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level: Capital Structures & Financing Costs

Questions and Answers List

level questions: Capital Structures & Financing Costs

QuestionAnswer
How are the dividends for ordinary shares recorded?They are recorded in the statement of changes in equity.
What is the face value of a share called?The Par or Normal value
What is share premium?The amount in excess of the Par value.
What is Authorised Capital?The maximum amount of shares a company may issue.
What is Issued Capital?The amount of share capital at nominal value that a company has issued to shareholders.
What is Call-Up Capital?When a company only calls up part of the share value, but will later call the remainder.
What is Paid-Up Capital ?The amount of Called-Up Capital that has been received.
What are Ordinary Shares?Also known as Equity Shares. These are the shares that give the shareholder the right to attend the general meetings, vote on company matters, own their share of the equity, receive dividends, receive a copy of the annual report and accounts.
What is Equity Financing?The raising of Capital through the sale of ordinary shares.
Which shareholders are the last to receive their equity if the company liquidises?The ordinary shareholders.
What are Preference Shares?The shares that carry the right to a final dividend, have priority over the other shares including on the payment of dividends, are classified as liabilities in the company accounts, but don't have any voting power.
What are Redeemable Preference Shares?The shares that are treated as loans and the nominal value must be repaid at a later date. These shares are a financing cost in the company accounts. When the nominal value is due in the next year, the share is treated as a current liability.
What are Irredeemable Preference Shares?Shares that form part of the equity.
What are Retained Earnings?The amount of profit that is retained and has not been sent out in the form of dividends or taxes, etc.
What is a Rights Issue?An issue of shares for cash.These shares are usually issued at a discount on the current market price.
What is a Bonus Issue?An issue that raises no funds but increase share capital.
What is a Loan Note?A type of non-current liability stock or bond which is not share capital. It is an acknowledgement of indebtedness.
How do taxes affect retained earnings?It reduces its balance.
How does profit affect retained earnings?It increases its balance.
How do dividends affect retained earnings?It reduces its balance.
What are dividends?An appropriation of retained earnings to shareholders.
How are debt preference shares shown on the SFP?They are shown as liabilities.
How are dividends paid for debt preference shares treated?They are treated as finance charges.
If there is an obligation to repay a preference share what type of preference share is it?It is a debt preference share.
What are the two types of preference shares?Debt and equity (Irredeemable) shares.
If there is no obligation to repay a preference share, what type of preference share is it?It is an equity (Irredeemable) share.
How are equity preference shares shown in the financial statements?As equity in the SFP.
How are ordinary shares treated in the financial statements?As equity in the SFP.
How are the dividends for ordinary shares recorded?They are recorded in the statement of changes in equity.
How is an issue of shares at nominal value recorded?Dr. Cash Cr. Share Capital
How is an issue of shares at market value recorded?Dr. Cash Cr. Share Capital Cr. Share Premium
How is the share capital account shown in the financial statements?On the SFP in the Equity section.
How is the share premium account shown in the financial statements?On the SFP in the Equity section.
How is the issue of bonus shares recorded?Dr. Share Premium (or other reserves) Cr. Share Capital
How is the payment of a dividend recorded?Dr. Retained earnings Cr. Bank
How is income tax charged recorded?Dr. Income Tax charges (SPL) Cr. Income Tax Liability (SFP)
How is the payment of Income Tax charged, recorded?Dr. Income Tax Liability Cr. Cash
What are the differences between ordinary and preference shares?Ordinary shares have voting rights – preference shares usually do not. The dividend on ordinary shares is recommended by the directors – preference shares carry a fixed dividend. The ordinary dividend is paid out of profits left after the preference dividend has been paid.
What is a bonus (scrip) issue of shares?A bonus issue of shares is an issue of new shares to existing shareholders in proportion to their existing shareholdings, free of charge. No cash is received.
What does the share premium account record?The share premium account records the excess of the amount of cash received from the issue of shares over the nominal (par) value of the shares.
What are capital reserves?Capital reserves are the share premium account and the revaluation reserve. They represent amounts owing to shareholders, but this amount cannot be paid out as dividend.
What are revenue reserves?Revenue reserves are profits that have been earned (and retained) by the company – retained earnings and general reserve. They represent amounts owing to shareholders that can be paid out as dividend.
How are dividends recorded?Dr. Retained earnings (SFP) Cr. Dividends Payable (SFP) Cr. Financing Cost (SPL)
What is an associate?"An entity over which the investor has significant influence but not control or joint control and that is neither a subsidiary nor an interest in joint venture."