurred when a company is formed • When they are large they are often Capitalised with a proportion being written off each year • Since the Companies Act 1981 they MAY NOT be shown as assets • They can be written off against any balance on the Share Premium Account • OR • They should e written off in the Profit and Loss account • They can also include expenses incurred in the issue of Debentures
HIGHER THEORY • Factoring • Where a company transfers responsibility for collecting its book debts to a factor • The factor will: • Settle the debts due to the firm • Receive a fee in return (based on the amount of debts paid – plus a service charge) • Manage the sales ledger and arrange for the collection of overdue debts • Advantages of factoring • Reduces debt collection period • Better credit control • Decrease in risk of bad debts
HIGHER THEORY • Operating profit • This is the Net Profit of a company BEFORE Corporation Tax is Deducted
Exercise 10 – Kelburn Plc Notes Prepayment £’000 Selling Expenses Original figure 26 Less Prepayment 5 BS/A 21 P&L Accrual Office Expenses Original figure 20 ADD Accrual 8 BS/L 28 P&L Debenture interest Original figure (1/2 year) 4 ADD Amount owing 4 BS/L 8 P&L
BS/FA BS/FA + + Exercise 10 – Kelburn Plc Notes Depreciation £’000 Fittings (Reduced Bal) Cost 60 BS/FA Dep to date 20 40 Dep for current year 25% 10 P&L NBV 30 BSC/FA Vehicles Cost 70 BS/FA Dep for Current year 20% 14 P&L 56 Existing Dep 9 NBV 47 BS/FA
Exercise 10 – Kelburn Plc Notes Provision for Bad Debts £’000 Debtors 40 BS/CA Provision 5% 2 New Debtors figure 38 BS/CA Existing Figure 3 Decrease in provision 1 P&L Property Revaluation Present Value 180 BS/FA Cost 147 Increase in Valuation 33 Cap Res
Exercise 10 – Kelburn Plc Notes Share premium Reserve£’000 Original amount 25 Less Preliminary Exp 20 BS/CL 5 BS/ FB General Reserve Original Value 27 This year’s transfer 13 APP 40 BS/FB Dividends 50,000 10% £1 preference 50 BS/FB Proposed dividend 5 BS/CL/ APP 60,000 £1 ordinary shares 60 BS/FB Interim Dividend paid 6 APP Final proposed dividend 5% 3 BS/CL/ APP
£000 £000 £000 Sales 300 LESS COST OF GOODS SOLD Opening Stock 15 ADD Purchases 180 ADD Warehouse Expenses 10190 205 LESS Closing Stock 20 Cost of Goods sold -185 GROSS PROFIT 115 Add any GAINS DECREASED Prov for BD 1 Discount Received 2 118 LESS EXPENSES Selling Expenses 21 Office Expenses 28 Bad Debts 5 Debenture Interest 8 Depreciation fittings 10 Depreciation Vehicles 1486 Net Profit Before Corporation Tax 32 TPL & App of Kelburn plc for y/e 31/3/11
£000 £000 £000 Net Profit Before Corporation Tax 32 Less Corporation Tax 25% 8 Net Profit After Corporation Tax 24 Add unappropriated profit from prev yr 5 29 Less Appropriations: Interim Ordinary dividend 6 Proposed Dividends Final Ord dividend 5% 3 50,000 10% £1 preference 5 Reserves General Reserve 1327 Unnappropriated Profit 2 TPL & App of Kelburn plc for y/e 31/3/11
£000 £000 £000 FIXED ASSETS Cost Dep NBV Properties 180 180 Fittings 60 30 30 Vehicles 70 23 47 257 CURRENT ASSETS Stock 20 Debtors (less provision (40-2) 38 Selling Expenses Prepaid] 5 Bank 4 67 CURRENT LIABILITIES Creditors 20 Office Expenses Accrued 8 Debenture Interest due 4 Proposed Ordinary dividend 3 Proposed Pref dividend 5 Corporation Tax due 8 VAT 6-54 Working Capital 13 NET ASSETS 270 Bal sheet of Kelburn plc as at 31/12/11
£ £ £ FINANCED BY Issued Share Capital 60,000 £1 Ordinary shares 60 50,000 10% Preference shares 50 110 Reserves and Provisions Unappropriated profit P&L 2 General Reserve 40 Share Premium Reserve (25-5) 5 Capital Reserve 33 80 ADD Long Term Liabilities 10% Debentures +80 NET WORTH 270 Bal sheet of Kelburn plc as at 31/3/11
Exercise 11 – Gibshill Enterprise plc Notes Accrual £’000 Selling Expenses Original figure 16 Add Accrual 4 BS/L 20 P&L Prepayment Office Expenses Original figure 18 LESS Prepayment 5 BS/A 13 P&L Depreciation Fittings - Cost 55 BS Depreciation 20% 11 P&L 44 Existing Dep 12 NBV 32 BS Total Dep (12 + 11) 23 BS
Exercise 11 – Gibshill plc Notes Depreciation £’000 Vehicles (Reduced Bal) Cost 85 BS Existing Depreciation 15 70 Dep for current year 10% 7 P&L NBV 63 BS Depreciation to date (15+7) 22 BS Provision for Doubtful Debts Debtors 60 BS/CA 5% Provision for DD 3 BS/CA Existing Provision for DD 1 Adjustment for this year 2 P&L
Exercise 11 – Gibshill plc Notes Bank overdraft £’000 Interest due Bank overdraft 1 BS/CL & P&L Debenture Interest ½ Year (Paid) 2 ½ Year (due) 2 BS/ CL Full year interest 4 P&L Bonus Share £1 Ordinary Shares issued 40,000 £1 Bonus shares (1 in 4) 10,000 50,000 FB Share Premium reserve 15,000 Less Bonus shares 10,000 5,000 FB
Exercise 11 – Gibshill Plc Notes General Reserve£’000 Existing amount 20 Less Amount to transfer 9 P&L 11 BS/ FB Goodwill Value 22 P&L (App) Dividends 10,000 10% £1 preference 20 BS/FB Dividend 2 Less Interim dividend) 1 P&L/app Proposed dividend due 1 P&L/app BS/CL 50,000 £1 ordinary shares 50 BS/FB Final proposed dividend 8% 4 BS/CL/ APP
£000 £000 £000 Sales 250 LESS COST OF GOODS SOLD Opening Stock 15 ADD Purchases 170 185 LESS Closing Stock 18 Cost of Goods sold 167 GROSS PROFIT 83 LESS EXPENSES Selling Expenses (16+4) 20 Office Expenses (18-5) 13 Provision for doubtful debts 2 Bad Debts 4 Discounts 1 Debenture interest 4 Depreciation Fittings 11 Depreciation Vehicles 7 Overdraft interest due 1 63 Net Profit Before Corporation Tax 20 TPL & App of Gibshill plc for y/e 30/4/11
£000 £000 £000 Net Profit Before Corporation Tax 20 Less Corporation Tax 25% 5 Net Profit After Corporation Tax 15 Add unappropriated profit from prev yr 6 21 Less Appropriations: Interim preference share div 1 Proposed Dividends Final Preference share div 1 Ordinary Share dividend 4 6 Goodwill written off 2228 -7 Reserves Transfer FROM General Reserve 9 Unnappropriated Profit 2 TPL & App of Gibshill plc for y/e 30/4/11
£000 £000 £000 FIXED ASSETS Cost Dep NBV Fittings 55 23 32 Vehicles 85 22 63 95 CURRENT ASSETS Stock 18 Debtors (less provision (60-3) 57 Office Expenses Prepaid 5 80 CURRENT LIABILITIES Creditors 10 Selling Expenses Accrued 4 Debenture Interest due 2 Overdraft interest due 1 Proposed Preference div 1 Proposed Ordinary div 4 Corporation Tax 5 VAT 4 Bank Overdraft 637 Working capital 43 NET ASSETS 138 Bal sheet of Gibshill plc as at 30/4/11
£ £ £ FINANCED BY Issued Share Capital 50,000 £1 Ordinary shares (40+10) 50 20,000 10% Preference shares 20 70 Reserves and Provisions Unappropriated profit P&L 2 General Reserve (20-9) 11 Share Premium Reserve (15-10) 5 18 ADD Long Term Liabilities 8% Debentures +50 NET WORTH 138 Bal sheet of Gibshill plc as at 30/4/11