Nature and Regulation of Companies and Their Operations Essays

Nature and Regulation of Companies and Their Operations Essays Nature and Regulation of Companies and Their Operations Essay Nature and Regulation of Companies and Their Operations Essay Nature Regulation of Companies Company Operations Legal nature of company ? Separate legal identity, distinct from owners ? Companies act through agents’. eg. shareholders elect board of directors to act on their behalf Public Company (Ltd. ) ? Limited liability of owners Raises funds from public Types of companies Private Company (Pty. Ltd. ) Regulation of companies Corporations Law: Companies must keep proper accounting records; prepare yearly half-yearly FS; ensure FS comply with accting standards.Accounting Standards: Australian Accounting Standards Board (AASB) is responsible for issuing accounting standards which have backing of the Corporations Law. Australian Stock Exchange – listing rules require companies disclose certain info. s which are necessary to fully inform stock market. Australian Securities Investment Commission (ASIC): administers Corporations Law including compliance with Accounting Standards International Accting Standards Board (IASB): attempts to converge/harmonise acting standards throughout the world.Reasons for regulating financial reporting Reasons for preparing FS: Provides info. that is useful for making economic decisions to resource providers (eg. shareholders, lenders, employees), recipients of GS (eg. customers, taxpayers), oversight groups (eg. regulatory agencies, media, unions). Characteristics of useful accting info. : relevance (predictive, feedback, timely), faithful representation (verifiable, Gloria Ltd reliable, free from bias), comparability consistency, materiality.Relationship between FSs Revaluation of video library by $1500: DR Video Library Cr Revaluation surplus Revaluation of library is shown in other comprehensive income Gloria Ltd Statement of income and other comprehensive income For period ended 31 January 2012 Income Rental revenue 10600 Expenses (classified by function) Selling expenses -advertising 200 Administrative expenses -telephone 195 -electricity 185 -postage 165 -wages 5000 Financial expenses -interest Total expenses 5745 Profit before income tax 4855 Income tax expense (30%) (1457) Profit for the year 3398 Other comprehensive income Gain on revaluation of video library 1500 Total comprehensive income 4898 Gloria Ltd Statement of changes in equity For period ended 31 January 2012 Total comprehensive income for the year 4898 Share capital Balance at 1 January 2012 60000Balance at 31 January 2012 60000 Reserves General reserve Balance at 1 January 2012 0 Balance at 31 January 2012 0 Revaluation surplus Balance at 1 January 2012 0 Gain on revaluation video library 1500 Balance at 31 January 2012 1500 Retained earnings Balance at 1 January 20 12 0 Profit for period 3398 Dividend paid (800) Balance at 31 January 2012 2598 Balance changes in equity 68996 Separation of owner from manager Does not raise funds from public Managers acting as agents of owners /shareholders No separation of owner from manager existence of interested users Normally, smaller, closely held May be listed or unlisted no interested users E. g.Facebook’s IPO Not a reporting entity Is a reporting entity Keep records for business Req’ed to prepare financial reports Compliance with AASBs not normally necessary Financial reports prepared in accordance with External audit not necessary (usually) accounting stds Generally, less regulation Financial reports subject to audit Generally, more regulation Statement of financial position As at 31 January 2012 Current assets Cash 76655 Accounts receivable 0 Prepaid rent 14400 91055 Non-current assets Store fittings 8000 Video library 31500 Computer 4000 Total assets 134555 Current liabilities Unearned revenue Accounts payable Tax payable Non-current liabilities Loan Total liabilities Net assets Equity Share capital Reserves Retained earnings Revaluation surplus Total equity 9000 20000 1457 30457 40000 70457 64098 60000 2598 1500 64098An entity is affected by external (sales purchases, borrowings) and internal (use of supplies equipment) events which are only recorded if it affects the entity’s A, L or OE. Transactions involving capital contributions, revenues, exp. s, dividends affect OE as it dec. s their claim on entity. IASB’s The Framework: Asset: A resource controlled by the entity as a result of past transactions or events from which future economic benefits are expected to flow to the entity. Definition criterion: FEB, control of FEB, result of past event. Liability: Future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events. Definition criterion: prese nt obligation, sacrifice/settlement of EB in future, result of past event.Equity: The residual interest in the assets of the entity after deduction of its liabilities. No definition criterion. Main components: issued capital, RE, reserves Income: Inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities other than those relating to contributions from owners, that result in an increase in equity during the reporting period. Includes both revenue and gains. Arises as a result of changes in A L (BS approach). AASB101 Presentation of FS requires disclosure of Total comprehensive income’ ? represents change in equity’ during period resulting from non-owner related transactions other events.Expense: Consumptions or losses of future economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to owners, that result in a decrease in equity during the reporting period. Recognition criterion for A, L, OE, R, E: Probable that FEB associated with item will flow to/from entity + Iten has cost/other value that can be measured reliably. Contingent A L – additional recognition criteria: amount recognised should be best estimate of expenditure required to settle present obligation at reporting date. Such amounts are not recognised in FSs but are disclosed by way of notes. Measurement on A, L, OE, R, E Historical cost, current cost, replacement value, PV, fair value.Most liabilities are stated at face/nominal value except if settled 12months+, then can use PV. Classification of expenses is by function (eg. selling exp. , financial exp. ) or nature. Accounting Policies: principles, bases or rules adopted by company in preparing presenting financial reports. AASB 108 Accounting Policies, changes in Accounting estimates and error covers: setting, changing and disclosure of accounting policie s in FSs. When selecting accounting policies consider: ? Relevance – enables predictions/expectations about future performance, enables confirmation/refutation of past evaluations, enables assessment of accountability rendered by preparers of FSs ?Faithful representation – free from material error and can be depended upon by users to represent faithfully that which it purports to represent. Portrays economic substance over legal form. ? Accountability Accounting entries: ? Inc. in RE with profit: DR PL summary CR RE ? Loss on trading: DR RE CR PL summary ? Distribute dividend to shareholders: DR Dividend declared CR Cash DR Dividend declared CR dividend payable DR dividend payable CR Cash // Paid dividend: Dr Dividends Cr Cash ? Paying monthly wage: DR cash and CR wage exp. (NOT wage payable) ? Received $300 each from thirty customers to join the VIP Programme. The Programme allows them unlimited rentals for the next 12 months: DR Cash CR Unearned Revenue