Week 9 Flashcards
(26 cards)
What is meant by ‘separate legal entity’?
The company exists independently from its owners; it can own assets and be sued in its own name.
What is ‘perpetual existence’?
A company continues to exist regardless of ownership or management changes.
What is limited liability?
Shareholders are only liable up to the value of their investment in shares.
Who owns and who manages a limited company?
Shareholders own it; directors manage it.
Can a UK limited company have only one shareholder and director?
Yes — it’s allowed and common for small businesses.
What’s the key difference between a PLC and an Ltd company?
A PLC can sell shares to the public; an Ltd cannot.
What are the 3 main expense categories in a company’s income statement?
- Distribution costs
- Administration expenses
- Other expenses
How is tax treated in a company’s income statement?
As an expense, since the company is taxed separately.
Does tax appear in a sole trader’s income statement?
No — tax is the personal responsibility of the owner.
What is the accounting equation?
Assets = Liabilities + Equity
What are the key equity components in a company’s balance sheet?
- Issued share capital
- Share premium
- Retained earnings
- Revaluation reserve
- Other reserves
What is the share premium account?
The amount received from issuing shares above their nominal value.
What are retained earnings?
Profits kept in the company after dividends are paid.
What is a revaluation reserve?
The gain from revaluing assets above their original value.
How is Net Asset Value (NAV) per share calculated?
Total net assets ÷ number of shares issued.
What is nominal value?
The face value of a share, fixed at issue.
What affects market value per share?
- Investor expectations
- Market sentiment
- Company performance
What is a contingency?
A condition with an uncertain outcome depending on future events.
What’s a contingent liability?
A possible obligation arising from past events, not recognised unless probable and measurable.
Where are contingent liabilities shown?
In the notes to the financial statements (unless the chance of occurrence is remote).
Give an example of a contingent liability.
A pending legal case, or a guarantee on another company’s debt.
Why aren’t contingent liabilities recognised as actual liabilities?
Because they are uncertain or can’t be reliably measured.
What is creative accounting (a.k.a. earnings management)?
Use of legitimate accounting flexibility to manipulate reported performance.
Why do companies use creative accounting?
To smooth earnings, meet targets, or influence stakeholder perception.
