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Financial Statement Analysis

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Financial Statement Analysis-FIN621
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Lesson-27
TYPES OF BUSINESS ORGANIZATIONS
(Continued)
Authorized Share Capital
The maximum amount with which a company gets registration/incorporation is called authorized share
capital of that company.
This capital can be increased with the prior approval of security and exchange commission. This capital
is further divided in to smaller denominations called shares. Each share usually has a face value equal to
Rs. 10. According to Companies Ordinance, this face value can be increased but can not be decreased.
The value of share written on its face is called face value or par value or nominal value
Issued Share Capital
When a company issues its shares to general public at large, the amount raised by the company with
such an issue is called issued share capital. This is also called Paid up Share Capital.( total amount
received by the company). Accounting entry is recorded for issued share capital; no such entry is
recorded for authorized share capital.
Preliminary Expenses
All expenses incurred up to the stage of incorporation of the company are called Preliminary Expenses.
All these expenses are incurred by subscribers of the company.
The maximum amount with which a company gets registration/incorporation is called authorized share
capital of that company. This capital can be increased with the prior approval of security and exchange
commission. This capital is further divided in to smaller denominations called shares. Each share
usually has a face value equal to Rs. 10. According to Companies Ordinance, this face value can be
increased but can not be decreased. The value of share written on its face is called face value.
Shares are issued for cash as well as for any asset. For example, if any member of the company sell
his/her land to the company. In return, company issue him/her fully paid shares instead of paying cash.
Those shares are also part of paid up capital because company has received the benefit of that amount.
Share Certificate
Share Certificate is the evidence of ownership of the number of shares held by a member of the
company. When a company issue more than one share to its member, it does not issue that number of
shares to him/her. Instead, it issues a certificate under the stamp of the company that a particular number
of shares are issued to members of the company.
Shares Issued At Premium
When a company has a good reputation and earns huge profits, the demand of its shares increases in the
market. In that case, the company is allowed by the Companies Ordinance 1984, to issue shares at a
higher price than their face value. Such an issue is called Shares Issued at Premium. The amount
received in excess of the face value of the shares is transferred to an account called "Share Premium
Account". This account is used to:
·  Write off Preliminary Expenses of the company.
·  Write off the balance amount, in issuing shares on discount.
·  Issue fully paid Bonus Shares.
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Financial Statement Analysis-FIN621
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Shares Issued On Discount
When a company is not making huge profits, rather it is sustaining loss, the demand of its shares
decreases in the market. If the company needs extra funds, then it is allowed by the Companies
Ordinance 1984, to issue shares at lesser price than their face value. Such an issue is called Shares
Issued on discount.
The difference of face value and the amount received is met by share premium account, if available. If
there is no share premium account available, this difference is shown in the profit and loss account of
that period, in which shares are issued as loss on issue of shares at discount.
Capital stock: This signifies ownership of a corporation in the form of shares issued or sold for cash
and sometimes in exchange of assets like land, buildings etc., and services (e.g. legal), using market
value of shares issued in exchange. It includes common and preferred stock. When only one type of
stock is issued, the words "common stock" is used. It is the amount invested by stockholders i.e. paid-
in-capital. It is also called "Outstanding Shares" i.e. shares in the hands of stockholders.
Stockholders' equity
Rs.
Cumulative 8% preferred stock, convertible
Rs.100 par value callable or redeemable
at Rs.110, authorized 20,000 shares;
Issued 10,000 shares.
1,000,000
Common stock Rs.10
Par/stated value, authorized 100,000 shares,
Issued and outstanding 50,000 shares.
500,000
Paid-in-capital
1,500,000
Plus additional paid-in-capital+ donated
Capital/assets at market value + Retained
Earning (or minus accumulated losses).
Retained earning transferred to B/Sheet= Opening balance + Net Profit for the year ­ Dividends.
Additional paid-in-capital: shows excess amount received, when stock is sold for more
than par value. Underwriters, (banks, investment companies etc) make profit by selling share at higher
prices. Retained earnings is an element of stockholders equity, does not indicate the form in which these
resources are currently held. These may have been invested in land, building, equipment or any other
assets, or might have been used in liquidating debts.
Balance Sheet as on June 30
Assets
Rs. _____
Current assets.
1,000,000
Fixed assets.
1,692,000
Total assets.
2,692,000
Liabilities & Stockholders' equity
Liabilities
Current.
112,000
12% long-term Notes payable
200,000
Outside liabilities.
312,000
Paid-in-capital (from previous slide)
1,500,000
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Financial Statement Analysis-FIN621
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Additional Paid-in-Capital, Common stock.
750,000
Retained earnings
130,000
Total Stockholders' equity.
2,380,000
Total Liabilities & Stockholder equity.
2,692,000
Dividend
Profit distributed to the share holders for their investment in the company is called Dividend. Dividend
is approved by the share holders in the annual general meeting at the recommendation of the directors.
Dividend is paid out of profits. If, in any year, company could not make any profit. No dividend will be
paid to share holders. Dividend is paid to registered share holders of the company. Registered share
holders are those members of the company, who are enlisted in the register of share holders of the
company.
Subscribers / Sponsors Of The Company
Subscribers / Sponsors are the persons who sign articles and memorandum of the company and
contribute in the initial share capital of the company.
Issuance Of Further Capital
Where a company wants to issue further capital (called raising the capital), shares are first offered to
current shareholders. The issuance of further capital to Present Shareholders is called Right Issue. This
issue is in proportion to current shares held by the shareholders. The shareholders can accept or reject
the offer. If shareholders refuse to accept these shares then these are offered to other people.
Journal Entries
·
Shares issued against cash
Debit:
Cash / Bank Account
Credit:
Share Capital Account
·
Shares issued against transfer of asset:
Debit:
Asset Account
Credit:
Share Capital Account
This is called issuance of asset in kind.
Bonus Shares
This is another way of distributing dividend. When a company decides, not to give cash to the share
holders as dividend, it issued shares called bonus shares, to the share holders for which it receives no
cash. These are fully paid shares.
Financial Statements Of Limited Companies
In Pakistan, Financial Statements of limited companies are prepared in accordance with:
·  International accounting standards adopted in Pakistan.
·  Companies Ordinance 1984.
In case of conflict the requirements of Companies Ordinance would prevail over Accounting Standards.
Components Of Financial Statements
Components of companies' financial statements are as follows:
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·
Balance Sheet
·
Profit and Loss Account
·
Cash Flow Statement
·
Statement of Changes in Equity
·
Notes to the Accounts
·
Comparative figures of Previous Period
Equity
Equity is the total of capital, reserves and undistributed profit. That means the amount contributed by
share holders plus accumulated profits of the company. Equity, therefore, represents the total of
shareholders fund in the company.
Statement Of Changes In Equity
The statement of changes in equity shows the movement in the shareholders equity (capital and
reserves) during the year. We can say that it replaces profit and loss appropriation account of
partnership business.
FORMAT OF STATEMENT OF CHANGES IN EQUITY
Name of the Company
Statement of Changes in Equity
For Year Ended June 30, 2002
Share
Share
Reserves
Profit  & Total
Capital
Premium
Loss A/c
Account
Balance On Jun 30, 2000
X
X
X
X
X
Movements During the Year
X
X
Balance On Jun 30, 2001
X
X
X
X
X
Movements During the Year
X
X
Balance On June 30, 2002
X
X
X
X
X
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