Chapter 11

Company financial statements

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 Learning outcomes
- Record and account for transactions and events resulting in
income, expenses, assets, liabilities and equity in accordance
with the appropriate basic of accounting and the laws,
regulations and accounting standards applicable to the
financial statement.
- Record and account for changes in the ownership structure
and ownership interests in an entity.
- Identify the main components of a set of financial statements
and specify their purpose and interrelationship.
- Prepare and present the statement of financial position,
statement of profit or loss and statement of cash flows (or
extracts) from the accounting records and trial balance in a
format which satisfies the information requirements of the
entity.

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 Company financial statements

Topic list
• The nature of a limited company
• Equity: share capital
• Equity: retained earnings and other reserves
• Dividends
• Rights issues and bonus issues of shares
• Non-current liabilities (debt capital)
• Provisions (IAS 37)
• Tax
• Revenue
• The regulatory framework for company financial statements

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 Company financial statements

The nature of a limited company

Share capital and shareholders
• A company's initial capital is divided into units of equal size, known as
shares, issued to individuals or companies, called shareholders.
• The total capital raised is referred to as equity share capital.
• Ownership of a share entitles the shareholder to receive payment of a share of
profit, or dividend.
• By law, shares must have a par value

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 Company financial statements

The nature of a limited company

Public and private companies
• A public company has 'plc' in its name.
• A private company ends its name with 'Limited' or 'Ltd'

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 Company financial statements
Comparing the financial statements of a sole trader and a company

Company: Sole trader

• A public company has 'plc' in its name.
• A private company ends its name with
'Limited' or 'Ltd'
The same basic accounting concepts are applied to preparing the financial statements

equity capital is represented by share capital and equity capital is represented simply by
reserves ‘capital’

tax on profit is an item in profit and loss Tax is excluded from a sole trader’s financial
statements.

Strictly required by laws and regulations. Many no reason to comply fully with the
companies do comply with the requirements of requirements of international accounting
international accounting standards. standards.
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 Company financial statements

Comparing the financial 1. A statement of Profit or Loss and other

comprehensive income
statements of a sole
trader and a company 2. A statement of financial position

3. A statement of changes in equity

Set of FSs required (IAS 1)
4. A statement of cash flows

5. Notes to the financial statements including

the disclosure required by various
international accounting standards.

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 Company financial statements
Equity
Issued and called-up share capital
• The issued share capital of a company is the par value of the
shares that have actually been issued to shareholders.
• If a company issues shares but 'calls up' the issue amounts in
instalments, instead of raising cash immediately, it then has
called-up share capital that is less than its issued share
capital.
• If a company has called-up share capital, but is waiting for
payment from some shareholders, it has paid up capital of less
than its called-up capital.

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 Company financial statements

Equity
Issued and called-up share capital
Example:
ABC Ltd was registered with registrar with a registered capital of Rs. 20,000,000 where
each share is of Rs. 10.
In response to the advertisements made by the company to buy shares in the company
applications have been received for 1,000,000 shares but company actually issued
700,000 shares where company has called for Rs. 8 per share.
All the calls have been met in full except three shareholders who still owe for their 6000
shares in total.

Solution:
Authorized capital = Rs. 20,000,000
Subscribed capital = 1,000,000 x Rs. 10 = Rs. 10,000,000
Issued capital = 700,000 x Rs.10 = Rs. 7,000,000
Called-up capital = 700,000 x Rs. 8 = Rs. 5,600,000
Paid-up
21 – Sep -capital
23 – (6000
= 5,600,000201109 x Rs. 811:
– Chapter ) =Company
Rs. 5,552,000
financial statement 9
 Company financial statements

Equity
Irredeemable and redeemable preference shares
• Preference shares which the company is not entitled to buy
back or redeem at some stage in the future, known as
irredeemable preference shares, are treated as share capital.
• Preference shares which the company is entitled to buy back
from its shareholders or 'redeem' at some future time are called
redeemable preference shares, treated as non-current
liabilities (debt capital).

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 Company financial statements
Equity
Accounting for share capital
When shares are issued at their par value and they are fully paid:
£ £
DEBIT Cash X
CREDIT Share capital (par value) X
When shares are issued at a premium to their par value, and the full amount is
paid: £ £
DEBIT Cash X
CREDIT Share capital (par value) X
Share premium (excess over par value) X

When shares are issued at their par value but an amount remains uncalled by
the company
£ £
DEBIT Cash X
CREDIT Share capital (called-up amount of issued shares) X
When shares are issued and called-up at their par value but an amount remains unpaid:
£ £
DEBIT Cash X
Other receivables (unpaid capital) X
CREDIT
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23 201109 – Chapter 11: Company financial statement
capital (par value) X 11
 Company financial statements

Equity
Retained earnings (RE)

RE: A reserve used to accumulate the company's retained earnings.

RETAINED EARNINGS
£ £
Dividends of the period X Balance b/d (opening statement of X
financial position)

Transfers to general reserve X Profit for the reporting period X

(from statement of profit or loss)
Balance c/d (closing statement X
of financial position)

X X

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 Company financial statements

Equity
Share premium: Commonly are issued at a price above par value
ABC PLC issued 1 million ordinary shares on 1 January 20X4 having face value of $1
each at an issue price of $1.5 per share.
As per the terms of the issue, $1.25 per share had been received by the Company on 1
January 20X4 while the remaining amount was received in full on 30 June 20X4.
State the journal entries required to account for the above transactions.
1 Jan 20X4 Debit Bank $1,250,000 ($1.25 x 1 million)
Credit Share Capital $1,000,000 ($1.00 x 1 million)
Credit Share Premium $250,000 ($0.25 x 1 million)
30 June
Debit Bank $250,000 ($0.25 x 1 million)
20X4
Credit Share Premium $250,000 ($0.25 x 1 million)

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 Company financial statements

Equity
General reserve
• A company might hold retained earnings that it has no
intention of distributing to owners as a dividend at any time in
the future in a general reserve rather than in retained earnings.
• A company might have other reserves in its financial
statements

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 Company financial statements

Dividends
Equity dividends: the dividend to be paid to shareholders is decided by the board of
directors.
The dividend rare can be expressed in a number of different ways.
Example: A company issues 100,000 shares of £1 at par value, but only calls up 75p per
share as a first instalment. The issued share capital is £100,000, but the called-up share
capital is only £75,000. The figure in the statement of financial position will be £75,000.
In a company's statement of financial position, the figure for share capital is the called-up
share capital.
On the face of the company's statement of financial position, or in a note, called-up equity
share capital and irredeemable preference share capital at par value are shown separately.
STATEMENT OF FINANCIAL POSITION (EXTRACT)
Equity £'000
Share capital: equity shares of 50p each (81.5m shares) 40,750
Share capital: 6% irredeemable preference shares of £1 (9m shares) 9,000
49,750
If a company has called-up share capital, but is waiting for payment from some
shareholders, it has paid up capital of less than its called-up capital.
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 Company financial statements

Bonus and rights issues

Rights issues: new share issues for Bonus issue of shares
cash (capitalisation issue)

 Existing shareholders have the right to  Issue of free new shares to existing
purchase the new shares in proportion shareholders in proportion to their
to their existing shareholding. existing shareholding.
 For example in a 1 for 3 rights issue,  For example, if there is a 1 for 3 bonus
existing shareholders are given the issue, shareholders will receive one new
opportunity to buy one new share for share free of charge for every three
every three shares they currently hold. shares they currently hold.
 If existing shareholders do not want to  The company raises no money from a
buy the new shares that are offered to bonus issue.
them, the shares will be sold to other  A bonus issue is simply a way of
investors. converting reserves (Share premium,
Retained earnings) into share capital.
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.
 Company financial statements

Rights issues: new share issues for cash Bonus issue of shares
(capitalisation issue)

Advantage Advantage
 A rights issue is a method of raising new capital  A company whose shares are traded on a stock
in the form of cash. market can use a bonus issue to increase the
 Existing shareholders have the opportunity to number of shares in issue. This will bring down
buy a proportion of the new shares, so that they the share price and might help to make the
retain the same proportion of the total shares in shares more marketable.
the company as before.  A bonus issue can be used to reduce the
 Since the price of the new shares is below the share premium account, or even remove the
current market price, the issue should be share premium account entirely from the
attractive to shareholders. statement of financial position.

Disadvantage Disadvantage
 Be expensive. 
. Except for the advantages listed above, a bonus
 A rights issue might be unsuccessful when the issue serves no practical purpose.
stock market is depressed and share prices are  No cash is raised from the issue.
falling.
.

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 Company financial statements
Bonus and rights issues
Example
ABC PLC declared a 3 for 2 bonus issue.
Extract of ABC PLC's balance sheet prior to issuance of bonus shares is as
follows:
$
Ordinary Share Capital $0.5 each 2,000,000
Share Premium Account 1,000,000
Revaluation Reserve 1,500,000
Retained Profits 5,000,000
9,500,000
Company's Standard Operating Procedures Manual requires that for the purpose
of accounting for bonus issue, revaluation reserve should not be used whereas
retained profits should only be used if other reserves are exhausted.
State the journal entries required to account for the above transactions and prepare
extract of the balance sheet after bonus issue.
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 Solution

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 Company financial statements
Bonus and rights issues
Question
CLARKE FRINGLAND COSTATEMENT OF FINANCIAL POSITION AS AT 31
DECEMBER 20X3 (EXTRACT)
$
Share capital (50c) 8,000
Share premium 7,000
Retained earnings 10,000
25,000
Clarke Fringland Co decides on a rights issue of 1 for 4 at $1.20.
Required
What is the double entry to record the issue of shares and what is the adjusted
financial position extract after the issue?

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 Company financial statements

Bonus and rights issues

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 Company financial statements
Non-current liabilities
• Non-current liabilities comprise debt securities (debentures, loan
stock and bonds), plus bank loans and redeemable preference
shares.
• Interest on non-current liabilities is a contractual obligation and
must be accrued for in the calculation of profit before tax.
• Any amounts that are repayable in less than 12 months must be
classified as current liabilities. The balance is treated as non-
current liabilities: long-term borrowings.

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 Company financial statements

Provision
• Provisions are liabilities of a company that are shown
separately from other liabilities because the amount of a
provision can be measured only by using a substantial degree
of estimation.
• IAS 37 aims to ensure that:
• Appropriate recognition criteria and measurement
bases are applied to provisions, contingent assets and
contingent liabilities.
• Sufficient information is disclosed in the notes to the
financial statements to enable users to understand their
nature, timing and amount.

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 Company financial statements
Provision
A business has been told by its lawyers that it is likely to have to
pay $10,000 damages for a product that failed. The business duly
set up a provision at 31 December 20X7. However, the following
year, the lawyers found that damages were more likely to be
$50,000.
Required: How is the provision treated in the accounts at:
(a) 31 December 20X7?
(b) 31 December 20X8?

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 Company financial statements
Provision

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 Company financial statements
Provision
EXTRACT FROM STATEMENT OF PROFIT OR LOSS
$
Expenses
Provision for damages 40,000
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
$
Non-current liabilities
Provision for damages (10,000 + 40,000) 50,000

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 Company financial statements

Tax
When a tax liability arises and is identified, the double entry to record it is:

DEBIT Tax expense (statement of profit or loss)

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 Company financial statements

Revenue
IAS 18 revenue prescribes the accounting treatment of revenue
recognition in common types of transaction. Its states that in general
terms revenue should be recognised:
• When it is probable that future economic benefits will flow to the
entity and
• These benefits can be measured reliably
Revenue should be measured at the fair value of the consideration
received or receivable

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 Company financial statements

The regulatory framework for company financial statements

IAS 1
The purpose of setting out formats for a statement of profit or loss and statement
of financial position is to make it easier for the users of financial statements:
 To find the items they are particularly interested in: companies are
prevented from using complex layouts and formats that make the financial
statements more difficult to understand
 To make comparisons of the results of different companies, or between
the results of the same company from one reporting period to the next.

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 Company financial statements

The regulatory framework for company financial statements

IAS 1
Structure and content of financial statements
• Name of the company
• Date of the statement of financial position/reporting period covered
• The statement of financial position must distinguish between current
and non-current assets and current and non-current liabilities
• In the accounting policies note to the financial statements the entity
must disclose the measurement basis and the other accounting
policies used that are relevant to an understanding of the financial
statements

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 Company financial statements

The regulatory framework for company financial statements

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
• The application of IAS 8 enhances the relevance, faithful representation
and comparability by ensuring that:
• Information is available about the accounting policies adopted by
different entities.
• Different entities adopt a common approach to the distinction
between a change in accounting policy and a change in an
accounting estimate.
• The scope for accounting policy changes is constrained.
• Changes in accounting policies, changes in accounting estimates and
corrections of errors are dealt with in a comparable manner by
different entities.

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 Company financial statements
Ethics as an issue for regulators
The overall regulatory framework within a country or market
can be very complex and needs to be underpinned by ethical
values. The process also needs to be:
 Honest and truthful
` Transparent and adaptable
 Legally compliant
 Consistent

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 Company financial statements
Practice question
Which of the following would cause a company's profit for the period to
increase?
A Issue of 100,000 £1 equity shares at £1.02
B Discount allowed of £255
C Disposal for £8,500 of a fork-lift truck which originally cost £15,000 and
has a carrying amount of £9,250
D Receipt of £25 in respect of a receivable previously written off as
irrecoverable

D The premium on the issue of shares must be credited to share

premium. Discount allowed to suppliers is an expense that decreases
profits. The disposal of the truck results in a loss which reduces profit.
Reduction in irrecoverable debts expense increases profits.

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 Company financial statements
Practice question
Which TWO of the following transactions could affect a company's
retained earnings for the reporting period?
A Rights issue of shares
B Transfer to the general reserve
C Purchase of land
D Repayment of debentures at their par value
E Increase of tax due
B and E
A DR Cash CR Share capital/share premium
B DR Retained earnings CR General reserve
C DR Non-current assets CR Cash
D DR Debentures CR Cash
E DR Statement of profit or loss (tax expense) CR Tax payable
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 Company financial statements
Practice question
The following information is available in relation to the tax figures to be
included in the financial statements of Godshill plc.
31 December 31 December
20X7 20X6
£ £
Tax payable 271,500 237,600
Statement of profit or loss tax 269,700 219,800
expense

What is the total tax paid during the year ended 31 December 20X7?
A £185,900 B TAX PAYABLE
B £235,800 £ £
C £237,600 Paid () 235,800 b/d 237,600
c/d 271,500 Statement of profit or loss 269,700
D £269,700 507,300 507,300
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 Company financial statements
The trial balance of Papaya Ltd as at 31 December 20X8 is as follows.
£ £
Share capital
£1 ordinary shares 100,000
£1 5% preference shares (irredeemable) 50,000
Retained earnings 76,015
Intangible assets 20,500
Land and buildings
Cost 450,000
Accumulated depreciation 81,000
Plant and machinery
Cost 82,000
Accumulated depreciation 18,000
Inventories at 1 January 20X8 58,045
Trade receivables 161,349
Cash at bank 112,000
Revenue 1,600,047
Purchases (cost of sales) 907,989
Debenture interest paid 6,260
Royalty income received 39,045
Administrative salaries 126,232
Salesmen's salaries and commission (selling and distribution costs) 24,291
Factory wages (cost of sales) 54,117
Operating lease rentals (administrative expenses) 6,002
Administrative expenses 18,822
Selling and distribution expenses 9,600
Trade payables 12,000
Dividend received from investments 11,000
10% Debentures (issued and redeemable at par) 62,600
20X7 final dividend paid 12,500
201109 – Chapter 11: Company financial statement
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2,049,707 2,049,707
 Company financial statements
Practice question
You are provided with the following information in respect of 20X8.
(1) Depreciation is to be provided on the basis of the following policies.
Buildings: Straight line over 50 years (charged to administrative expenses)
Plant and machinery: Straight line over 10 years (charged to cost of sales)
The land originally cost £115,000.
(2) The intangible asset is a brand following an impairment review the value has
been estimated at £12,000. The impairment should be charged to
administrative expenses.
(3) Papaya Ltd wishes to propose an ordinary dividend of £25,000. The 20X8
preference dividends have been declared and were paid on 15 January 20X9.
(4) Tax of £22,500 is to be charged for the current year.
(5) Inventories held at 31 December 20X8 are valued at cost of £68,000. Within
this amount there are 1,000 units of finished goods valued at £20 each. These
units are now expected to sell at a discounted price of £18 each and incur £1
selling costs per unit.
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 Company financial statements
Practice question
(6) In November, a member of the public slipped on the wet floor of a premises
owned by Papaya Ltd. A subsequent legal letter confirmed that the individual is
seeking compensation for this incident. Papaya Ltd's legal advisors believe that
the matter can be settled with a payment of £5,000 to the individual.
(7) During the year the company made a 1 for 10 bonus issue of its ordinary
shares from retained earnings. No entries have been made in respect of this.
(8) Included in administrative expenses is £36,000 which relates to an annual
insurance premium which provides cover until 31 May 20X9.
(9) On 27 December 20X8 the company received a cheque from a creditor in the
amount of £13,520. This was incorrectly recorded as £13,250.
Requirement
Prepare the statement of profit or loss for Papaya Ltd for the year ended 31
December 20X8 and the statement of financial position at that date.

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 Company financial statements
Practice question
Statement of profit or loss for the year ended 31 December 20X8

£
Revenue
Cost of sales
Gross profit
Other operating income
Distribution costs
Administrative expenses
Profit / (loss) from operations
Investment income
Finance costs
Profit / (loss) before tax
Income tax expense
Profit / (loss) for year

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 Company financial statements
Practice question
Statement of financial position at 31 December 20X8
£
Non-current assets
Property, plant and equipment
Intangible assets

Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets

Equity and Liabilities

Ordinary share capital
Preference shares
Retained earnings

Non-current liabilities
Borrowings

Current liabilities
Trade payables
Tax payable
Preference dividend
21 Tax payable
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Total equity and liabilities
 Company financial statements
Practice question
Statement of profit or loss for the year ended 31 December 20X8
£
Revenue 1,600,047
Cost of sales (W1) (963,351)
Gross profit 636,696
Other operating income (royalties) 39,045
Distribution costs (W1) (33,891)
Administrative expenses (W1) (156,256)
Profit from operations 485,594
Investment income 11,000
Finance cost (6,260)
Profit before tax 490,334
Income tax expense (22,500)
Profit for the year 467,834

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 Company financial statements
Practice question Statement of financial position as at 31 December 20X8
£
ASSETS
Non-current assets
Property, plant and equipment (W2) 418,100
Intangible assets (20,500 – 8,500) 12,000
Current assets
Inventories 65,000
Trade receivables (161,349 – 270) 161,079
Prepayments (36,000  5/12) 15,000
Cash and cash equivalents (112,000 + 270) 112,270
Total assets 783,449

EQUITY AND LIABILITIES

Capital and reserves
Ordinary share capital 110,000
Preference shares (irredeemable) 50,000
Retained earnings (W3) 518,849
Non-current liabilities
Borrowings (debentures) 62,600
Current liabilities
Trade payables 12,000
Tax payable 22,500
Provision 5,000
Preference dividends201109 – Chapter 11: Company financial statement
21 – Sep - 23 2,500
42
Total equity and liabilities 783,449
 Company financial statements
Practice question WORKINGS (1) Allocation of costs
Cost of Admin Distrib
sales expenses costs
£ £ £
Opening inventories 58,045
Purchases 907,989
Administrative salaries 126,232
Salesmen's salaries 24,291
Factory wages 54,117
Operating lease rentals 6,002
Administrative expenses 18,822
Selling and distribution costs 9,600
Closing inventories (68,000 – (1,000  £3)) (65,000)
Depreciation
Buildings ((450,000 – 115,000)  50) 6,700
Plant (82,000  10) 8,200
Impairment of brand (20,500 – 12,000) 8,500
Provision 5,000
Prepayment of insurance (36,000  5/12) (15,000)
963,351 156,256 33,891
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 Company financial statements
Practice question
(2) PPE
Land Buildings P&E Total
£ £ £
Cost 115,000 335,000 82,000
Accumulated depreciation (81,000) (18,000)
Depreciation charge for year ( 6,700) (8,200)
Carrying Value 115,000 247,300 55,800 418,100

(3) RETAINED EARNINGS

£ £
Dividends (12,500 + 2,500) 15,000 Bal b/d 76,015
Bonus Issue 10,000
Bal c/d 518,849 Profit for year 467,834
543,849 543,849

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 End of chapter 11

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chapter 11 (p. 290 - 318)
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