Ch10 Financial Statements of a Limited Company (1)

8/11/2019 Ch10 Financial Statements of a Limited Company (1)

1/21

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/


2/21


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)


3/21


The story so far ...

The obligation to disclose financial information onlyapplies to limited liability entities

24% of businesses in the UK are limited companies


4/21


5/21


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)


6/21


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


7/21


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


8/21


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


9/21


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


10/21


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...


11/21


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)


12/21


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


13/21


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)


14/21


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


15/21


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)


16/21


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)


17/21


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


18/21


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


19/21


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


20/21


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


21/21


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

Documents

Ch10 Financial Statements of a Limited Company (1)