ACCT10002 Lecture Notes - Lecture 8: Private Placement, Write-Off, Cash Flow Statement
19 Jun 2018
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Introductory Financial Accounting
Lecture 8: Equities, Dividends, Share Capital and Changes to Equity Accounts
Measurement Concepts for Shareholders Equity
Equity- the residual interest in the assets of the entity after deducting all its liabilities.
The Components of Shareholders Equity
Made of a number of different accounts which can comprise:
- Contributed Equity (paid up or share capital)
- Retained Earnings (current period profits + previous periods retained earnings – dividends
distributed as profits to shareholders)
- Reserves (e.g. revaluation surplus, general reserve)
The Corporate Form of Organisation
Characteristics of a corporation:
- Separate legal existence
- Limited liability of shareholders
- Transferable ownership rights
- Continuous life
- Ability to acquire capital
- Elected board of directors
- Subject to government regulations
Forming a company:
- A company is formed by registration and bound by the Corporations Act
- Each company is allocated an ABN and an ACN
- A company may adopt a constitution — set of rules governing internal management
- If no specific constitution is adopted, a company is automatically subject to the replaceable
rules of the Corporations Act
Shareholder Rights
A company is owned by its shareholders, who want both dividends and capital gain in share price. These
shareholders hold either ordinary, preference or cumulative preference shares
Ordinary shares have 3 major ownership rights:
Right to vote
Right to share in company’s profit
Right to a residual claim if company is liquidated
Preference shares have priority over ordinary shares with respect to dividends and claims at liquidation
Share Issues
Company receives cash for shares. When issuing shares, a company will have to decide how many shares
will be issued and how they will be issued in regards to timing and at what price and payment plan.
Private placement involves issue of shares to certain private investors by invitation – eg. via a broker, a
fund manager, or superannuation fund
Public issue requires a prospectus inviting public application for shares
The prospectus:
Reports on the company’s financial position, performance and plans
Contains reports from independent parties
Factors influencing the issue price of new shares include:
The company’s anticipated profits
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The company’s expected dividend rate per share
The company’s current financial position
The current state of the economy
The current state of the securities market
Undersubscription:
A share offer is undersubscribed when the total number of applications received is less than the number of
shares the business is issuing. In such instances all application money is refunded and the issue is
abandoned
Oversubscription:
A share offer is oversubscribed when the total number of applications received exceeds the number of
shares the business is issuing. There are two ways to account for an oversubscription:
1. Refund excess money – first in or ballot allocation.
2. Offset excess application money against future instalments – pro rata allocation.
Note: a company can only issue the number of shares nominated in its prospectus
Equity and Earnings
At the end of the reporting period, all revenue and expense accounts are closed off to the temporary
account – the Income Summary Account (or the Profit and Loss Account or P&L Account). At this point, the
Income Summary Account reflects the Before Tax Profit or Loss.
Adjustments considered so far:
- Receivables adjustments (doubtful debts)
- Inventory adjustments (write-down)
- PPE adjustments (write-off)
- Liability adjustments (provision)
Closing the Profit and Loss to Retained Earnings
The Income Summary Account (P&L) balance now reflects the after-tax profit (or loss) which is then closed
and the balance is transferred to the Retained Earnings Account (an Equity account). The Retained Earnings
Account is a permanent equity account in the Balance Sheet.
Companies close their revenues and expenses to the Income summary account
Then they close the final profit from the Income summary account to the Retained earnings account
The Company Income Statement
Accounting Standard AASB 101, Presentation of Financial Statements, specifies the information that must
be shown in the income statement. Variations in the format of the statement are allowed provided that it
presents fairly the financial performance of the business.
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find more resources at oneclass.com
Document Summary
Lecture 8: equities, dividends, share capital and changes to equity accounts. Equity- the residual interest in the assets of the entity after deducting all its liabilities. Made of a number of different accounts which can comprise: Retained earnings (current period profits + previous periods retained earnings dividends distributed as profits to shareholders) A company is formed by registration and bound by the corporations act. Each company is allocated an abn and an acn. A company may adopt a constitution set of rules governing internal management. If no specific constitution is adopted, a company is automatically subject to the replaceable rules of the corporations act. A company is owned by its shareholders, who want both dividends and capital gain in share price. These shareholders hold either ordinary, preference or cumulative preference shares. Right to a residual claim if company is liquidated. Preference shares have priority over ordinary shares with respect to dividends and claims at liquidation.
