Questions and Answers
What is the primary objective of forming a company?
What is the document called that incorporates a company?
What is the term for the first issue of shares in a public company?
What is the advantage of forming a company?
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What is the main difference between for-profit and non-profit companies?
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Who are the first shareholders of a company?
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What is the organization that a company must file its Notice of Incorporation with?
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What is the term for the units into which a company divides its capital?
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What is the term for the maximum number of shares a company is authorised to issue?
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What type of shares holders have preferential rights to dividends and in the event of liquidation?
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What is a debenture?
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From which profit can dividends be declared?
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What is the purpose of provisional tax payments?
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What is the rate of Dividends Tax?
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What is the purpose of financial statements?
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When are financial statements presented?
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What is reflected in the statement of changes in equity?
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What happens when the actual tax liability for the year exceeds the estimated amount?
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What is the primary purpose of financial statements prepared for internal use?
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What is the role of the International Accounting Standards Board (IASB)?
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What is the main purpose of a cash flow statement?
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What is the basis of the statement of comprehensive income?
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Why was the cash flow statement developed?
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What type of financial statements must comply with IFRS?
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What is the primary benefit of IFRS?
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What is the purpose of the statement of financial position?
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What is the purpose of the statement of changes in equity?
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Why is the accrual basis used in the statement of comprehensive income?
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What is the primary purpose of a cash flow statement?
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What is the difference between the direct and indirect methods of presenting a cash flow statement?
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What type of adjustment is made to profit before interest and tax in the indirect method?
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What is an example of a cash flow from investing activities?
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What does an increase in current assets indicate in the cash flow statement?
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What is the purpose of the financing activities section of the cash flow statement?
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Why do investors and managers need to understand a company's cash flows?
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What is an example of a non-cash flow adjustment made in the indirect method?
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What is the role of the cash flow statement in evaluating a company's performance?
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What is an example of a cash flow from financing activities?
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Why are investing activities separated from operating activities in the cash flow statement?
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How is the use of cash indicated in the cash flow statement?
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Which of the following is not a non-current asset?
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What is the carrying value of land and building as at 31 December 20.14?
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What is the accumulated depreciation on the equipment sold?
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What is the profit for the year of Schion Ltd?
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What is the balance of retained earnings as at 31 December 20.14?
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What is the total of non-current liabilities as at 31 December 20.14?
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What is the total of current liabilities as at 31 December 20.14?
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What is the total of equity and liabilities as at 31 December 20.14?
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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).
Transactions Related to Companies
Share Capital
- 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.