Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Allows for investment by, potentially, a very large number of people Offers the protection of limited liability Is regarded as a ‘person’ in law Allows access to capital markets Can offer some tax advantages

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning A major advantage for shareholders BUT A corresponding disadvantage for creditors - how can they be sure they will be paid?

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Example: Tommy Elba Limited orders goods on 1 June 20X4 for £3000 from Tommy Elba goes out of business on 10 August 20X4 without having paid Tommy

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Elba Limited: balance sheet at 31 May 20X4

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Elba Limited: balance sheet at 10 August 20X4

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Can Tommy recover any money? At 10 August there are creditors of £17 240, but total assets of only £ Also the asset values may not be realistic estimates. Tommy and the other creditors may recover some, but probably not all, of their money This example emphasises The need for INFORMATION

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Needs of creditors information about company solvency to be able to make better decisions BUT information is available only periodically information may be out of date

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Needs of shareholders Directors should be accountable to shareholders (NB: stewardship) Regulation ensures that financial information is available in a standard form Needs of other parties: e.g. employees, customers, journalists, academics

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Companies Acts 1985 and 1989 Companies Act 1985: –formation of new companies –constitutional arrangements –role of directors –audit of companies –publication of accounting information

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Private company (Ltd) Public limited company (plc) Company formation –straightforward and inexpensive –filing forms with Companies House

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Annual general meeting (AGM) acceptance of financial statements authorisation for payment of dividend election of directors appointment of auditors

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Memorandum of Association –purposes of company (‘objects’) –authorised share capital (not necessarily the same as issued share capital) Articles of Association –internal constitution: e.g. arrangements for appointment of directors, powers of directors

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Authorised and issued share capital Example: Li Ming Pauletta Limited has authorised share capital of £40 000, split into 25p shares. Half of the shares have been issued. In the year ended 31 December 20X4 a dividend of 4p per share is declared. Li Ming owns 5000 shares in Pauletta Limited

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Authorised and issued share capital Example: Li Ming a) what is the nominal value of the issued share capital of Pauletta Limited? b) what is the total value of the dividend declared for the year? c) what is the value of Li Ming’s dividend?

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Authorised and issued share capital Example: Li Ming a) £ x 25p = shares. Half are in issue: Nominal value = x 25p = £ b) Total value of dividend = 4p x = £3200 c) Li Ming’s dividend = 4p x 5000 = £200

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning In respect of accounting, directors must: keep adequate accounting records prepare accounts each year, which must be filed with the Registrar of Companies ensure that the company does not trade while insolvent

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning UK accounting standards since 1990 set by the Accounting Standards Board (ASB) International accounting standards set by the International Accounting Standards Board (IASB) After 1 January 2005 all listed companies in the EU must prepare their financial statements in accordance with international accounting standards

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Components of a set of limited company accounts: profit and loss account balance sheet notes to the accounts directors’ report auditor’s report (where applicable)

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Listed company regulation handled by the Financial Services Authority (FSA) Example of additional regulation: Listed companies must produce interim financial statements (for most companies this means every 6 months)

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Corporate governance: the system by which companies are directed and controlled UK: the Combined Code (for listed companies): directors directors’ remuneration relations with shareholders accountability and audit

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning ADVANTAGES OF DISCLOSING NON-FINANCIAL INFORMATION Can help less financially oriented users of financial statements Illustrations with photos and graphs help users to understand The presentation of non-financial information is often more attractive and user-friendly, thus (perhaps) encouraging people to read the information.

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning DRAWBACKS OF DISCLOSING NON-FINANCIAL INFORMATION The volume of information in the annual report may be off- putting to readers Non-financial information may be produced principally for public relations purposes Information such as graphs accompanying non-financial reports may be biased

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning OFR - largely non-financial disclosure setting out the directors’ analysis of the business OFR is voluntary but many UK listed companies have chosen to produce one Proposal that all UK companies over a certain size should produce an OFR

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Corporate reporting on the internet Examples include: webcasts of AGMs and/or analysts’ meetings corporate videos stockbrokers’ forecasts press releases preliminary announcements of results links And most corporate websites include accounting information