7/23/2019 Topic 5 - Sukokokopplemental Tasks and Exercises (Week 17)

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Topic 5: Seminar Tasks and Exercises

5.1   What is the difference between an interim dividend and a final dividend?

Interim dividend is paid to shareholders before the company’s final annual earnings are to beascertained. Interim dividends are paid out at the time that the company reports its profits andinterim financial statements for the period. Interim dividends are paid from undistributed

 profits that have been brought forward. Interim dividends may be paid quarterly or every sixmonths, depending on thereserves that the company holds.

 final dividends will be paid at the end of the financial year. Final dividends are declared andcalculated once the company’s overall financial position and profitability has beendetermined. ince final dividends will be paid out once the company’s end of year financialstatements have been prepared and audited, the decisions regarding final dividend paymentswill be fuelled by more insights and information on the company’s financial health. !hismeans that in the event that the company is unable to ma"e dividend payments at year end,the dividends maybe carried forward to the next accounting period.

5.2 #xplain how each of the following reserves may arise$

• hare %remium

Share premium is the amount received by a company over and above the face value of its shares.Face value of a share is its value that is printed on the share certificate. For example, face

value of a &' share is one dollar. (ut )ust because the value of share is printed &' does not necessarilymean that the share is worth only one dollar. If a company has a history of good financial

 performance, it can sell its shares at a price higher than the face value of the shares. !his difference between the selling price and the face value of a share is "nown as share premium.

It is important to note that share premium arises only when the *company+ sells the shares. Itarises only when a company issues new equity shares. It does not arise when the *investor+ sells

shares at a price greater than face value. If a company sells a share whose face value is &' at a price of &, the company earns a share premium of &'. (ut subsequently if the investor sells the same share tosomeone else at a price of &-, no share premium will be gained by the company. !he investor will

 benefit from this gain.

• etained earnings

etained earnings are the profits generated by a company that are not distributed as dividends to theshareholders. !he retained earnings are the sum of profits that have been retained by a company sinceits inception. !hey are reduced by the losses. etained earnings are also "nown as accumulatedsurplus, accumulated profits, accumulated earnings, undivided profits and earned surplus.When a company ma"es profits, the board of directors has two choices. It can either distribute these

 profits as cash dividends or it can retain these profits and reinvest them for future growth. / companymay retain its profits in a reserve to serve some specific ob)ectives. For example, a company mayretain its profits to create a reserve for paying off a debt or for purchasing an expensive capital asset.

• evaluation eserve

evaluation reserves 0or, more precisely, revaluation surplus reserves1 arise when the value of an asset becomes greater than the value at which it was previously carried on the balance sheet, increasingshareholders’ funds. 2ot every increase in value is added to the revaluation reserve, and the exacttreatment depends on the history of the asset$ in particular, whether it has been impaired.

5.3  This exercise is formally assessed

how how the 3apital and eserves section of the tatement of Financial %osition will loo" for thefollowing company, after ta"ing all of the following into account.

7/23/2019 Topic 5 - Sukokokopplemental Tasks and Exercises (Week 17)

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i1 /uthorised hare 3apital is ' million 45p 6rdinary shares of which 755,555 have been issued, all being issued at 8 each. !he mar"et price for each share is now 89.

The Share Capital Account shown on (alance heet : 2ominal value x no. of shares issued:;755,555 x 5.4 :8945,555.

 Statement of Financial Position Extract 

3urrent /ssets$ 8(an" 0755,555x891 ',-55,555

#quity6rdinary hare 3apital of 85.45p each 945,555hare %remium /ccount 0',-55"<945":1 ',545,555

arket Capitalisation: 755,555=89 : 8,'55,555

 

ii1 !he company has re<valued land owned to 8955,555. It had previously been shownin the accounts at its cost price of 874,555.

evaluation of property, plant and equipment >nder IF it is acceptable, but not required, to restatethe values of property, plant and equipment to fair value.  A surplus on re!aluation "ould #e

recorded as a reser!e mo!ement$ not as income.

  evaluation eserve surplus$ 8955,555<874,555 : 84,555iii1 !his year’s profit for the year attributable to shareholders was 845,555. / final

dividend of '5p per share was paid for the previous year 0there was no interimdividend1.

etained profits brought forward into this year totalled 8''5,555.It is a key link  between the statement of financial position and the income statement$

 (eginning etained #arnings

@< 2et Income 0Aoss1< Bividends: #nding etained #arnings

!otal dividend payment : '5p x 755,555 :875,555(eginning etained #arnings 8''5,555

 2et Income 845,555Bividend 0875,5551#nding etained #arnings 8C5,5555.%  /t the end of the /nnual Deneral Eeeting of (etter (rewers Atd, a shareholder has as"ed thefollowing question$*Why does the company leave so much money in the etained #arnings account on the tatement ofFinancial %osition? urely it would be better to spend it to modernise our machinery.+ow would you reply to the shareholders?'. ave Eoney$

 G et aside cash for expected future expenses .et aside cash for unexpected future expenses. pend Eoney$

 G (uy fixed assets 0capital expenditures1 esearch and develop new tools and products G %ay bonuses to executives and other employees. %ay down debt G /cquire another company.Aicense intellectual property, such as patent rights .#xpand the mar"et foryour products .Ea"e investments that, hopefully, will generate a profit3&Stock 'epurchase

Dive money to you0shareholders1 Increase the value of existing shares. Bistribute cash directly. !he

most common way for a company to increase the value of its shares is to buy a large number of themon the open mar"et and then ta"e those shares out of circulation. !his is called a *stoc" repurchase+ or *share buybac".+