Accounting for limited companies flashcards

Topic 16: Accounting for limited companies

500,000 ordinary shares of £1. A 1 for 5 rights issue at £1.40. Entries?

100,000 new shares. Dr Bank £140,000; Cr Share capital £100,000; Cr Share premium £40,000.

600,000 ordinary shares of £0.25. A 1 for 2 bonus issue from retained earnings. Entry?

300,000 new shares. Dr Retained earnings £75,000; Cr Share capital £75,000. No cash.

A building costs £200,000 with accumulated depreciation of £30,000 and is revalued to £260,000. Surplus and entry?

Surplus 260,000 − 170,000 = £90,000. Dr Building £60,000; Dr Provision for depreciation £30,000; Cr Revaluation reserve £90,000.

Profit from operations £50,000; depreciation £12,000; profit on disposal £1,000; inventory up £3,000; receivables up £4,000; payables up £2,000

50,000 + 12,000 − 1,000 − 3,000 − 4,000 + 2,000 = £56,000 cash generated from operations.

Tax charge £14,000; tax payable £12,500 at the start and £14,000 at the end. Tax paid?

12,500 + 14,000 − 14,000 = £12,500.

Interest charge £4,800; accrued interest £1,200 at the start and £600 at the end. Interest paid?

1,200 + 4,800 − 600 = £5,400.

Statement of cash flows: where do sale proceeds, dividends paid and a bonus issue go?

Sale proceeds: investing activities (inflow). Dividends paid: financing activities in the common layout. Bonus issue: not shown, no cash.

Why can a revaluation reserve not be used to pay cash dividends?

The gain is unrealised: the asset has not been sold.

Accumulated depreciation £20,000 at the start; charge £10,000; depreciation on an asset sold £9,000. Closing balance?

20,000 + 10,000 − 9,000 = £21,000.

Three reasons companies publish accounts

It is a legal requirement; stewardship (owners are often not the directors); and limited liability means lenders and suppliers need information.

Limitations of published accounts

Historical and published months after the year end; summarised; money measurement only, so non-financial factors are missing; estimates and judgement; window dressing; visible to competitors.

Purpose and importance of the international accounting standards framework

Purpose: common rules for measuring, presenting and disclosing items (set by the IASB). Importance: comparability, reliability and investor confidence, less scope for creative accounting, consistency, a benchmark for auditors.