ch10 financial statements of a limited company (1)
TRANSCRIPT
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Business Accounting 1
Chapter 10:
Financial statements of a limited company
On completion of this topic you should be able to
Explain the terms used in the financial statements of
limited companies
Understand the profit and loss account and balance sheet
for a limited company under UK GAAP and the income
statement and balance sheet under international GAAP
Independent study
Study Chapter 10
Download the annual report and accounts for Ted Baker
Plc from http://ft.ar.wilink.comand study the chairmansstatement, income statement and balance sheet
Progress test and practice question(s) as set
http://ft.ar.wilink.com/http://ft.ar.wilink.com/ -
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Business Accounting 2
The story so far ...
Financial reportingis the statutory disclosure ofinformation by limited liability entities
Must file their annual report and accountsat Companies
House and send a copy to all shareholders
Both UK GAAPand international GAAPareunderpinned by conceptual frameworksbased on the
objective that general purpose financial statements
should be useful to users for economic decisions
Statement of Principles for Financial Reporting (ASB, 1999)Framework for the Preparation and Presentation of
Financial Statements (IASB, 1989)
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The story so far ...
The obligation to disclose financial information onlyapplies to limited liability entities
24% of businesses in the UK are limited companies
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Differences in sources for limited liability entities
CapitalKnown as equity financeand comprises ordinary shares
and reserves(include reserves of retained profit)
Ordinary shareholders(also known as equity holders)
receive dividendsbased on a variable percentage of profit
Debt finance also includes
Debentures, whichare a widely used form of long-term loan
(usually secured on the assets) a fixed rate of interest
(lower than overdraft rate) and repayable at a fixed date
Non-equity shares(eg preference shares) with a fixed rate
of dividend (paid before dividends to ordinary shareholders)
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Types of share capital
Share capitalis the equity finance received fromshareholders in exchange for ordinary shares
Authorized share capitalis the maximum amount the
company can issue (in memorandum of association)
Issued share capitalis the amount of authorizedshare capital for which shareholders have subscribed
Called-up share capital fully paidis the amount where
payment has been requested and paid in full (with some
shares, part of the payment is deferred)Called-up share capitalnot paidis the amount where
payment has been requested but not paid
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Business Accounting 7
Exercise 1
Share capital
Note 21 to the 2006 accounts of Ted Baker Plc tellsus that the company has authorized share capital of
80,000,000 ordinary shares of 5p each
At 28 January 2006, 42,989,801 shares had been
issued, called up and paid for in full Required
Calculate the called-up share capital fully paid
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Business Accounting 8
Solution 1
Share capital
Called up share capital fully paid is:
42,989,801 shares 5p = 2,149,490
So Ted Baker has raised 2.15m in equity finance
from selling 43m ordinary shares on the stockmarket
Public limited companies have a considerable
advantage in being able to raise capital on the stock
exchange compared to private limited companieswhich cannot offer their shares publicly
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Adoption of international GAAP
The UK is in a state of transition as we begin toadopt international GAAPand move towards EU
harmonization in the regulation of financial reporting
Since 2005, all group companieswith a listing on an
EU stock exchangemust use International FinancialReporting Standards (IFRSs) for preparing their
statutory financial statements
In the UK, all other companies continue to use UK GAAP,
but it is likely that IFRSswill soon become applicable tosingle entities and the IASB is also working on developing
an IFRS for SMEs
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Consolidated financial statements
A group company (parent + subsidiaries) preparesconsolidated financial statements
Consolidationis the process of adjusting and
combining financial information from the individual
financial statements of a parent undertaking and itssubsidiary undertakings to prepare consolidated
financial statements that present financial
information for the group as a single economic entity
(Collis and Hussey, 2007, pp. 172-3)A full set of financial statements under UK GAAPdiffer
from those required under international GAAP...
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Full set of financial statements under UK and
international GAAP compared
UK GAAP International GAAPBalance sheet Balance sheet
Profit and loss account Income statement
Statement of total recognized
gains and losses
Statement of changes
in equity
Cash flow statement Cash flow statement
Both require notesto the financial statements (see Note 1 in
the accounts of Ted Baker Plc, which gives a summary ofsignificant accounting policies)
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Greater emphasis on financial position
International GAAPplaces greater emphasis on themeasurement of financial positionthan UK GAAP
The objective of financial statements is to provide
information about the financial position [ie the balance
sheet], performance [ie the income statement] and changes
in financial position [ie the statement of changes in equity
and the cash flow statement] (IASB, 1989, paras. 22-23)
IAS 1, Presentation of Financial Statementsrequires
certain headings, line items and subtotals if they are
relevant to the users understanding, but a number ofpresentations are acceptable
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Balance sheet - main headings under IAS 1
(see Ted Bakers accounts as an example of presentation)
Assets
Non-current assets(ie fixed assets)
Current assets(Note: Stock is called inventories and trade
debtors are called trade receivables)
Liabilities
Current liabilities(ie amounts due 1 year) (Note: Tradecreditors are called trade payables)
Non-current liabilities(ie amounts due > 1 year)
(Total assets - Total liabilities = Net assets)
Equity(ie capital and reserves)
Share capital
Other reserves
Retained earnings(Resulting total matches net assets above)
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Balance sheet - key definitions (IASB, 1989, para. 25)
An asset is a resource controlled by the enterprise as aresult of past events and from which future economic
benefits are expected to flow to the enterprise
A liability is a present obligation of the enterprise
resulting from past events, the settlement of which is
expected to result in an outflow from the enterprise of
resources embodying economic benefits
Equity is the residual interest in the assets of the
enterprise after deducting all its liabilities
In other words, Assets- Liabilities= Equity
Equity = Share capital + Reserves
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Income statement - main headings under IAS 1
(See Ted Bakers accounts as an example of presentation)
Revenue (ie sales revenue or turnover) Expenses(a deduction analysed by natureas we did for
sole traders, or by functionas in Ted Bakers accounts eg
distribution, administration and finance expenses)
Profit before tax
Income tax expense(a deduction)
Profit for the period
Attributable to:(breakdown between parent & subsidiaries)
Equity holdersof the parent company
Minority interests(negative figure indicates a loss)
(Resulting total matches profit for the period above)
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Income statement - key definitions (IASB, 1989, para. 70)
Income is increases in economic benefits during theaccounting period in the form of inflow or enhancements
of assets or decreases in liabilities that result in
increases in equity, other than those relating to
contributions from equity participants (ie not equity
finance)
Expenses are decreases in economic benefits during
the accounting period in the form of outflows or
depletions of assets or occurrences of liabilities that
result in decreases in equity, other than those relating todistributions to equity participants (ie not dividends)
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Earnings per share (EPS)
All the profit made by the company belongs to theordinary shareholders, but normally only part is paid
to them as dividends (the remainder is retained in a
reserveto help the company grow)
So, the dividendper sharerepresents only part of anshareholders earnings
Earnings per share (EPS)measures the total
earnings and is based on the profit for the period
attributable to ordinary shareholdersDisclosure is a requirement under both UK GAAPand
international GAAP
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Basic and diluted EPS
IAS 33, Earnings per share(revised) requiresdisclosure of both basicEPSand dilutedEPS
Basic EPS is calculated as
Profit attributable ordinary shareholders
Average number of ordinary shares issuedDiluted EPS is similar, except it includes additional shares
that might be issued as a result of future obligations (eg
share options), which makes the denominator a larger
figure, hence diluting the EPS
Basic and diluted EPS are shown in pence at the
foot of the income statement
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Exercise 2
Basic earnings per share (EPS)
Note 9 to the 2006 accounts of Ted Baker Plc tellsus that the profit for the period attributable to the
ordinary shareholders for the year ended 28 January
2006 was 12,919,000 and the company had issued
an average of 42,236,880 ordinary shares Required
Calculate the basic EPS in pence using the following
formula:
Profit attributable to ordinary shareholdersAverage number of ordinary shares issued
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Solution 2
Basic earnings per share (EPS)
Basic EPS:Profit attributable to ordinary shareholders
Average number of ordinary shares issued
= 12,919,000
42,236,880= 0.3058701
= 30.6p
Companies using UK GAAPmust also disclose
basic and diluted EPSRequired by FRS 22, Earnings per sharewhich replaced
FRS 14, Earnings per share
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Conclusions
The UK is in a state of transition as we movetowards using IFRSs
The set of 4 financial statements required by international
GAAP differ from those under UK GAAP
Chapter 10 describes both sets, but we have focused on
the income statement and the balance sheet that large
companies publishing consolidated accounts must prepare
using IFRSs, as these are widely analysed by users
Bring a copy of the income statement and balance
sheet for Ted Baker Plc to the next lecture