Financial Reporting and Analysis Unit 4

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Questions and Answers

What is the primary objective of forming a company?

To provide employment opportunities

To benefit the shareholders

To undertake cultural or social activities

To make a profit (correct)

What is the document called that incorporates a company?

Memorandum of Association

Articles of Association

Notice of Incorporation

Memorandum of Incorporation (MOI) (correct)

What is the term for the first issue of shares in a public company?

Initial Share Offering (ISO)

Initial Public Offering (IPO) (correct)

First Share Release (FSR)

Primary Public Offering (PPO)

What is the advantage of forming a company?

Limited liability of shareholders Signup and view all the answers

What is the main difference between for-profit and non-profit companies?

For-profit companies aim to make a profit, while non-profit companies aim to benefit the public Signup and view all the answers

Who are the first shareholders of a company?

The subscribers to the Memorandum of Incorporation Signup and view all the answers

What is the organization that a company must file its Notice of Incorporation with?

Companies and Intellectual Properties Commission (CIPC) Signup and view all the answers

What is the term for the units into which a company divides its capital?

Shares Signup and view all the answers

What is the term for the maximum number of shares a company is authorised to issue?

Authorised share capital Signup and view all the answers

What type of shares holders have preferential rights to dividends and in the event of liquidation?

Preference shares Signup and view all the answers

What is a debenture?

A long-term loan (non-current liability) Signup and view all the answers

From which profit can dividends be declared?

Profit after tax Signup and view all the answers

What is the purpose of provisional tax payments?

To pay taxes to SARS Signup and view all the answers

What is the rate of Dividends Tax?

15% Signup and view all the answers

What is the purpose of financial statements?

To provide information for economic decisions Signup and view all the answers

When are financial statements presented?

During the annual general meeting of the company Signup and view all the answers

What is reflected in the statement of changes in equity?

Total dividends for the year Signup and view all the answers

What happens when the actual tax liability for the year exceeds the estimated amount?

The company makes a third payment to SARS Signup and view all the answers

What is the primary purpose of financial statements prepared for internal use?

To provide detailed information required by management Signup and view all the answers

What is the role of the International Accounting Standards Board (IASB)?

To develop the International Financial Reporting Standards (IFRS) Signup and view all the answers

What is the main purpose of a cash flow statement?

To provide information about the cash receipts and cash payments of an entity Signup and view all the answers

What is the basis of the statement of comprehensive income?

Accrual basis Signup and view all the answers

Why was the cash flow statement developed?

To fulfil the needs of the users of financial statements in respect of the cash position of an entity Signup and view all the answers

What type of financial statements must comply with IFRS?

Financial statements of public companies Signup and view all the answers

What is the primary benefit of IFRS?

Easy comparison of financial statements of different companies Signup and view all the answers

What is the purpose of the statement of financial position?

To provide information about the financial position of an entity at a specific point in time Signup and view all the answers

What is the purpose of the statement of changes in equity?

To provide information about the changes in equity of an entity over a specific period Signup and view all the answers

Why is the accrual basis used in the statement of comprehensive income?

Because it does not show the cash flows from operating activities Signup and view all the answers

What is the primary purpose of a cash flow statement?

To evaluate past performance and future prospects Signup and view all the answers

What is the difference between the direct and indirect methods of presenting a cash flow statement?

The presentation of cash generated from operations Signup and view all the answers

What type of adjustment is made to profit before interest and tax in the indirect method?

Non-cash flow adjustments, such as depreciation Signup and view all the answers

What is an example of a cash flow from investing activities?

Payment to acquire non-current assets Signup and view all the answers

What does an increase in current assets indicate in the cash flow statement?

An operating use of cash Signup and view all the answers

What is the purpose of the financing activities section of the cash flow statement?

To provide information on cash flows to and from providers of capital Signup and view all the answers

Why do investors and managers need to understand a company's cash flows?

To evaluate the company's ability to pay its bills and provide returns to owners Signup and view all the answers

What is an example of a non-cash flow adjustment made in the indirect method?

Depreciation Signup and view all the answers

What is the role of the cash flow statement in evaluating a company's performance?

To evaluate the company's past performance and future prospects Signup and view all the answers

What is an example of a cash flow from financing activities?

Proceeds from the issue of shares Signup and view all the answers

Why are investing activities separated from operating activities in the cash flow statement?

To provide information on investing activities that generate future income Signup and view all the answers

How is the use of cash indicated in the cash flow statement?

By bracketing the amount Signup and view all the answers

Which of the following is not a non-current asset?

Inventories Signup and view all the answers

What is the carrying value of land and building as at 31 December 20.14?

462 000 - 159 840 = 302 160 Signup and view all the answers

What is the accumulated depreciation on the equipment sold?

2 250 Signup and view all the answers

What is the profit for the year of Schion Ltd?

144 105 Signup and view all the answers

What is the balance of retained earnings as at 31 December 20.14?

353 880 Signup and view all the answers

What is the total of non-current liabilities as at 31 December 20.14?

30 000 Signup and view all the answers

What is the total of current liabilities as at 31 December 20.14?

126 135 Signup and view all the answers

What is the total of equity and liabilities as at 31 December 20.14?

1 185 015 Signup and view all the answers

Study Notes

Definition of a Company

A company is an association of people working together to make a profit.
It is a legal person, incorporated according to the Companies Act No. 71 of 2008.
A company's existence is independent of its shareholders, and the liability of shareholders is limited to the amount invested.

Types of Companies

For-profit companies:
- Public companies
- Private companies
- State-owned companies
- Personal liability companies
Non-profit companies:
- Formed to benefit the public or for cultural/social activities

Establishing a Company

A company must be established according to the Companies Act No. 71 of 2008.
The people who start a company are called incorporators or promoters.
One or more persons can start a for-profit company.
The promoters complete and sign a Memorandum of Incorporation (MOI) and file a Notice of Incorporation with the Companies and Intellectual Properties Commission (CIPC).

The MOI stipulates the maximum number of shares a company is authorised to issue (authorised share capital).
Companies usually register an authorised share capital that is larger than what is needed at the time.
The shares that are actually sold are called the issued share capital.

Types of Shares

Preference shares:
- Provide holders with a fixed percentage dividend.
- Have preferential rights to dividends over other shareholders in the event of liquidation.
Ordinary shares:
- May only qualify for dividends once preference shareholders have been paid.
- Share in the profit varies depending on availability and dividend approved.

Debentures

Public companies are entitled to raise capital by issuing debentures.
A debenture is a long-term loan (non-current liability) and is redeemed at the end of its term.
Debenture holders receive a fixed percentage interest usually paid annually.

Dividends and Retained Earnings

Dividends may only be declared from profit after tax.
The board of directors recommends a proposed dividend to shareholders at the annual general meeting.
The proposed dividend is stated as the number of cents per share.
A current liability, shareholders for dividends, is created.
When the dividend is paid, the liability is settled.
Companies usually do not distribute all profits after tax as dividends, and a portion is retained to finance expansion.

Company Tax

Companies pay tax each year at a specific rate (e.g. 28%) on their taxable income.
Dividends Tax replaced Secondary Tax on Companies from 01 April 2012.
Dividends Tax is levied at a rate of 15% of the amount of dividends paid by a company.
Companies are required to make two provisional tax payments to the South African Revenue Services (SARS).

Financial Reporting for Companies

Financial statements are intended to provide information about a company's financial position, financial performance, and changes in financial position.
Companies produce different sets of financial statements aimed at different users.
Financial statements for internal use are similar to those of sole proprietorships and partnerships.
Financial statements for external users contain minimum required information as prescribed by the Companies Act.

Financial Statements

Statement of Comprehensive Income:
- Reflects all income and expenses of a company.
Statement of Changes in Equity:
- Reflects changes in a company's equity.
Statement of Financial Position:
- Reflects a company's financial position at a specific point in time.

Cash Flow Statement

Reflects all cash flows of a company in a standardised format.
Provides information about cash receipts and cash payments for a specific period.
Cash flows are classified into operating, investing, and financing activities.

Operating Activities

Cash flows from operating activities are derived from a company's main revenue-generating activities.
Include cash flows from transactions reflected in the Statement of Comprehensive Income.

Investing Activities

Provide details about specific expenditures made to generate future income and outflows.
Relate mainly to the purchase and sale of non-current assets.

Financing Activities

Provide information relating to cash flows to and from providers of capital.
Include cash flows from issuing shares, loans, bonds, and debentures.

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Description

Learn about the definition and characteristics of a company, including its legal status, incorporation, and limited liability of shareholders.