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Non-current (fixed) assets
plus
Current assets
minus
Current liabilities
minus
Non-current (long-term) liabilities
equals
Ownership Interest
[..........................
..............................]
Financial Accounting
Safe and Sure plc
Notes Year 7 Year 6
£m
12 195
13 55
14 46
16 3,408
3,704
When a company first comes into existence,
it issues to the owners who become .
Each share has a , which is called its
(...............................).
J.A. Smith has paid £25,000 to the company. That is the limit of this persons liability if the
company fails.
The company issues 100,000 shares to J.A. Smith at a price of 25 pence each. The shares
represent the in the company.
Financial Accounting
=
Business makes profits when the increase in assets is greater than the increase in liabilities. If
the assets are kept in the business, then the profit is said to be retained.
(a)
=
(b)
=
(c)
=
(d)
Financial Accounting
Company has traded profitably: company wishes to raise as much funds as possible.
Will issue shares at their .
Nominal value remains the same, the market value may be quite different.
Nominal value is 25 pence but finds that its shares are selling in the market at 80 pence each.
Share premium = Amount per share .
= ( ) = per share
Company issues 200,000 new shares.
It will collect ( ) = £ in cash.
Amount per share above nominal value (=) per share
Total share premium per share × shares = £
Total nominal value per share × shares = £
=
Comprehensive = includes everything
All changes in assets and liabilities, apart from transactions with owners
IASB permits two stages:
1) Income statement (sales minus expenses)
2) Other comprehensive income (OCI) (other gains and losses)
Financial Accounting
A hotels cost is £560,000. The hotel is run successfully for a period of three years, and at the
end of that period, a professional valuer confirms that the hotel, if sold, would probably result in
sale proceeds of £620,000.
The directors of the company may wish to tell shareholders about this increased market value of
the companys fixed asset.
Options available to company:
1. Keep the value in the statement of financial position (balance sheet) at £560,000 (the
historical cost) but include a .. explaining that the
market value is £620,000.
2. Recognise the increase in financial statements
=
Gains or losses resulting from changes in the rates of exchange with regard to assets held and
liabilities owed and denominated in a different currency.
Loans $6 million when rate of exchange is £1=$2
Liability expressed in £ = (6 1/2) = £3 million
Rate of exchange changes to £1=$3
Liability expressed in £ = (6 1/3) = £2 million
Financial Accounting
A company, Office Owner Ltd, is formed on 1 January Year 1 by the issue of 4 million ordinary
shares of 25 pence nominal value each.
The cash raised from the issue is used on 2 January to buy an office block, which is rented to a
customer for an annual rent of £50,000. The tenant carries all costs of repairs.
The companys administration costs for the year are £10,000.
At the end of the year, the office block is valued by an expert at £1,015,000.
On the last day of the year, the company issues a further 2 million ordinary shares at a price of
40 pence each, to raise cash for expansion plans in Year 2.
Office Owner Ltd analysis of transactions for Year 1
Date Transaction or event Effect on assets Effect on ownership
interest
Year 1
Financial Accounting
Office Owner Ltd spreadsheet of transactions for the Year 1
Date Transaction or event Cash Office block Share capital Share
premium
Retained
earnings
Revaluation
reserve
Year 1 £ £ £ £ £
Financial Accounting
Fixed asset:
Statement of changes in equity
Total comprehensive income
+
Reconciliation of change in profit or loss
+
Reconciliation of change in OCI
+
Transactions with owners over the period
Reward to the owner (usually cash)
Questions:
1. Does the company have . to pay a dividend?
2. Has the company made (increase in ownership interest) to
justify a dividend?
Financial Accounting
Might be:
Dividend proposed for previous year, now paid
Interim dividend as part of dividend for current year
A L = OI
Decrease in .
Decrease in . reported in income statement (profit and loss
account)
At end of accounting year, after profits have been calculated, directors decide whether to pay a
final dividend and, if so, how much.
This is not a liability because it has not been approved by shareholders. It is a proposal from
directors.
The proposal to pay the dividend is reported as an item in the directors report.
Capitalisation issue (Bonus issue or Scrip issue) (read Section 12.8.2)
A company decides to increase the number of shares with . to assets or
liabilities.
Reasons for a capitalisation issue
Share price tends to . after the announcement
of a capitalisation issue.
There tends to be an acceptable .. for listed shares: £20 per
share maximum. Increase number of shares to scale down the price per share.
Capitalisation issue is often made out of reserves (very often out of retained profits). A
message is given to shareholders that these are now part of the . of the
company. They are no longer available to cover the payment of dividends.
Rights issue (read Section 12.8.3)
When a public (listed) company raises finance by the issue of shares, this is normally done by
way of a rights issue.
Financial Accounting
This gives existing shareholders the of subscribing for new shares in the
company and so maintain their proportional shareholding.
The issue price is set at . the current market price of the shares.
Assume that Office Owners Ltd wishes to make a 1 for 5 capitalisation issue.
The share capital is 6 million 25p shares. This gives a nominal value £1.5 million.
New shares _______________/___________ = ___________________
Nominal value __________________ × __________ p = £__________________
In terms of the accounting equation, the effect on the statement of financial position (balance
sheet) is:
Office Owner Ltd capitalisation issue in January Year 2
Date Transaction
or event
Cash Office
block
Share
capital
Share
premium
Retained
earnings
Revaluation
reserve
Financial Accounting
Rights issue: Example
A company has 400 million shares in issue of a nominal value of 25 pence per share. It wishes
to issue a further 100 million shares.
Implies a rights issue of 1 for 4
(A holder of 8,000 shares will be given the right to subscribe for 2,000 new shares)
Assume an issue price of 150 pence per share
This is split, for accounting purposes, into the nominal value of 25 pence and the premium of
125 pence.
In terms of the accounting equation, the effect of the rights issue on the statement of financial
position (balance sheet) is:
total cash raised by the issue £.............. × 100 million shares = £.............. million.
nominal value of shares issued will be ...... pence × 100 million shares = £.........million.
share premium on issue of shares will be £......... × 100 million shares = £.......... million.
Analysis of the month-end adjustments
(a) At the end of the month, it is found that the roof has been leaking and rainwater has
damaged goods worth £500.
Dr Cost of goods sold £500
Cr Inventory (stock) of goods £500
(b) The business uses gas to heat a water boiler, and it is estimated that consumption for the
month amounts to £80.
Dr Expense of gas £80
Cr Accruals £80
Financial Accounting
Trial balance of M. Carter at the end of May, before month-end adjustments
Ledger account title Trial balance Adjustments Income statement
(Profit and loss
account)
Statement of financial
position (balance sheet)
Dr Cr Dr Cr Expense Revenue A L + OI
Financial Accounting
Income statement (profit and loss account) (adjusted)
for the month of May Year xx
Other expenses
Statement of financial position (balance sheet) (adjusted)
on 31 May Year xx
Accounting
Equation
Fixed assets
