COMPANIES

Types of Limited Company

1) Private Limited Company (LTD )
a)cannot issue shares to the public
b)its name must end with the word LTD
C)it is not required to have a minimum share capital
d)its shareholders must be at least one with no maximum limit
2)Public limited company PLC
a)its memorandum() must state that it is a public company
b)its name must end with the word PLC
C)its authorized & issued capital must be at least 50000
d)its shareholders must be at least two with no maximum limit

CLASSES OF SHARES
Ordinary (Equity) shares: Risky investment
1)Are entitled to vote at the general meeting to elect directors
2)Ordinary dividend is not fixed.it changes every year depending on the profit
3)Last to be repaid on liquidation()
4)on cumulative()
Preference shares: Risky investment
1)No right to vote
2)Are entitled to a fix rate of dividend every year, before any dividend is paid on
the ordinary shares.
3)Priority of repayment in case of liquidation
4)Might be cumulative()

Cumulative preference shares

They have the right to receive any dividend in arrears from previous years
before any other shareholders receive a dividend.
Non cumulative
Do not receive dividends in arrear
Differences between shares & debentures
Shares
1)Part of share capital
2)Holders are owners
3)Shareholders have the right to vote
4)Shareholders are entitled to dividends which depend on profits-Appropriation
Debentures
1)Loan to a company
2)Holders are creditors to a company
3)Debenture holders do not have the right to vote
4)Debenture holders are entitled to a fix rate of interest, which is payable
regardless of profits P& L
Share capital
1)Authorized/Nominal/Registered
The maximum amount of capital the company is allowed to issue to
shareholders
2)Issued
The Nominal value of authorized which has been issued.It cannot be more than
authorized. 3)called up
The amount of the called-up which the shareholders have actually paid.

Reserves
Profits set aside for a specific purpose
ExambleFixed Asset replacement
---General Reserve
----Share premium
Two Types of Reserves
1)Capital or Non-Distributabpe Reserves
They cannot be distributed to share holders by way of dividends
Ex. share premium, revaluation reserve, capital redemption reserve.
2)Revenue Distributable Reserves
They can be distributed to shareholder by way of dividends
Ex. Retained Earnings/Retained profits/profit & loss, General reserve.

BONUS AND RIGHTS ISSUE

Differences between Rights & Bonus issue:
Rights issue
Subscribers pay for shares

Bonus issue
Shareholders dont pay for shares

Net Assets are increased by cash received Net Assets are unchanged
Shareholders do not have to exercise their All Ordinary shareholders will
right to subscribe for the new shares

receive their bonus shares

Shareholders may sell their rights if they

Shareholders may sell their bonus

do not wish to exercise them

shares if they do not wish to keep them

STOCK VALUATION
Net realizable value (N.R.V)=estimate S.P expenses to make it saleable
.Goods on sale or return basis must included into stock if the customers has not
indicated an intention.
.Goods belonging to customers but remain in our warehouse should not be
taken into stock.
Methods of stock valuation under ssap9
1)FIFO=FIRST IN FIRST OUT 2)LIFO=LAST IN FIRST OUT
3)AVCO=Weighted Average Stock 4)Replacement cost( )
5)Standard cost ( )
Stock Accounting systems
1)Pepertual inventory system( )
2)Periodic inventory system( )

DEPRECIATION
Depreciation is the loss of value of fixed Assets over time. It is not cash expense.
Tangible Fixed Assets are Assets that have physical substance() and are
bought for used in the business.
Intangible Fixed Assets do not have Depreciation but have Amortization like
(Goodwill , patents, Trade Marks , Development Costs).
Methods of calculating Depreciation
1)Straight Line Method or fixed installment method(Land and Buildings)
The depn is the same each year and is calculated on the cost of fixed Assets.
2)Reducing or Diminishing method(motor vehicles & computers)
The Depn is reduced each year and is calculated as a given percentage on the
N.B.V of Fixed Assets.

3)Revaluation method (loose tools)

4)Sum of the years digits method
5)Usage method or machine hour method or units of output method
(To inspection for airplane is capital expenditure)
A comparison between two methods (Straight line & Reducing)
Advantages of straight line method
-Is simpler to calculate it is therefore cheaper to operate and there is less
chance of making errors.
-The straight line method does not distort() profit with higher level of
depreciation in early years.
Advantages of Reducing balance Method:
-The Reducing Balance method is more realistic as, in practice, assets tend to
lose market value fast in early years compared with later years.
-Is more appropriate where the risk of obsolescence is high (vehicles,computers)
-As Assets get older the repairs and maintenance gets higher. The reducing b/ce
method results in a more even total charge of use of an asset. In the early years
when repair expenses are low , depn is high and in later years repairs are high
and depn is low.
-Greater depn is charged in early years due to the fact that fixed assets lose
more value in the early years
-May provide a more realistic N.B.V in assets loose more value in early years.
S.O.S---Under the provisions of depn (FRS 15) an item of subsequent
expenditure should only be capitalized in three circumstances:
1)Where the subsequent expenditure enhances the fixed asset over and above
its previously assessed state.

2)Where a component of the fixed asset has been treated separately for the
purposes of depn and depreciated over its useful economic life and has been
replaced or restored.(ex. Ship machine is capitalized)
3)Where the subsequent expenditure relates to a major inspection or overhaul
of a tangible fixed asset that restores economic benefits that have already been
consumed by the entity. ()-
S.O.SWhy Land do not Depreciated?

1)is not deteriorated. 2)is not consumed. 3)unlimited useful life.

BUDGETING()
Advantages for budget
1)Negotiate o loan in better terms
2)Invest in case of surplus cash
3)Allow us to see the future outcome
Disadvantages for budget
1)Time consuming and costly to prepare
2)The amounts are only estimates

COST BEHAVIOUR & BREAK EVEN ANALYSIS

Break-even Analysis:
Is a useful tool for management decision making in order to know the point at
which they will start making profits.
Fixed COSTS:
Are those costs that do not change .e.g- interest on loan, Advertising, rent &
rates, depn, insurance, salaries.

Variable costs:
Are those costs that change directly with the level of production.
e.g-direct materials, commission based on the number of using sold.
Advantages of Break-Even Analysis:
1)It is a useful tool for management delusion making, because it indicates
exactly how many units must be made before profit is made.
2)Helps a business break down costs into fixed or variable.
3)Helps identify margin of safety and the angle incidence.
Disadvantages of Break-Even Analysis:
1)Assume that fixed costs remain always the same. However, they changed in
the long term.
2)Assume that variable are the same per unit.
3)Assume that selling price will be the same semi-fixed cost are ignored.
4)B/E charts cannot apply for more than one product.

INVESTMENT APPRAISAL()
Methods of investment Appraisal
A)Payback Period ( )
Is the amount of time it takes a business to recover the initial cost of an
investment.
Advantages:
1)Simple to calculate, use and understand.
2)The shorter the payback period, the less risk involved.
3)Cash flow is less subjective than profitability.

Disadvantages:
1)It ignores the time value of money.(inflation)
2)The life expectancy of a project is ignored
3)It ignores cash flows after the payback period
B)Accounting Rate of Return:
ARR shows the Average profit as a percentage of the capital invested in a
project. It is a key that ARR is about profit and not cash.
Advantages:
1)Easy to calculate and understand.
2) It measures the profitability of the prodject.
Disadvantages:
1)It ignores the time value of money.
2)The life expectancy of a project is ignored.
3)Ignores the timing of the cash flow.
C)Net present value ( )
Time value of money
It is better to have money now rather than later for the following reasons:
a)Inflation reduces the real value and the purchasing power of the money.
b)Money received today could be deposited in a saving account and earn
interest. Because of this, the later we receive the money, the more interest we
lose.
Advantages of NPV method:
1)Considers the time value of money
2)Considers all the cash flows
3)Considers the timing of future cash flows and the interest rates

Disadvantages of NPV method:

1)Complex to calculate and to explain
2)Easily misunderstood
What it means:
- When NPV is greater than zero it means that the discounted value of future
cash flows is greater than your initial investment and you would be getting an
even higher return than you desire.
-When NPV is zero it means that the discounted value of future cash flows
equals your initial investment and you would be getting exactly the return you
desire.
When NPV is less than zero (a negative number) it means that the discounted
value of future cash flows is less than your initial investment and you would be
getting a lower return than you desire.

Group A/Cs
Consolidated financial statements
Goodwill or cost of control
Goodwill is the worth of business over the value of the net assets.
Minority interest
The shares of subsidiary which are not held by the holding company.
Treatment of inter company debts:
As the group cannot owe money to itself, the amounts owed by one group
company to another must be cancelled by offsetting the relevant debtors and
creditors. Any differences are likely to be either cash in transit or goods in
transit.

Treatment of unrealized profit:

Profit which has not yet been earned by an external sale must be removed from
consolidated accounts, together with the sales value of the goods concerned.
Stocks of these goods remaining at a year end will contain unrealized profit
which must be removed to prevent the overpayment of the value of an asset.
The need of fair value adjustment:
Goodwill on consolidation can only be calculated accurately by comparing the
fair value of what has been acquired with the fair value of what has been
invested. If the net assets of subsidiary are not already recorded at fair value at
acquisition then affair value adjustment is required.

INTERPRETATION AND ANALYSIS OF ACCOUNDING RATIOS

Rations are used to:

1. Compare results with previous year.
2. Compare own results to other businesses in the same industry.
Disadvantages of Rations:
1. Different firms apply different accounting policies (depn&stock valuation)
2. Radio analysis is a costly technique.
3. Difficult to interpret.
CASH FLOW STATEMENT (FRS1)
Purpose of the cash flow statement :
1)
2)
3)
4)

Used to assess the liquidity, solvency and financial adaptability.

Helps in future investing and financing plans of the business.
Helps in efficient management of cash .
Used to make comparisons with other companies.

Importance of the format of FRS1: To ensure that the cash flow statement is
reliable (not misleading) comparable, understandable and relevant .

Explanations of the Adjustments calculating the Net Cash inflow from operating activities

1) Depn for the period must be added back because there is no cash inflow.
2) Loss on disposal: has to be added back because the loss reduces the
operating profit without any cash outflow taking place.
3) Profit on Disposal has to be deducted back because the profit increases
the operating profit without any cash inflow taking place. The cash
received is reported under a different heading capital expenditure &
financial investment.
4) Stock increased has to be deducted back because it means that the firm
has purchased more stock than it has sold
Stock decreased has to be added back because it means that the firm has
sold more stock than it has purchased
5) Debtors increased has to be deducted back because the cash received
from Debtors is Less than the sales reported for the period
Debtors decreased has to be added back because the cash received from
Debtors is more than the sales reported for the period
6) Creditors increased has to be added back because the cash paid to
creditors is Less than the purchases reported for the period
Creditors decreased has to be deducted back because the cash paid to
creditors is more than the purchases reported for the period