Financial Statements for Limited Companies (Cambridge (CIE) IGCSE Accounting): Flashcards
Exam code: 0452 & 0985
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What do ordinary shareholders have that preference shareholders do not?
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What do ordinary shareholders have that preference shareholders do not?
Voting rights, because the ordinary shareholders are the owners of the company.
Preference shareholders have no vote at shareholders' meetings.
How do preference dividends differ from ordinary dividends?
Preference shareholders receive a fixed rate based on the face value of their shares, and they are paid before ordinary shareholders.
An ordinary dividend is not fixed and may be withheld altogether in a poor year.
True or False?
A company can buy back its redeemable preference shares.
True.
That is what "redeemable" means: the company can buy them back at an agreed date and price. Non-redeemable preference shares cannot be bought back at all.
Where does the dividend on a redeemable preference share appear?
As a finance cost in the statement of profit or loss.
Any part of it still unpaid at the year end is shown as a current liability.
How does paying an ordinary dividend affect the financial statements?
It reduces the retained earnings and the bank balance in the statement of financial position.
Ordinary dividends are not accrued either, so they affect the statements only when they are actually paid.
True or False?
Redeemable preference shares are part of a company's equity.
False.
They are treated as a long-term loan and appear under non-current liabilities. Only ordinary shares and non-redeemable preference shares count as equity.
Define debenture.
A debenture is a long-term loan to a company, repaid in full on a fixed future date.
It carries a fixed rate of interest, and debenture holders are repaid before shareholders if the company fails.
What is the difference between share capital and loan capital?
Share capital is raised by issuing shares, and those shareholders become part-owners of the company.
Loan capital is borrowed from outside the company and has to be repaid, debentures being the main example.
Complete the sentence about share capital:
The amount shareholders have been asked to pay is the
capital, and the amount they have actually paid is the capital.The completed sentence is:
The amount shareholders have been asked to pay is the called-up capital, and the amount they have actually paid is the paid-up capital.
What is the only difference between a limited company's statement of profit or loss and a sole trader's?
The finance costs.
Debenture interest and redeemable preference share dividends are included there, and nothing of that kind arises for a sole trader.
True or False?
All preference share dividends are finance costs in the statement of profit or loss.
False.
Only the dividends on redeemable preference shares are. Those on non-redeemable preference shares are distributions of profit and appear in the statement of changes in equity.
Why is a redeemable preference share dividend treated as a finance cost?
Because redeemable preference shares are treated as a long-term loan, so their dividend behaves like loan interest.
It is a cost of borrowing rather than a share of the profit.
Complete the sentence about a limited company's statement of profit or loss:
The finance costs are subtracted from the profit from
to give the profit for the .The completed sentence is:
The finance costs are subtracted from the profit from operations to give the profit for the year.
A company has 4% debentures of $46 000 and none of the interest has been paid. What is the finance cost for the year?
$1840, since 4% × $46 000 = $1840.
The whole year's interest is charged whether or not any of it has actually been paid.
Define the statement of changes in equity.
The statement of changes in equity shows how a limited company's equity has changed over the year.
It sets out the movements in the share capital, the general reserve and the retained earnings.
What are the three things that change the retained earnings during the year?
The profit for the year is added.
The dividends paid are subtracted, and so is any transfer to the general reserve.
Which shares appear in the statement of changes in equity?
Ordinary shares and non-redeemable preference shares.
Redeemable preference shares are left out of it entirely.
What is the difference between an interim and a final dividend?
An interim dividend is paid partway through the year.
A final dividend is paid at the end of it.
True or False?
A dividend proposed by the directors at the year end is included in the statement of changes in equity.
False.
Only dividends actually paid during the year are included. A proposed dividend stays out until the payment is made.
Complete the sentence about a transfer to the general reserve:
A transfer to the general reserve
the retained earnings and the general reserve, so the total equity is unchanged.The completed sentence is:
A transfer to the general reserve reduces the retained earnings and increases the general reserve, so the total equity is unchanged.
Retained earnings opened at $55 000, with a profit of $70 000, a dividend of $32 000 paid and $12 000 transferred to the general reserve. What is the closing balance?
$81 000.
That is $55 000 + $70 000 − $32 000 − $12 000 = $81 000.
How does a limited company's statement of financial position differ from a sole trader's?
The capital section is called the equity section, and it is made up differently.
The non-current assets, current assets and current liabilities sections are unchanged.
Complete the sentence about the equity section:
Equity is made up of the share capital, the
reserve and the earnings.The completed sentence is:
Equity is made up of the share capital, the general reserve and the retained earnings.
Which items go under non-current liabilities for a limited company?
Debentures and redeemable preference shares.
Both are long-term borrowing rather than equity, so neither belongs in the equity section.
Where do the figures for the equity section come from?
From the statement of changes in equity, which has already worked out the closing balances.
That is why it is prepared before the statement of financial position.
In what order are a limited company's three financial statements prepared?
Statement of profit or loss, then statement of changes in equity, then statement of financial position.
Each one needs a figure that the statement before it produces.
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