chapter 14 the financial statements of limited liability ...statement of changes in equity this...

Chapter 14

The Financial Statements

of Limited Liability companies

Copyright D O'Donoghue 1

The Financial statements of Limited liability companies

Contents:

1. The Financing of Limited liability companies.2. The structure of the financial statements of limited

liability companies.a) Comprehensive Income statementb) Comprehensive Balance sheetc) Statement of changes in Equity

3. The preparation of the financial statements through a worked example.

4. The requirements for published financial statements Copyright D O'Donoghue 2

1. The Financing of Companies

Financing is the basis on which businesses can receive investment (money) to procure assets that generate the revenues and profits to grow and prosper

Companies are financed in two ways

1. The contributions of the owners – called share capital or equity.

2. Debt financing /Loan capital


Equity Financing

Share capital represents what has been invested in the company by the owners or shareholders. A person invests in a company by buying shares in that company. If a person owns 50% of the share capital of a company then they own half the value of the company

There are two types of shares to invest in• Ordinary shares• Preference shares


Share capital

Ordinary shares:Real owners of the business for which each share carriesvoting rights.Shareholders have a right to a share of the profits after allpayments are made.At liquidation would be the last to receive any payments ofcash. Hence they take a greater risk than preferenceshareholders

Preference shares:Agreed fixed rate of dividend each year. Dividend is paid before ordinary share dividends.Less risky than ordinary shares.Not considered the real owners of the business and do notvote on company resolutions.At liquidation they would be repaid their investment beforethe ordinary shareholders if there are any monies left inthe company. Copyright D O'Donoghue 5

Share Capital/Equity TermsAuthorised share capital: This is the maximum amount ofshares (as stated in the memorandum and articles ofassociation of the company) a company is entitled to issue.This is a legal limit which can be changed.Issued share capital: This is the amount of authorised sharecapital actually issued and allotted to shareholders.Called-up capital: This is the amount of capital paymentwhich has actually been demanded by the company. Thisapplies only where shares are issued and are payable byinstalments rather than in full on application. This is the figurethat is recorded in the balance sheetPaid-up capital: This is the amount of the called-up capitalthat has been actually paid over to the company by theshareholders.Uncalled capital: This is the amount of capital thatshareholders agree to pay if they are called on to do so. Thisfigure is owed to the company and hence would be recorded asa current asset


Share capital/Equity termsShare Premium:When shares are first issued they have a nominal value. This isthe value or denomination the company chooses for its shares.This is a meaningless value. The true value of the shares is themarket value. For example the nominal value of a €50 note is€50 (the nomination it was given originally). The true value ofthis note is what it will purchase for you and that changesdepending on inflation and the fate of the economy.

If a company issues 1,000 shares with a nominal value of€1 and they receive €3 per share, then the shares have beenissued at a premium of €2 per share. The company will debittheir bank account with €3000 received and credit the sharecapital accounts with the nominal value €1000 and credit ashare premium account with the premium received of €2000.


Share capital/ Equity terms Dividends:A shareholder reward for investing in the company comes inthe form of a dividend.

A dividend is a part of the profits made by the company thatis actually paid out to shareholders.

The directors of the company decide the amount of profits tobe retained in the business for expansion and the balance isgiven as dividends to the shareholders.

Shareholders are powerless to change any decision made bydirectors on the level of dividends to be appropriated.


Debt Financing /Loan capitalThe term loan capital refers to the loans acquired by a company.Loans can be acquired in two ways

Approaching the bankThe company issuing own debt instruments such as loan notes, bonds or debentures

The term bonds/loan notes/debentures are used when publiccompanies seek individuals or other companies to provide loansto the business. In return the loan provider will get a loancertificate (often called a bond or debenture) stating the amountof the loan, the agreed interest rate and the date of redemption.

These bonds are marketable instruments thus allowing theholder of the bond (the loan provider) to sell the bond at anystage within the period of the loan (similar to buying and sellingequity shares). This option of liquidity makes company bonds apopular form of investmentCopyright D O'Donoghue 9

2. The Financial Statements of limited liability companies

The financial statements of companies must comply with all legal and financial accounting standards.They comprise of the following:

1. Statement of comprehensive income (income statement

2. Statement of financial position (balance sheet)3. Statement of changes in equity4. Statement of cash flow (covered in section 4)5. Notes comprising a summary of accounting policies

and explanatory notes.Copyright D O'Donoghue 10

Statement of changes in EquityThis statement shows the following1. The individual components of equity at the beginning of the year. These are:

q Share capital (comprising preference and ordinary shares)q Share premium (recording any premium paid on the shares)q The reserves of the business. Reserves are the retained profits of the

business and can be classified into the following typesq Accumulated profit reserve – comprising all profits retainedq General or specific reserve- Where profits are taken out of accumulated

profit and put into a special reserve account.q Revaluation reserve- Where property assets have been revalued and this

is recorded as a gain in the revaluation reserve (no cash)2. The profit after tax for the period3. Dividends paid to shareholders4. Additional contributions from shareholders 5. Any revaluations in property assets6. The closing balance of the components of equityCopyright D O'Donoghue 12

Statement of changes in Equity


Preparing the Financial Statements of CompaniesA comprehensive Example

Please review the comprehensive example presented on pages 286 – 290 in the text book

From the information you are required to

a) Prepare a comprehensive income statement for the year b) Prepare a statement of changes in equityc) Prepare a statement of financial position at the year end


Published Financial Statements

All companies are required to publish their annual report with the Companies Registrar Office (CRO) every year.The annual report must include the following

qStatement of comprehensive incomeqStatement of changes in equityqStatement of cash flow qNotes expanding and explaining the figuresqThe financial statements and notes must show

previous years figures.qStatement of accounting policiesqAudit reportqDirectors reportCopyright D O'Donoghue 16

Published Financial StatementsSmall and medium companies do not have to publish as much information as large companies

q Medium sized companies – publish an abridged income statement & balance sheet with selected notes & directors report

q Small companies only need to publish an abridged balance sheet and selected notes

SmallCompanies

Medium Companie

Balance sheet totals not exceeding €4.4 m €7.62m

Turnover not exceeding €8.8m €15.24m

No. of Employees not exceeding 50 250Copyright D O'Donoghue 17

Published Financial StatementsFor large companies accounting standards and company law require additional information to be published in the annual report and financial statements to ensure greater clarity and understanding. Examples include:

q Segmental reporting requirements (See page 293)q Reporting of continuing, new and discontinued

operations (See page 294)q Distinguishing between ordinary and exceptional items

(See page 295)


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