Business Structures: Ltd, PLC and Sole Trader

Name is followed by 'Ltd' (short for 'Limited'), hare issue is restricted to family and friends, Shares cannot be listed or traded on the stock market

Name is followed by plc (short for 'Public Limited Company'), Can raise finance by selling shares to the general public, Shares can be listed and traded on the stock market

own limited companies but appoint paid directors to run the company on their behalf. Shareholders' interests are protected by a number of laws to ensure that they do not lose out financially.

a company has a separate legal entity to its shareholders: it can suee sued and the company (not its owners) pays Corporation Tax ,a company has continuity it has a separate existence to its owners,the shareholders in a company benefit from limited liability.

An income statement , A statement of financial position, A statement of changes in equity (Topic 21)

Directors are legally employees of the company, appointed by the shareholders to run the company on their behalf. The income they received from the company is therefore an expense of running the business and an administration expense in the income statement covers all the financial benefits the directors receive from the company, whether in the form of money, e.g. salary, bonus, or fees, or 'benefits-in-kind', such as company cars.

There is a legal requirement that the financial statements of limited companies are audited. An auditor is an independent expert, usually a financial accountant who does not work for the company and checks the figures prepared by the company's accountants to ensure that they have been prepared correctly and prepares an Auditors' Report to confirm that the financial statements represent a 'true and fair view' of the company's financial situation.This is to protect the shareholders' interests due to the divorce between ownership (shareholders) and control (directors)

The Profit for the year before tax is usually lower than the Profit from Operations because the company has to pay interest on loans and preference dividends which are expenses in the income statement similar to sole traders.

is equivalent to profit for the year for a sole trader - it is Gross Profit + Income - Expenses. A sole trader is entitled to all of this profit which is then transferred to the Capital Account on the Balance Sheet. This is not the case for companies, and their income statement does not end at this point.

Companies are separate legal entities and pay Corporation tax in their own right.

On a company statement of financial position the equity section shows how much the company is worth to its shareholders, namely the assets minus the liabilities.

A company raises share capital through the issue of shares in exchange for money to enable it to buy assets shareholders may then receive an annual share of the profit for the year, known as a dividend. The most common type of shares are Ordinary shares (also known as 'Equity shares') the annual dividend can vary and is recommended by the company directors the annual dividend goes in the Statement of Changes in Equity

A companys sofp will show authorised share capital for information purposes but the figures to be included in the balance sheet totals are the issued share capital. When the company is first formed its equity will consist of just share capital as there will be no reserves.

known as 'face value' and 'par value' it is the value at which the shares are placed in the ledger accounts and on the balance sheet, It is not necessarily the price at which the shares were sold ,this is the issue price or what they are worth ,this is the market price

this document confirms that the business will operate as a company and will issue shares,It contains information of interest to external parties such as the company's line of business, its name and registered office ,its authorised share capital (though no longer a requirement since 2009

this document contains the rules that govern the internal running of the company such as the conduct of directors meetings and voting rights of the shareholders at meetings.

is shown in the Memorandum of Association and is the maximum amount the company can raise through the issue of shares. The authorised share capital can be subsequently increased if the company grows, subject to a majority vote of the ordinary shareholders. It can only be reduced following a court ruling.

the number of shares actually issued, which cannot exceed the authorised share capital. This enables the company to issue more shares at a later date, for example if it needs to raise more finance.

basically means the same as 'issued share capital' and is the amount of share capital that the shareholders have paid for.

Shareholders in a limited company may be entitled to an annual share of the profit for the year known as a dividend.Only dividends actually paid during the accounting period are included in the financial statements. This means that any proposed final dividend for the year in question is not recorded.

The ordinary share dividend is a variable amount and is recommended by the directors based on:the level of profit made in the year ,how much profit the directors wish to retain the company's revenue reserves ,how much the company can afford to pay (i.e. bank balance or overdraft facility)

When a company first starts trading its equity consists simply of share capital, however over time the company becomes worth more to its shareholders, for example as it makes profits.Increases in the worth of the company over and above its share capital are known as 'reserves'. Reserves are not cash or money in the bank, so they are not money available to spend.Reserves change the equity of a company, so before the equity section of the Statement of Financial Position can be completed it is necessary to prepare an additional financial statement, called the statement of changes in equity.

which occur due to the normal trading activities of the company which are calculated in the Income Statement and enable the company to have retained earnings (profits)

which occur due to transactions which are not part of the company's normal trading activities and which affect the Statement of Financial Position

explains how the equity section of the statement of financial position has changed from the beginning of the financial year to the end.

Sole traders take drawings, but are likely to retain some profits in the business. Similarly, the directors of a limited company may decide that some of the profits after tax should not be paid as dividends but should be retained by the company as Revenue Reserves by adding to Retained Earnings

the final dividend for the previous year + the interim dividend for the current year.

is used to 'balance' the increase in the value of non current assets. Each time land is revalued, the revaluation reserve changes and so revaluation is a change in equity and must be included in the statement of changes in equity.

by issuing more ordinary shares,the shares are offered to existing shareholders,in proportion to the number of shares already held /on a pro rata basis

when a company issues FREE shares to existing shareholders and no payment is made for the shares,no money is received by the bank so no change in the 'Net Assets' section of the Statement of Financial Position

The main reason bonus shares are issued is because the directors of a company feel that the ordinary share capital does not adequately reflect the net asset base of the company.

Additional shares are given free to existing shareholders, The capitalisation of reserves into share capital, Issued to restructure the Statement of Financial Position, Total equity remains the same, (Capital) Reserves go down, Stock market price of shares will fall in proportion to bonus issue, Distributed in proportion to existing shareholding, Control of the company does not change

Additional shares offered for sale to existing shareholders, Shares have to be paid for, Issued to raise finance - Company receives payment from shares sold, Issued to raise finance - Company receives payment from shares sold, Shareholders can either buy additional shares or sell the rights on the stock market, Total equity increases, Share premium reserves go up, Offer price is below market value so Stock market price may fall, Distributed in proportion to existing shareholding,Control of the company does not change

Rights issues are a good way for companies to raise finance,There is no interest to pay, unlike finance through borrowing, reducing the risks of high gearing ,It is less expensive to write to existing shareholders offering shares for sale than to advertise to the general public, known as a 'full dress issue', the cost of which can run into millions.,Existing shareholders are more likely to want to buy shares than the 'general public'. If the company advertised shares to the general public there is less guarantee that the shares will sell for the desired price,there is no change in ownership, the existing ordinary shareholders hold more shares but each shareholder's percentage of issued share capital remains the same.Control of the company does not change because the shares are offered on a pro-rata basis, namely on the basis of the existing shareholding, so if a person owned 5% of the old shares they will still own 5% of the new shares,Rights issues are also of benefit to the shareholders since they are offered at a lower price than the current market price of the shares to encourage the shareholders to take up their 'right' to buy.

Authorised share capital is the maximum amount/finance/limit the company can raise through issuing ordinary shares (as set out in its Memorandum of Association) whereas issued share capital is how many shares have actually been issued/how much finance has been raised through the issue of shares . Issued share capital cannot exceed the authorised share capital.

Profit from operations is the profit the company makes from its normal trading activities and is gross profit + other operating income - operating expenses. Profit for the year before tax adjusts profit from operations for income or costs not from the normal trading activities such as interest received/finance costs.

the directors of a limited company may decide that some of the profits after tax should not be paid as dividends but should be retained by the company as Revenue Reserves by adding to Retained Earnings.Another cause of changes in equity is if the company issues more shares. The shares issued are always recorded under share capital at nominal value (in £ not the number of shares).

Companies often prepare half yearly statements for the first six months of the year and the directors will propose and then pay interim dividends based on the first half year's results. The final dividends will be proposed after the financial statements for the remaining six months have been completed. And only dividends paid can be included in the financial statements. So the dividends paid in the statement of changes in equity will usually consist of: the final dividend for the previous year+the interim dividend for the current year.

This is a capital reserve (therefore a ledger account) which is credited when a company issues shares at a price that is greater than the nominal value. This is known as issuing shares at a premium.

When new shares are issued equity changes and this must be shown in the statement of changes in equity as well as the statement of financial position.

is used to 'balance' the increase in the value of non-current assets.Each time something is revalued, the revaluation reserve changes and so revaluation is a change in equity and must be included in the statement of changes in equity so that the statement of financial position gives a 'true and fair view' of the company

By issuing more ordinary shares and they can be offered to existing shareholders in proportion to the number of shares already held /on a pro rata basis

A bonus issue is made when a company issues FREE shares to existing shareholders .No payment is made for the shares/No money is received by the bank( so no change in the 'Net Assets' section of the Statement of Financial Position)

Bonus issues turn reserves into share capital, using reserves that have built up and 'capitalising' them.There is no change in the total of the Equity section of the Statement of Financial Position..The Equity section of the Statement of Financial Position is 're-arranged'.

Capital Reserves first to keep reserves in their most flexible/distributable form - in descending order on the Statement of Financial Position, namely:Share Premium Then Revaluation Reserves Then Revenue Reserves/ Retained earnings

The main reason bonus shares are issued is because the directors of a company feel that the ordinary share capital does not adequately reflect the net asset base of the company.As a PR exercise to keep shareholders happy and reward existing shareholders for loyalty/To reward directors and/or managers in a bonus system/To reward employees in a share participation system/Capital Reserves cannot be used to pay dividends: by converting capital reserves to ordinary shares the company can pay more dividends./Bonus issues may be considered if there is insufficient cash to pay the ordinary dividend.

Shareholders are no better off-All that happens is the companies value is spread over a greater number of shares - each shareholder owns more shares, but each share is worth less however since they are offered at a lower price than the current market price of the shares to encourage the shareholders to take up their 'right' to buy.

Rights issues are a good way for companies to raise finance,There is no interest to pay, unlike finance through borrowing, reducing the risks of high gearing.It is less expensive to write to existing shareholders offering shares for sale than to advertise to the general public, known as a 'full dress issue', the cost of which can run into millions.Existing shareholders are more likely to want to buy shares than the 'general public'. If the company advertised shares to the general public there is less guarantee that the shares will sell for the desired price.,There is no change in ownership, the existing ordinary shareholders hold more shares but each shareholder's percentage of issued share capital remains the same.Control of the company does not change because the shares are offered on a pro-rata basis, namely on the basis of the existing shareholding, so if a person owned 5% of the old shares they will still own 5% of the new shares.

to the company compared to a full dress issue where the shares are advertised to the wider public.

Additional shares offered for sale to existing shareholders, Shares have to be paid for, Issued to raise finance - Company receives payment from shares sold, Shareholders can either buy additional shares or sell the rights on the stock market,total equity increases,share premium reserves go up, Offer price is below market value so Stock market price may fall, Distributed in proportion to existing shareholding, Control of the company does not change

1.Inter- year comparison one firm can compare ratios for one year with another year to see is the firm is doing better or worse ?can a trend be identified? 2.Inter- firm comparison one firm can be compared to a similar firm to monitor its progress.3.Comparison to the Industry average A firm can compare its ratios to the industry average because there are 'norms' for a particular industry.Some industries operate on low mark-up/margins because they are very competitive/some have high start-up/ capital costs because they use sophisticated equipment/Some industries have high overheads.

measure how well the business has performed by comparing the level of profit to assets or revenue.

measure the short term solvency of the business/is the business in a position to pay its everyday expenses and bills/whether or not it is likely to face cash flow problems in the near future.

Profitability is also linked to efficiency which measures how well the business is using its assets.

Is the company a good financial investment for its shareholders

measure the long term solvency of the business/how does the business obtain long term sources of finance - ordinary shares (low geared) or loans (high geared

1.Gross Profit margin -This shows how profitable the business is through its trading activities before taking any overheads into consideration.A rising GP margin would indicate that revenue is rising relative to cost of sales (and vice versa).2. Gross Profit Mark Up -Gpm and gross profit mark up are linked , the mark up is the percentage addition to cost (price) to get selling price and is therefore the same as gross profit.The higher the % mark up, the higher will be the Gross Profit Margin.3.Profit in relation to revenue-The difference between gross profit and profit before tax (or profit from operations) is expenses including or excluding finance costs comparing the gross profit margin to profit in relation to revenue enables a firm to see how well it is controlling its expenses.

This is another way of measuring how well a firm is controlling its expenses, the lower the % the better, showing efficient control of operating expenses.

Capital employed is the medium to long term finance of a business. For a company this is:Equity + Non - current liabilities.This ratio is showing the rate of return that the company is generating in relation to the net assets employed by the company financed either through equity or long term loans .The higher the return the better

means how easily a firm can turn its assets into cash without loss. A firm may be profitable but have cash flow problems, for example if trade receivables take too long to pay. Liquidity ratios measure a firm's ability to pay short term debts and expenses

shows how quickly, on average, the firm is selling off its goods, Businesses need to hold inventories in order to meet demand, however holding too high levels of inventories is costly and inefficient/slow inventory turnover could lead to cash flow problems. The higher the number of times and the shorter the number of days the better

Conventional accounting may refer to some 'ideal' result of between 1.5:1 and 2:1. So > 2:1 firm is over-liquid and tying up too many of its assets in current assets < 1.5:1 firm is under-liquid and in danger of failing the liquid capital ratio when inventories are deducted; however there is no ideal current ratio and it is important to look at trends when considering this ratio.

Inventories may take time to sell and so this ratio is a better indicator of a firm's liquidity than the Current ratio.

This ratio shows how long, on average, receivables take to pay the firm.The shorter the number of days the better as it means that cash is coming into the business more frequently.The Prudence Concept says always round up to the longer day.

This ratio shows how long, on average, the firm takes to pay its suppliers.Against this the company needs to weigh the potential drawbacks of delaying payment to suppliers:for example loss of cash discount;refusal to supply; court action.The Prudence Concept says round down to the nearest day (though mark schemes round up).

These ratios help existing and potential shareholders, and their advisers, decide whether or not a company is a good financial investment./Potential shareholders may decide whether or not to buy shares in a company./Existing shareholders may decide to keep their existing shares, or buy more shares or sell their shares.

The dividend yield shows the rate of return a shareholder is getting on their investment.The share price is how much it costs to buy each share and the dividend per share is what the shareholder is getting back.The higher the yield the better. A shareholder might compare the yield of one company with another or might compare the rate of return on a less risky investment, such as a savings account with a bank.

This ratio shows how much profit is potentially available to pay the ordinary shareholder dividend, also known as the 'Earnings', compared to what is actually paid out as a dividend.

This is a measure of the profitability of the company to its shareholders. Each ordinary share is generating a profit available to the ordinary shareholders of 16p.

This compare the eps (which indicates the profitability of the company) with the current market price of the share. It represents the number of years' earnings that investors are prepared to pay to purchase one of the company's shares.A high PE ratio would mean that share price is rising in relation to a company's profits. and is an indication of confidence in a company's prospects, however a high or low ratio can only be judged in relation to other companies in the market.

Dividends - an annual profit share which is a source of unearned income. These shareholders would be seeking a high rate of dividend and would want a rate of return comparable with other financial investments. These shareholders would be looking for a high Dividend Yield and high Dividend per Share in relation to Earnings per Share. Also Dividend cover to ensure there are sufficient earnings to guarantee a dividend payment. Capital gains. People make personal gains by selling shares for more than they paid for them. These shareholders would be looking for capital growth, and would want the company to have high earnings, while retaining most of them.These shareholders would be interested in a high level of Dividend cover, meaning that the company is retaining much of its profit, and only paying out a small amount in dividends.They would also want high eps and a rising PE Ratio. Eps indicates profitability and the PE ratio compares eps with the current share price.

also known as 'leverage' refers to the capital structure of a business, namely how it is financed. Unlike working capital, which focuses on liquidity and short term finance, gearing focuses on the medium/long term finance of a company, namely non-current liabilities + equity.A gearing ratio of less than 50% means the company is low geared and obtains most of its finance from ordinary shareholders. A gearing ratio of more than 50% means the company is highly geared and obtains most of its finance from borrowing.

A highly geared company is a riskier investment for the shareholders because there must be sufficient profit from operations to meet the annual interest payments, which must be paid regardless of profits.In general, a company with a high gearing ratio may be more vulnerable to economic downturns. This is because it has to make interest payments and service its debt from the profit from operations which may be significantly lower due to the downturn.This is especially important in the case of secured loans such as debentures. Debenture holders can force the sale of secured assets if the company is unable to pay the interest.The flipside of this argument is that high gearing is beneficial to the ordinary shareholders during good times, since there will be more profits available for distribution to the ordinary shareholders once finance costs have been met.

The Gearing ratio will change if equity OR non-current liabilities change:If ordinary share capital and/or reserves increase gearing will go down.If the company takes out more loans or issued debentures gearing will go up and If the company repays loans gearing will go down.If the company is relatively low geared there would be little risk in taking out a loan or issuing debentures, however if the company is already highly geared then this would be a risky source of finance and it might be better to issue ordinary shares.

Ratios cannot be used in isolation.They must be compared with previous years or other businesses within the same industry and of similar size. Otherwise they are purely mathematical calculations.Average ratios may not reliable The industry average may be distorted by one or two very successful or very unsuccessful businesses and may not reflect what is actually happening in the industry for example one company may be significantly larger or more profitable than all the others.Ratios focus only on numbers Ratios are based on quantitative based on the financial statements and not qualitative data. They do not show the full picture of the business for example the motivation or quality of the staff the health and safety record, the environmental impact, which may be important in judging business performance .Ratios are based on historical data.The financial statements which provide the basis of the ratios are based on the historical cost concept and this may not reflect the current position of the business.Different businesses may use different accounting policies which can make it difficult to compare the results for example if one business uses the reducing-balance method of depreciation and another the straight-line method for similar assets the profit and value of the assets would be different and this would affect the ratios calculated.The ratios identify a problem but don't show the cause or indicate how to resolve it especially as they are based on historical data.The financial statements may be 'window dressed'This means showing the financial position of the business in a better or worse way than it actually is resulting in the ratios not accurately reflecting the true performance of the business

1.Statutory:Company Law exists to protect the interests of shareholders and other parties due to the divorce of ownership and control. Without laws to protect them, the directors could run the company in their own interests rather than the shareholders' interests. Published financial statements keep shareholders informed regarding the stewardship of the directors.2.Information:can use the financial statements to assess the performance of the company to allow them to make decisions. 3.Publicity-:Published financial statements can be a marketing tool can be attractively presented and can be used to advertise products and present good public relations information about the company

Provide audited figures from the company's accounting records,profitability, liquidity and gearing can be assessed,may be the only reliable source of information,companies must disclose their accounting policies

Historical- not a good predictor for the future,may be window dressed - this means presenting the company in its best light which might not reflect the real trading position.total figures - do not give a breakdown of individual products/departments ,Monetary measurement - ignores non- financial aspects e.g. relations with suppliers/workforce/quality of management/impact on environment/ethical stance,No information on markets/ external factors,Only two years for comparison - insufficient to calculate any trends.

The Companies Act 1985 as amended by the Companies Act 1989, Accounting Standards ,regulations required by the Stock Exchange

as amended by the Companies Act 1989 ensures that directors report annually to the shareholders on the way that they have run the company for the owners (the shareholders).The directors must also file an annual return with the Registrar of Companies. This return contains copies of the annual financial statements. This filed annual return can be inspected by any member of the general public at Companies House.

An accounting standard is a statement on how certain transactions or items are to be treated in the financial statements. This ensures that all financial statements are: understandable by different interested stakeholders such as shareholders,relevant to help with business decision making , reliable/correct by not containing any errors or bias or fraud and to avoid window dressing/creative accounting,consistent and comparable ,complete and contain all of the main documents within a set of financial statements This would include: income statement, statement of financial position, statement of cash flows, statement of changes in equity, directors' report and explanatory notes about policies,fairly presented to show a true and fair view,support the auditors' report when expressing an opinion about the financial statements,support compliance with the Companies Acts 1985/1989

financial statements should take a conservative approach where there is any doubt in the reporting of profits or the valuation of assets.

financial statements should not include the personal expenses or incomes or record personal assets or liabilities for any of the personnel involved in the ownership or running of the company.

only transactions that can be measured in monetary terms should be included in financial records or in financial statements.

all financial transactions are to be recorded using the actual cost of purchase.

there are always two ways of looking at every accounting transaction. One considers the assets of the company, the other considers any claims against the assets.

financial statements are clearly shown separately from other information shown in the corporate report;the name of the company is shown, the period covered by the financial statements is shown, the currency used and its magnitude is shown (ie £ or £000 etc).

operating expense and is deducted from profit (loss) from operations to get the profit before tax. Occasionally a company may also be in receipt of interest (non-operating income) which is added to profit (loss) from operations.

Interim dividends are paid part way through the financial year. They are based on half- yearly profits reported by the company.Final dividends are paid on the profits based on the results of the whole year being considered. They will be paid in the early part of the next financial year.Only dividends that have actually been paid are to be recorded in the financial statements. This means that last year's proposed final dividend (provided it has been approved by the shareholders and has been paid) and this year's interim dividend paid will be included in the current year's financial statements.

Profits, Interest received,Dividends received,Tax refund, Sale of non-current assets, Decrease in inventories, Decrease in trade and other receivables, Increase in trade or other payables, Increase in share capital, Increase in loans, Issue of debentures

Losses, Interest paid, Dividends paid, Tax paid, Purchase of non current assets, Increase in inventories, Increase in trade or other receivables, Decrease in trade or other payables, Redemption of share capital, Repayment of loans, Redemption of debentures

Timing differences ,(Realisation concept),Sales on credit are recorded when the transaction takes place but trade receivables pay cash laterCapital expenditure ,Does not affect profit but may result in significant cash outflowsRepayment of loans -Again - no effect on profit but a cash outflow

Profit on the sale of non-current assets and decrease in provision for doubtful debts increase profit but are book adjustments not cash receiptsAccruals concept -Accrued income is added to calculate profit even though the income has not yet been paid into the bank. Prepaid expenses are deducted from expenses but have been paid.

The disposal proceeds are a cash inflow but only the profit(loss) on sale goes in the income statement

Share issues or loans received will increase cash but have no effect on profit. Only the interest on loans goes in the IS

Depreciation, amortisation (the fall in the value of intangible non- current assets), loss on sale of assets and an increase in the provision for doubtful debts reduce profits but have no effect on cash flow.

Depreciation, amortisation (the fall in the value of intangible non- current assets), loss on sale of assets and an increase in the provision for doubtful debts reduce profits but have no effect on cash flow.

IAS7 requires that published accounts produce a statement of cash flows set out in the OIF format - mnemonic: O I F
O Operating Net cash from (used in) operating activities usually inflow In order to complete the first section of the IAS7 statement of cash flows it is necessary to complete a reconciliation of profit (loss) from operations to net cash from(used in) operating activities
+I Investing. Cash flows from (used in) investing activities Purchase and sale proceeds of non current assets = Net cash from (used in) Investing activities usually outflow+ F Financing .Cash flows from (used in) financing activities

current assets
1. The disposal proceeds are an inflow in the investing activities section of the statement of cash flows. 2. The profit (loss) on disposal is an adjustment in the reconciliation of profit (loss) from operations to net cash from (used in) operating activities.

Tax paid is usually the tax owing from the previous year, however if the company has not paid this in full or has overpaid tax it is necessary to calculate the tax paid.

Statutory-Public limited companies are required by law to publish their financial statements. Company Law exists to protect the interests of shareholders and other parties due to the divorce of ownership and control. Limited companies are owned by shareholders but run by directors, appointed by the shareholders to run the company for them. This is the 'stewardship role' of the directors.Without laws to protect shareholders, the directors could run the company in their own interests rather than the shareholders' interests.Published financial statements keep shareholders informed regarding the stewardship of the directors.Information-People such as shareholders, potential shareholders, trade and other payables, can use the financial statements to assess the performance of the company to allow them to make decisions.Publicity-Published financial statements can be a marketing tool. The financial statements are attractively presented and can be used to advertise products and present good public relations information about the company

Provide audited figures from the company's accounting records, Profitability, liquidity and gearing can be assessed,May be the only reliable source of information ,Companies must disclose their accounting policies (IAS 1 page 7)

Historical- not a good predictor for the future,May be window dressed - this means presenting the company in its best light which might not reflect the real trading position.Total figures - do not give a breakdown of individual products/departments,Monetary measurement - ignores non- financial aspects e.g. relations with suppliers/workforce/quality of management/impact on environment/ethical stance,No information on markets/ external factors,Only two years for comparison - insufficient to calculate any trends

The directors of a limited company, who are elected to their position by the shareholders, manage the company on behalf of the shareholders fulfilling their stewardship role.They have been put into a position of trust by the shareholders and shareholders need to be confident that the financial statements present a true and fair picture of the profitability, liquidity and solvency of the company.The directors of limited companies must prepare the financial statements within a regulatory framework so that shareholders, payables and other stakeholders' interest are protected.

the Companies Act 1985 as amended by the Companies Act 1989, Accounting Standards,regulations required by the Stock Exchange.

The Companies Act 1985 as amended by the Companies Act 1989 ensures that directors report annually to the shareholders on the way that they have run the company for the owners.

prepared by the directors, audited and published annually. These financial statements must contain certain documents.The documents must be sent to shareholders and debenture holders in advance of the Annual General Meeting (AGM).The directors must also file an annual return with the Registrar of Companies. This return contains copies of the annual financial statements. This filed annual return can be inspected by any member of the general public at Companies House.

that all published financial statements present a true and fair view of the company's financial position.'True' means that if any of the statements states that a transaction has taken place then in reality it has taken place. If an asset is shown on a statement of financial position then the asset actually exists.'Fair' implies that transactions and assets are shown using generally accepted accounting rules and principles.

An accounting standard is a statement on how certain transactions or items are to be treated in the financial statements. Accounting standards are used in the preparation of financial statements to provide guidelines for transactions where there is scope for subjectivity, for example, how to value intangible assets.

The standards seek to ensure that all companies prepare and publish their accounting information using the same methods. This will ensure that areas of difference will be ironed out so that valid comparisons can be made.The standards recommend disclosure of accounting bases - for example, how the company values inventories and methods of depreciation. They have been designed to improve disclosure requirements and to identify any departures from the standards. Understandable by different interested stakeholders such as shareholders, relevant to help with business decision making, reliable/correct by not containing any errors or bias or fraud and to avoid window dressing/creative accounting. This means that revenue/expenditure and profit, also assets, liabilities and equity are correct, consistent and comparable between years within a business and across different businesses in different countries, complete and contain all of the main documents within a set of financial statements, fairly presented to show a true and fair view. To support the compliance with accounting concepts, support the auditors' report when expressing an opinion about the financial statements, support compliance with the Companies Acts 1985/1989

was established to reduce the scope for inconsistency, fraud and misrepresentation in the light of a series of financial scandals in the early 1970s which severely discredited the accountancy profession. The ASB produced a number of Statements of Standard Accounting Practice (SSAPs) for those areas of accounting where there was the greatest inconsistency of treatment. SSAPs were replaced by Financial Reporting Standards (FRSs), which have been replaced by International Accounting Standards (IASs).

Compliance with International Reporting Standards helps multi-national companies to ensure that all parts of the business in different countries apply the same rules.It allows shareholders and potential shareholders to make inter-firm and inter-year comparisons, safe in the knowledge that they are all preparing financial statements using the same standards and procedures. They make window-dressing more difficult.

they are incurred in the company's normal trading activities, nearly all other overheads e.g.: office salaries; rent and rates; heating and lighting; discounts,irrecoverable debts; provision for doubtful debts (increase = expense/decrease = negative expense); directors' remuneration.

interest paid is a non-operating expense and is deducted from profit (loss) from operations to get the profit before tax. Occasionally a company may also be in receipt of interest (non-operating income) which is added to profit (loss) from operations.

Interim dividends are paid part way through the financial year. They are based on half- yearly profits reported by the company.Final dividends are paid on the profits based on the results of the whole year being considered. They will be paid in the early part of the next financial year.Only dividends that have actually been paid are to be recorded in the financial statements. This means that last year's proposed final dividend (provided it has been approved by the shareholders and has been paid) and this year's interim dividend paid will be included in the current year's financial statements.

The directors' report contains details of:the principal activities of the company,a review of the activities of the company over the past year, likely developments that will affect the company in the future including research and development,the names of directors and their shareholdings in the company,proposed dividends, the company's policies

The auditors are experts in financial accounting (normally a Chartered or a Certified Accountant) who is independent of the company (neither an employee nor a shareholder). The auditors are appointed by the shareholders and their report is printed in the published financial statements.

the respective responsibilities of directors and auditors,the basis of audit opinion,the opinion.

the auditors are of the opinion that: the financial statements have been properly prepared,they give a true and fair view of the company's affairs in accordance with the IFRS as adopted by the European Union and the information given in the Directors' Report is consistent with the financial statements.

the auditors feel that certain parts of the financial statements have not been dealt with correctly and that this is important enough to be brought to the attention of any of the users of the accounts.

This provides an overview of the company's performance over the year. This is a statement directly addressed to the company shareholders and for this reason is will try to present a positive view of the company in order to retain shareholder interest.

where the company informs shareholders and other stakeholders of its activities which support the wider community.

where the company informs stakeholders about its strategies to protect the environment and its 'green' policies.

Unlike a cash flow forecast (cash budget) a statement of cash flows is historic (rather than a prediction) and forms part of the financial statements of medium to large limited companies. A cash budget is for internal use but a statement of cash flows contains information for external parties.

The main purpose of a statement of cash flows is to explain the change in the cash and cash equivalents (bank + cash balance) from one accounting year to the next. Statements of cash flows link the Income Statement and Statement of Financial Position and reveal information not directly disclosed in the other two sections.The statement focuses on liquidity and may try to explain the difference between profit and cash flow and why a profitable company might have a bank overdraft.The statement also helps stakeholders assess whether the cash has been used efficiently.Cash is a more certain figure than profit profit can be distorted and subjective but cash is more difficult to manipulate and is objective.The Statement of Cash Flows helps stakeholders who are users of financial statements to understand a company's cash position by adjusting the differences between cash flow and income and expenditure.

Timing differences (Realisation concept)Sales on credit are recorded when the transaction takes place but trade receivables pay cash later

Does not affect profit but may result in significant cash outflows

Accrued income is added to calculate profit even though the income has not yet been paid into the bank. Prepaid expenses are deducted from expenses but have been paid.

Timing differences (Realisation concept) Purchases on credit are recorded when they take place and reduce profit but will not reduce the cash until later when they are paid for.

The disposal proceeds are a cash inflow but only the profit(loss) on sale goes in the income statement

Share issues or loans received will increase cash but have no effect on profit. Only the interest on loans goes in the IS

Depreciation, amortisation (the fall in the value of intangible non current assets), loss on sale of assets and an increase in the provision for doubtful debts reduce profits but have no effect on cash flow.

Accrued expenses are added when calculating profit and prepaid income is deducted. This reduces the profit even though there is no movement of cash

If assets are revalued their Statement of Financial Position value will increase, however the revaluation will include no movement of cash.When completing a statement of cash flows from a complete Statement of Financial Position an increase in the revaluation reserve in the equity section indicates that a revaluation of non-current assets has taken place, and that the increase in the value of non-current assets is not solely due to the company buying more non-current assets.

The issue of more shares should be included as an inflow in the Financing section of the statement of cash flows, provided that the shares have been issued to raise finance (money). A bonus issue involves no movement of cash and should not be included in the statement of cash flows.

Non - current assets are usually shown on the statement of financial positon at cost in accordance with the concept of objectivity.Some non-current assets, such as land, have an infinite life however most property, plant and equipment has a finite life and must be depreciated over its useful economic life. This is in accordance with the prudence concept and the accruals concept.

A non-current asset is impaired if it is worth less than its carrying amount (net book value) due to being damaged or obsolete. This is an application of the prudence concept and the treatment is similar to inventory valuation , where inventories are valued at the lower of cost of NRV.When non-current assets are impaired they should be placed on the statement of financial position at the lower of cost or the recoverable amount and depreciated based on the recoverable amount not cost. The recoverable amount is the higher of the fair value (NRV) and the value in use (future cash flows) and is similar to net realisable value - what the asset could be sold for less any associated costs, such as repairs, marketing or legal fees.

The schedule of non-current assets assists in the reporting of the financial position/financial performance . It shows a breakdown of the net book value between the cost and depreciation components./ The schedule can be used by different stakeholder groups to interpret the business such as analysing the impact of non-current assets on profitability and cash flow / It complies with the requirements of the regulatory framework and thus supports showing a true and fair view./The schedule satisfies various criteria in that it is understandable, objective and comparable

The schedule contains historical information from the previous year and may not reflect the current position of the business / The schedule is in a summarised format. Even in the notes, there is not a detail break down of the cost for individual asset addition and disposal/ The schedule could be used to window dress the financial statements through creative Accounting. For example, revaluation could be used to boost the asset worth ./ Also, there are elements of the depreciation policy which are subjective and so could again be used to improve the worth of the asset base.

Consider time required - short, medium, long/ Internal or external finance/ Type of firm - sole trader, partnership, private limited company, plc or small/medium/large

Short Term Finance would normally be used to pay for day to day running costs normally Short Term is paid back in less than one year -Trade Credit, Overdrafts,Working Capital

Medium Term Finance would normally be used for buying new smaller scale Non-current Assets with medium term economic lives and replacing old ones, e.g. vehicles, equipment. Medium Term between one and five years E.g Loans ,Debentures

Long Term Finance would normally be used for expansion of the firm, taking over other firms and the purchase of large new Non-current Assets. This is important because ideally the items the finance is taken out for should pay for the finance.Usually, the larger amount of finance that is needed the longer it will take to pay it back. Long Term over five years. E.g Capital, Share capital, Mortgage, Loans Debentures

This is the money put into the business by its owners and is not normally repaid until the business closes down. It is a suitable form of finance for sole trader and partnership start-ups and for inputting additional capital over the life of the business

This is an important form of finance for small businesses which can be re-invested to increase the size or update the business.

are also cited as a source of finance for limited companies, however it is important to remember that profit is not the same as cash flow and 'reserves' are not a source of finance in themselves. It is nevertheless important for companies to be profitable when seeking external sources of finance.

This pays for all the day to day running of the business.Collecting money from trade receivables and managing inventory levels carefully can keep funds available and enable the business to pay its trade payables and other bills without having to borrow.

If necessary a business can sell its assets to raise finance.Most firms will sell old Non-current Assets to raise part of the finance to buy new ones. The sale of Non-current Assets to pay short term debts should be avoided as it will reduce the firm's ability to make future profits.

This is the money put into a company by its shareholders and is not repaid until the company ceases trading.

Owning one share in a company gives ownership rights, including voting rights at general meetings and a right to a share in profits through dividends.

Loans are amounts of money borrowed, usually for a specific purpose such as buying Non-current Assets.They are usually taken out for a certain period of time, although early repayment is possible. Interest may be at a fixed rate but it is more likely to be variable. The rate of interest is usually lower than on an overdraft.

These are a special form of loan usually raised by Limited Liability Companies they are fixed term, fixed interest, transferable loans.This means that the loan is repayable in full on a certain date and not before. The interest never varies. If the lender wants the money back before the end of the term the debenture can be sold to someone else.

A short term shortage of finance can be covered by an overdraft from the bank. This simply means taking more out of the bank current account than was in there to start with.

Buying goods on credit means that the goods are received straight away and paid for later. This means that the money for the goods is still available to the firm. It is possible that the goods might be resold and the money received before the supplier has to be paid.

No interest or fixed dividend,Dividend varies with profit,Low gearingeduces gearing if new issue, Permanent capital -no need to repay

Voting rights.Pressure for higher dividends if higher profits or inflation,Risk of takeover if plc,Restricted to family and friends if private company,Permanent finance which must be serviced

Fixed interest regardless of the level of profit Interest will be less in real terms in the future due to inflation, No voting rights - don't dilute ownership, Interest qualifies for tax relief , Eventually repaid - no longer a liability

Interest must be paid even when profits low,Increases gearing,Secured on company assets - risk of liquidation if loan not serviced, Must be repaid within a given time period

,Voting rights, High dividend potential if high profit, Potential for large capital gains on sale

Interest must be paid, Secured on company assets, Price less volatile on stock market, Less risky than shares - a safer investment than ord. shares

Low/zero dividend if profits low, Price fluctuates on stock market- potential for capital losses, Sale of shares restricted if private limited company

Interest stays the same even if high profits, Less scope for capital gains , Loans not shares

The issue of shares, obtaining a bank loan or the issue of debentures provides an immediate injection of cash/liquidity.

The finance raised from issuing shares, debentures or obtaining loans or the repayments of loans has no effect on profit.

outlines the main duties of the job itself. In addition the advertisement contained a person specification - this explains the qualities desirable in the applicant:

Association of Chartered Certified Accountants

Chartered Institute of Management Accountants

International Financial Reporting Standards

integrity, objectivity, professional competence and due care, confidentiality , professional behaviour

An accountant performs financial functions related to the collection, accuracy, recording, analysis and presentation of a business, organisation or company's financial operations. The accountant usually has a variety of administrative roles within a company's operations.

role may consist mainly of financial data collection, entry and report generation.

use an accountant as an adviser and financial interpreter, who may present the company's financial data to people within and outside of the business.

Public practices are accountancy firms that offer fee paying provides services to a broad range of clients in both the private and public sector while remaining independent from the organisations staff. These include preparing financial statements; auditing; providing tax advice or providing specialist advice on financial and business matters

are the upper management of the company and actively involved in running the company.

are not involved in running the company but are appointed for their general business knowledge and abilities

Remuneration packages for executives have been in the spotlight for years. It is one of areas on which shareholders regularly focus at AGMs around the world. The debate around executive pay is of interest to shareholders, the media and legislators alike.The members of remuneration committees must keep independence, transparency and potential conflicts of interest at the front of their minds when deciding on pay arrangements.The design of remuneration policies should be linked to the achievement of the company's long-term success, but there is no simple answer that works for every company.The composition of the committee is also important. It is essential that no one should be involved in deciding his or her own remuneration. All, or a majority of, remuneration committee members will be independent directors, and executives are excluded.

Corporate governance focuses upon the "supervision" of the company or its management. It means ensuring that business is done competently, with integrity and with due regard for the interests of all stakeholders. Good governance is, therefore, a mixture of legislation, non-legislative codes, self-regulation and best practice, structure, culture, and board competency.

Professional bodies: A key responsibility of professional bodies is setting and enforcing standards of performance and conduct for members.

is an umbrella group of chartered professional bodies of British qualified chartered accountants which has five member bodies: Association of Chartered Certified Accountants (ACCA), Chartered Institute of Public Finance and Accountancy (CIPFA), Institute of Chartered Accountants in England and Wales (ICAEW) , Chartered Accountants Ireland (CAI, formerly ICAI), Institute of Chartered Accountants of Scotland (ICAS)

The FRC is the UK's independent regulator responsible for promoting high quality corporate governance and reporting. It sets codes and standards and also oversees the regulatory activities of the professional accountancy bodies..

This is a government department whose relevant remits include:supporting innovation and developing the UK's science and research industry, which is important to help economic growth/ making sure consumer law is fair for both consumers and businesses, and that consumers know their rights and are able to use them effectively/ supporting British businesses to increase productivity and compete anywhere in the world/ better regulation - by cutting the amount of regulation and making it easy to understand we can help businesses cut time, save money and be more efficient

Is a non-ministerial department which seeks to protect the interests of consumers and businesses by promoting fair competition both within and outside the UK. It investigates anti-competitive practices such as takeovers, mergers and/or collusion between firms if this would be against the public interest.If there is a suspicion that an unethical or illegal act has been, or may be, committed by an employer, colleague or client, courses of action include-:ensure safeguards are in place, evaluate the significance of threats to the fundamental principles, resolve conflicts of interest, seek external/professional help when necessary.

CSR is how companies run their business to produce an overall positive impact on society. Companies have a responsibility to their stakeholders for example:

If the workforce is unhappy productivity will suffer/ There may be high labour turnover (large numbers leaving) or absenteeism / New or temporary staff my need to be hired increasing recruitment and training costs / A poor reputation may make it difficult to hire new staff / Poor industrial relations may cause trade union action/ Larger firms may receive extensive media coverage for activities which are seen as socially undesirable for example exploiting workers, causing pollution, using dangerous substances and animal testing / Social irresponsibility damages a firm's corporate image. This can reduce demand for the product and in extreme cases even result in a consumer boycott. It can also reduce shareholder confidence in the company, meaning an increase in the sale of shares and a fall in share price.

are the same as the prime costs studied under 'manufacturing accounts' and change in direct proportion to the level of activity/output. A cost is direct if it is expressed as 'per unit', e.g. raw materials/ direct wagesoyalties.Direct costs are also known as variable costs. Variable costs always change in direct proportion to a change in the level of activity (output or sales) undertaken by the business. If variable costs are plotted on a graph, the result is an upward sloping line starting at the origin.

are costs which cannot be identified directly to the end product. They are also known as 'overheads' which stay the same regardless of the level of activity/output and are paid on a time basis - per week, per month, per annum; e.g. rent and rates; salaries and depreciation.Indirect costs are also known as fixed costs. Fixed costs do not change with the level of business activity. If fixed costs were plotted on a graph, the result would be a horizontal line parallel to the x axis.

contain both a fixed element and a variable element. For example an energy bill contains a standing charge as well as a usage charge. If semi-variable costs were drawn on a graph the fixed element would mean the line started partway up the y axis but the variable element would mean that the line sloped upwards as usage increased.

is used for a variety of short run decision making situations, the cost of one unit of a product or service which would be avoided if that unit were not produced or provid When calculating marginal cost fixed costs are ignored.

Very useful in short term decision making and planning-A business can plan output - A business can calculate what selling price to charge/ It identifies the margin of safety -So a business knows how much output is contributing to profit / It is part of a business plan- Banks whether or not to provide loan

it makes very simplistic assumptions about costs, namely that costs are either fixed or variable. In reality almost all business costs fall some way in between - for example semi-variable costs which have a fixed and variable element and semi-fixed (stepped costs) which are fixed only over a given range of output./ It assumes that variable costs are constant over the entire range of output, when in fact firms are likely to benefit from purchasing economies of scale so that costs per unit fall as output increases. / It assumes a constant selling price, but basic marketing theory recognises that in order to increase sales firms may have to lower price./ Assumes that a single product is sold Break-even is not a suitable concept to apply in a multi-product firm, where each product would have a different contribution per unit/ Ignores unsold goods: break-even analysis assumes that all items produced will be sold. It ignores opening and closing inventories.

Contribution to sales shows how much each £ of sales contributes to the fixed costs of the firm. The contribution to sales ratio is used to calculate the sales revenue needed to break-even or achieve a target profit when it would be difficult to determine the variable cost per unit and/or the selling prices, or where these are unknown. For example, if a firm sells a number of products. It is calculated using the following formula:

A chart is also visually attractive and non-accountants who less confident using numbers may understand break-even if the information is presented on a chart / provides clarity of information and emphasises the main features, such as break-even point, area of profit/loss and the margin of safety/ Break even information can be imputed in a spreadsheet, which can then generate a chart. Changes in fixed costs, selling price, variable costs and output can be incorporated into the spreadsheet and shown on the chart.

A chart can be time consuming to construct / The lines in a break even chart are straight, and so maximum profit occurs at capacity/planned output. The lines are straight because it is assumed fixed costs are always the same and selling price and variable cost per unit are the same regardless of the level of output ( unrealistic)/ Semi variable costs contain an element of fixed costs (e.g. basic weekly wages) and a variable element (overtime pay)/. Economies of scale mean that variable costs will not be rising as fast as output; diminishing returns mean that variable costs will be rising faster than output / Semi-fixed costs are fixed over a range of output and then increase beyond that range

the costs incurred when one extra unit is produced above the planned level.

the revenues earned by the sale of one extra unit.

has the firm spare capacity to cope with the order- would be more cost efficient to utilise that capacity because fixed costs would be spread over a greater level of output, therefore reducing unit (average) costs / Are fixed costs already covered by existing production, and will there be no additional fixed costs?

There must be separation from existing customers who must be unaware of the special low price, otherwise there would be a loss of goodwill and existing customers/ The new customer must not be able to 'sell on' the product for less than the normal price/ Competitors may react by cutting their prices, leading to a damaging price war./ If the order comes from overseas, there will be added complications - delays in payment/credit control; currency/exchange rate problems; language barriers or the need to employ a special agent.

A special order may lead to future orders and greater long term profits. The 'one-off' order is acting as a 'loss leader'/ If a business is facing a downturn in sales accepting loss making orders:-will keep their workforce in employment, providing social benefits and ensuring the workers do not become de-skilled+ keep machinery in use if failure to use the machinery would result in deterioration/. social accounting means that firms do not simply aim to make profits and may provide products below cost to disadvantaged groups. This can be for purely altruistic reasons or to provide good PR.

If shown a centre making a 'loss' but if the product makes a positive contribution the business would be worse off discontinuing the product.

likely to make extra profit by making its products rather than buying them in from an outside supplier, however this depends on the firm's costs and the buy-in price charged by suppliers.If a firm currently makes its own product but an outside supplier can supply them at a lower price than the manufactured cost per unit, on financial grounds the firm should buy in rather than make.

How reliable is the new supplier in terms of delivery times and quality assurance? Problems of overseas orders - transport, currency, returns out, language/ Possible redundancies if work is contracted out - implications for employee motivation, industrial relations, image and social responsibility / Is the price quoted long-term and realistic, or is it a special promotional price which might be increased in the future?

If the workforce is unhappy productivity will suffer. / There may be high labour turnover (large numbers leaving) or absenteeism. /New or temporary staff my need to be hired increasing recruitment and training costs. /A poor reputation may make it difficult to hire new staff/ Poor industrial relations may cause trade union action/ Larger firms may receive extensive media coverage for activities which are seen as socially undesirable for example exploiting workers, causing pollution, using dangerous substances and animal testing./ Social irresponsibility damages a firm's corporate image. This can reduce demand for the product and in extreme cases even result in a consumer boycott. It can also reduce shareholder confidence in the company, meaning an increase in the sale of shares and a fall in share price.

High costs - for example of installing safety equipment or filters to prevent pollution./. Many firms compete on a global scale and different countries have different health and safety and environmental standards. /. It is difficult to place a monetary value on non-financial aspects and assess whether the benefits of social responsibility outweigh the costs. / Conflicting stakeholder group interests - there can be conflict between groups and within groups. Which group should the firm be aiming to satisfy the most?

When management have to choose between two or more competing courses of action which incur the same level of fixed costs then only the marginal costs need to be considered. The strategy which provides the greatest contribution should be considered.

When a resource needed to make products is limited in supply, production of the product will not be able to match demand. If a firm makes a range of products, all using the scarce resource, the firm will have to rationalise production to concentrate on producing the most profitable products.

a production or service location, function, activity or item of equipment whose costs may be attributed to cost units

is a unit of production which absorbs the cost centre's overhead costs.

is also known as Total Costing or Full Costing because it includes total/full costs. Absorption costing enables a manufacturer to set the correct selling price which ensures that all costs are covered.

Fixed overheads cannot be precisely attributed to a unit of production because they are paid on a time basis and relate to the whole firm, however absorption costing attempts to attribute these costs to a unit of production. In this way, fixed overheads are 'absorbed' by each unit of production.

Overheads which relate to a specific cost centre are specifically allocated to that cost centre.

Overheads which relate to more than one cost centre, such as rent, are divided between centres using an appropriate method of apportionment.

1 ) Direct labour hour rate/ 2) Machine hours

Time based/ Suitable when production is labour intensive - machine costs will be relatively low, and labour costs relatively high. Overheads will be related to labour - e.g. canteen costs, supervisors' wages.

not suitable for capital intensive production

Time based/ Suitable for capital intensive production where a significant proportion of the overheads will be machine costs such as maintenance, repairs and depreciation.

Not suitable for labour intensive production.

When there are reciprocal services, namely when one service centre provides services to another service centre, the treatment is to transfer service centre costs in descending order of the number of cost centres served. ( If service departments service the same number of other departments start with the department with the highest costs. )

When a firm makes a standard product with identical costs per unit this is the most suitable method of absorbing overheads.

This means that the firm will have made less profit than anticipated and was probably under-charging its customers.

this means that fewer actual overhead costs were incurred than expected, this means that the recognition of expense is reduced in the current period, which increases profits.

takes all costs into account - so selling price is set to cover all costs and make a profit/. Absorption costing requires a smaller mark-up than marginal costing/ It is suitable for long-term decision making

makes a clear distinction between fixed and variable costs and no attempt is made to allocate or apportion fixed costs incurred by cost centres.

Marginal costing is useful for short term decisions where fixed costs can be ignored,.

Marginal costing makes very simplistic assumptions about cost behaviour/ costs can be split between fixed and variable. Most costs fall someway between/ Fixed costs do not change with output / Variable costs are constant per unit/ There is a danger in firm's becoming over-reliant on the use of contribution - firms need to cover all costs in order to make a profit/ Marginal costing requires a higher % mark up than full cost pricing

It is based on pre-determined figures - actual figures may differ / The basis of apportionment is not precise / It is not appropriate for short-term decision making/ under/over-absorption of overheads - if a firm undercharges so that overheads are not recovered it will not make a profit. If it overcharges it may become uncompetitive with competition.