Friday, 4 September 2009
Theories & Further Information about Shareholder's Equity
The shareholder's equity is often an important part of the capital that funds the net assets.
The share capital may be made up of both ordinary and preference shares, though preference shares are much less popular these days for tax reasons. However, in the notes to the accounts there may also be a figure for Authorised Share Capital. This may be very different to the Issued Share Capital. The authorised capital is the maximum amount of money that the shareholders have decided that the company can issue in shares and will usually be considerably...
What is Shareholder's Equity?
The shareholder's equity comes in the bottom half of the balance sheet and is part of the overall financing of the business. The shareholder's equity is a part of the overall level of capital that finances the net assets.
As well as the shareholder's equity the net assets may be financed by:
•Retained profit & reserves
•Loans & debentures
There may also be other more detailed sources of capital shown on a balance sheet. These may include the "share premium account". This is where the shares are issued at above their face value. The amount...
Theories & Further Information about Dividends Payable
When it's considering how much of its profit to pay in dividends, the company is up against various conflicting interests. The shareholders clearly want a share of the profit in return for their investment in the shares, but they also (unless they're very short-sighted!!) want the company to grow in the future. To grow in the future, the company needs to invest a proportion of the profit. Whatever is invested can't then be paid to shareholders as dividends.
It is the job of the Board of Directors to try to take account of all these conflicting...
Theories & Further Information about Dividends Payable
When it's considering how much of its profit to pay in dividends, the company is up against various conflicting interests. The shareholders clearly want a share of the profit in return for their investment in the shares, but they also (unless they're very short-sighted!!) want the company to grow in the future. To grow in the future, the company needs to invest a proportion of the profit. Whatever is invested can't then be paid to shareholders as dividends.
It is the job of the Board of Directors to try to take account of all these conflicting...
What are Dividends Payable?
Any profit that the firm makes belongs to the owners of that firm. They are the shareholders. The amount of the profit that each shareholder should receive depends on how many shares they own. The more shares they own, the larger the proportion of the company they own and therefore the more of the profit they should receive. This share of the profit is known as a dividend and to spread out fairly, the dividend is normally expressed as an amount per share.
The size of the dividend depends on two things. First it depends on the amount of profit...
What is Interest Payable?
When a firm borrows money, it has to pay interest. Interest is the return to the lender for the service of having lent money and the associated risk. The level of interest payable is therefore the total amount of interest the firm has to pay on all its borrowings, whether short-term or long-term.
The amount of interest payable will depend on how much money the firm has borrowed, and for how long it has borrowed it. The rate of interest will vary according to the level of risk (the higher the risk the higher the rate of interest) and the length...
What is Cost of Goods Sold?
Cost of goods sold is also sometimes phrased as COST OF SALES.
The cost of goods sold is the costs actually incurred in producing the product or service. It is the direct costs of production. It does not include the indirect costs, which may be things like administration and marketing costs. These cannot be directly attributed to producing the product and so are not included.
The cost of goods sold for a production company will include things like raw materials, energy and labour used to produce the product. For a retail company such as Marks...
What is Operating Profit?
Profit is often a misunderstood term. Profit is the surplus in money terms that a firm has made after paying all the costs associated with producing and selling that product. It should not be muddled with sales revenue which is the money the firm has received from selling the product.
There are various types of profit that are measured by accountants in the firm's profit & loss account. Operating profit is the profit after both the direct and indirect costs have been paid.
Sales revenue - Cost of goods sold = GROSS PROFIT
Gross Profit -...
What is Sales Revenue?
Sales revenue is the total amount of money that the firm has earned from the sale of all its goods and services during a given time period. This is usually six months or a year. If a firm produced just one product or service the sales revenue would be the price of the product multiplied by the number of the product sold. In the case of more than one product or service the revenue from each needs to be added together.
The figure for sales revenue in the profit & loss account does not necessarily mean that the firm has received all that money...
What are Long-term Liabilities?
A liability is something which a firm owes to a person or another firm. It may be in the form of creditors - people or firms who have sold you goods which you have not yet paid for, or it may be money borrowed from a financial institution - loans.
As the title of the variable suggests, we are looking in this case for liabilities that are owed in the long-term. This is generally taken in accounting terms to be more than a year. This therefore tends to mean that most trade creditors (except in exceptional circumstances) are not long-term but current...
Debentures, Mortgages and Long-Term Loans
As we saw from the explanation of long-term liabilities, they are liabilities that the firm has which are due in over a year. There are various possibilities for this:-
•Debentures
•Mortgages
•Long-term loans
Debentures
A debenture is a form of borrowing by a firm. It may issue debentures of a fixed value - say £1000 or £5000 - at a certain rate of interest. These debentures may be bought by individuals or by financial institutions. The debentures will have a fixed time period, after which they will be paid back. This may be 5 or 10 years or...
What are Net Assets?
Assets are anything which the firm owns or has title to (in other words ownership of). The term net then means all assets net of liabilities. Net assets are therefore:-
NET ASSETS = Total Assets - Total Liabilities
The total assets are made up of fixed assets (plant, machinery and equipment) and current assets which is the total of stock, debtors and cash.
The total liabilities are made up in much the same way of long-term liabilities and current liabilities.
The net assets figure therefore can be used as a measure of the value of the business....
Theories & Further Information About Net Assets
As we have seen from the explanation of net assets, the net assets are composed of the fixed assets and the current assets less the current liabilities and the long-term liabilities. This means that they are a measure of the total worth of the business - what it should be worth if it was shut down tomorrow and all its debts paid. However, it is extremely unlikely that it would actually be worth this sum, as many assets would be worth a very different amount if you actually tried to sell them. What may be an invaluable machine to one company may...
What are Current Liabilities?
A liability is something which a firm owes to a person or another firm. It may be in the form of creditors - people or firms who have sold you goods which you have not yet paid for, or it may be money borrowed from a financial institution - loans or overdrafts.
As the title of the variable suggests, we are looking in this case for liabilities that are owed in the short-term. This is generally taken in accounting terms to be less than a year. Any money that is owed in more than a year's time is considered to be a long-term liability. Short-term...
What is Cash?
Hopefully this is an obvious question as I am sure the quantity of it you have is important to you. In much the same way it is important to a business. However, in a business the term cash may have a broader meaning than it does to you as an individual. Cash is an asset to the business and is usually considered to be one of the current assets. The other current assets are stocks and debtors.
Under the heading cash on the balance sheet may be included a number of items of varying liquidity. A small amount may actually be cash (or readies) held...
What are Debtors?
Debtors are people or other firms who owe money to the firm. This will usually happen where the firm has sold goods with a period of credit. The firm sells the good or service but allows the purchaser a period of credit to pay - usually a month. During this month the purchaser owes the firm the money and is therefore a debtor.
If the firm has debts these are considered an asset, because when the debtors pay the firm will have converted the debt into cash in the bank. Because most debts are relatively short-term they are considered current assets....
The Balance Sheet
The balance sheet is one of the financial statements that limited companies and PLCs produce every year for their shareholders. It is like a financial snapshot of the company's financial situation at that moment in time. It is worked out at the company's year end, giving the company's assets and liabilities at that moment.
It is given in two halves - the top half shows where the money is currently being used in the business (the net assets), and the bottom half shows where that money came from (the capital employed). The value of the two halves...
What are Stocks?
Stocks are often also known as inventories. They are anything which a firm has which is not currently being used for one of the firm's functions. Most departments in the company will have stocks of something. The factory may have stocks of raw materials ready to produce, the office may have stocks of stationery and the warehouse may have stocks of finished goods.
Stocks are vital to a company to help it function smoothly. If production had to be stopped every time the firm ran out of raw materials, the time wasted would cost the firm a fortune....
What are Current Assets?
Assets are anything which the firm owns or has title to (in other words ownership of). Firms may have fixed assets which are long-term assets - plant, machinery and equipment, but they will also have assets which can be realised (cashed-in) in the short-term. This is generally taken in accounting terms to be less than a year.
The current assets are therefore ones that can be quickly realised and change frequently. The main current assets are stock, debtors and cash.
CURRENT ASSETS = Stock + Debtors + Cash
They are usually shown on the...
Non-Profit Making Organisations
Introduction
This resource aims to give students help with financial statements from non-profit making organisations including clubs and societies. The nature of these types of organisations means that students should also be able to understand the effect of life membership schemes and donations.
The resource is relevant to:
•OCR: Module 2502, Final accounts
•AQA: Module 5, Further aspects of financial accounting
What are non-profit making organisations? Are they businesses that make losses? Are they businesses that are run badly?
Non-profit...
Sources of Finance
Introduction
This resource is designed for use with Accounting courses at A' level. This resource is relevant to the following:
•AQA Module 5, Section 14.5: 'Types of Business Organisation, Sources of Finance'
•OCR Module 2505, Sections 5.3.2 and 5.6.2
For many businesses, the issue about where to get funds from for starting up, development and expansion can be crucial for the success of the business. It is important, therefore, that you understand the various sources of finance open to a business and are able to assess how appropriate these...
Accountancy
Accountancy or accounting is the art of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management.
Such financial information is primarily used by managers, lenders, investors, tax authorities, regulators, and other decision makers to make resource allocation decisions between and within companies, organizations, and public agencies. It involves the...
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