Types of Shares

Characteristics
1) Ordinary Share Capital
 Most common type of share issued
 Dividends may vary – no guarantee of dividend payment and paid last – dependent
on level of profit
o If insufficient cash or profit, or both, then dividends do not have to be paid.
 Carries voting rights – each shares represents 1 vote at the annual general meeting
(AGM) – rate of dividend
o ↑ shares, ↑ control
 Dividend is paid AFTER preference share dividend
 LAST to be repaid their share of capital in a winding up (Pay creditors then preference
shares then ONLY ordinary shares)

2) Preference Share Capital (Irredeemable)

 Have a preferential rights to dividends over ordinary shareholders
o Receive dividend FIRST BEFORE ordinary share (PRIORITY)
o Lower risk
 FIXED Dividend – fixed % of the nominal value of their investment
 ↑ profits, the dividends will be lower than ordinary shareholder
 No voting rights at AGM – less control than ordinary shareholders
 Entitled to receive repayment of capital after creditors of the company have been paid,
and in priority to ordinary shareholders.

a. Redeemable Preference Shares

These issued shares can be brought back by the company at a future date.

SUBSTANCE OVER FORM

 A principle stating that information should show the substance of a transaction
rather than the legal form.
The legal form of the instrument is equity. In substance, the fixed level of
dividend out of the profits of a company is the interest, together with a fixed
amount on redemption.
In substance, these shares are like loan. By nature itself, it meet the definition of a
liability.
LIABILITY

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  Future sacrifices of economic benefits that the entity is presently obliged
arising from past transactions.
Hence, they are classified as a non-current liability on the SOFP.
Dr Bank (ASSET)
Cr Redeemable Preference Share (LIABILITY)
 The dividend is reported as FINANCE COSTS in the Income Statement (IAS
1 – Statement of Profit or Loss and Other Comprehensive Income).
NOT in SOCIE as dividends to redeemable preference shareholders are just
like paying interest to DEBT holders.
Hence it will be treated as a FINANCE COST in the Income Statement

b. Irredeemable Preference Shares

- Remain in EXISTANCE indefinitely; company will not buy them back in
the future.
- Classified as an equity on the SOFP, together with ordinary shares, reserves
and retained earnings
- Dividend is reported in the SOCIE

c. Cumulative preference shares

If a company fails to pay the preference dividend in any year (lack in funds or
profits), shareholders carry forward their right to the dividend to the next year, until
profits are large enough to pay the accumulating dividend rights can be paid.

d. Non-cumulative preference shares

IF company fails to pay the preference dividend in any years, then the dividend
arrears are NOT carried forward.

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What are dividends?
Dividend: The amount given to shareholders as their share of the profits of the company.
Many people invest in shares NOT for the dividend, BUT for capital growth.
Capital growth – arises when shares are sold by a shareholder for a value > than their original
purchase cost.

 Decided by the board of directors

INTERIM FINAL
DIVIDEND DIVIDEND

Dividends are both paid and/or Dividends paid and/or declared at

declared at some point during the the end of the financial year once
financial year before determining its profits are known.
full-year earnings

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Preference share:
Receive fixed rate of dividend
Total amount paid to preference shareholders CANNOT exceed the fixed dividend. Therefore,
receiving an interim dividend and final dividend does not matter as:

Interim + Final = Fixed Dividend

*Dividends to Redeemable Preference Shares are treated as FINANCE COST under Income
Statement.

Equity Dividends:
Equity dividends are dividends paid to the Equity shareholders.
Dividends are usually stated at AMOUNT PER SHARE: eg: $0.02 per share
Equity dividends ↓ the coy’s distributed profits. When a company pays out equity dividend, the
balance on the retained earnings reserve (revenue reserve) is reduced.
An ordinary shareholder can receive 2 dividends payments that are totally independent of each
other and for which there is NO MAXIMUM.

Calculate the dividend

1. A limited company has 100 000 ordinary shares of $1 each. A dividend is declared at 6
percent.
How much dividends will a shareholder receive if he or she owns 1 000 shares?
1 000*$1*6% = $60

2. A limited company has 100 000 ordinary shares of $1 each. A dividend is declared at
$0.08 per share.
How much dividends will a shareholder receive if he owns 2 000 shares?
2 000*$0.08 = $160

3. A limited company has raised $200 000 from issuing ordinary shares with nominal value
of $0.50 each. A dividend is declared at $0.02 per share.
No. of issued shares: $200 000/$0.50 = 400 000
Dividend = 400 000*$0.02 = $8 000

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 4. A limited company has 200 000 8 per cent preference shares of $1 each. A dividend is
declared.
A shareholder with 500 shares would receive a dividend of:
Dividend: $500*8% = $40

3) The issue of shares

Share issued will ↑ equity

Authorised share capital: Maximum number of shares that can be issued under limited
company’s constitution

Issued share capital: Amount of share capital that the company has actually issued to
shareholders, which CANNOT exceed the authorised amount.

Issued at par: A share issued at its nominal (face) value.

Share premium: Shares are issued at a higher price than their nominal (face) value.

ISSUE PRICE SHARE PREMIUM NOMINAL VALUE

Issue Price $1.80 Share Premium $0.80 Par Value $1.00

1) The amount received for the shares when they are first issued depends on the market
price of the shares.
The market price of a share can fluctuate daily, depending on the individual willingness
to pay.
2) When a company issues new issues, the issue price of the shares may be higher than the
par value of the shares.
3) Share Premium:
Created when the actual ISSUE PRICE of new shares EXCEEDS the NOMINAL
VALUE.
4) When new shares are issued, the nominal value is recorded separately from the extra
value gained from the issued shares which is added to a share premium account.
5) Share Premium is a non-distributable reserve (capital reserve account).

Example 1
100,000 shares of $1.00 each issued at $1.50
Share Capital = 100,000 units x $1.00 = $100,000
Share Premium = 100,000 units x $0.50

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Example 2
A limited company has authorized share capital of 200 000 ordinary shares of $1 each and 100
000 8% preference shares of $2 each.

The company decided to issue 100 000 ordinary shares at $1.30 and 50 000 8 percent preference
shares at $2.20. These shares are fully subscribed and paid.

Example 3
ABC Company issues 80 000 ordinary shares of $1 each. The issue price of the share is $2.50
per share. Prepare the journal entries and SOFP extract for the above.

The Reserves of a Limited Company

*Profits remain after any dividend has been paid on preference shares belongs to the ordinary
shareholders, and ordinary dividend will be paid out of that. All the reserves (including retained
profit) also belong to the ordinary shareholders.

During a wounding up, the remainder assets after payments to creditors (including debenture
holders) and the preference shareholders, belong to the ordinary shareholders. Proceeds from the
sale of assets will too be paid to them.

Isaac Limited
Statement of Financial Position (Extract) at 30 June 2014

Equity
Issued Ordinary Share Capital XX
5% Preference Share Capital XX
Share Premium XX
General Reserve XX
Revaluation Reserve Reserve XX
Retained Earnings XX XX
Total Equity Capital XX

Reserve

Revenue Capital
Reserve Reserve
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Revenue Reserve
 Arises from the transfer of profit made by company attributed to the equity holders
 Transfer is shown in the SOCIE
 Created for a specific purposes:
o Replacement of non-current assets
o Planned expansion of business
o Major repair work
OR
 A general reserve may be maintained with NO specific use, but retains profits or generally
to strengthen the financial position of the company.
 Accumulated retained profits of the company, revenue reserves can be paid out as dividends,
if required.

 General reserve
o ↓ the amt of profit available to pay dividends
 Retained earnings

Capital Reserve
 Arises from non-trading activities and represents unrealised gains
 NOT available for distribution to the shareholders in the form of dividends
 Are part of the capital structure of a company, cannot be transferred to the income statement

 Share Premium Account

 Revaluation Reserve

Share Premium
Issued at premium: When shares are issued at a price above nominal value
The Companies Act permits the Share Premium account to be used for the followings:
a) To issue bonus shares to shareholders
b) To pay premiums on the redemption of debentures
c) To write off any expenses incurred in the formation of the company
d) To write off any expenses incurred (commission payable) in the issue of shares or debentures

Revaluation Reserve
a) A company may revalue its non-current assets
b) Any gain on the revaluation must be credited to a Revaluation Reserve
o It is an unrealised gain and may not be credited to the Income Statement

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Example 1
1801S Ltd’s Statement of Financial Position is as follows:
$
Buildings 60 000
Provision for depreciation 18 000

The buildings have been professionally revalued at $100 000 and the directors have decided to
revalue the buildings in the books.

REQUIRED
Prepare the journal entry.

Example 2
Premises are shown in the Statement of Financial Position of a company as follows:

$
Premises 60 000
Net Book Value 42 000

It has been decided to revalue the premises in the books of the company at $80 000.

REQUIRED
Prepare the journal entry.

Example 3 (9706/21/O/N/13)
Cassandra Limited’s statement of financial position at 31 March 2013 showed the following:
$
Property 200 000
Accumulated depreciation 14 000

The value of the property is split equally between land and buildings. They had been owned for 7
years. On 1 April 2013 its property was revalued at $315 000.

REQUIRED
a) Prepare the journal entry to record this revaluation. A narrative is not required.
b) Name the section in Cassandra Limited’s financial statements where the surplus will
appear.

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 c) Cassandra Limited will continue to use the same rate of straight line depreciation for its
buildings. Calculate the depreciation charge for the year on buildings after the
revaluation.

Example 4 (9706/21/O/N/16)
Explain why the company should not use its revaluation reserve to pay dividends to
shareholders.

Capital of a Company

Debt Equity
Capital Capital

Preference Share Preference Share

Capital Capital
(Redeemable) (Irredeemable)

Ordinary Share
Loan/ Debentures
Capital

Debt Capital
o Bank Loans
o Debentures (Loan Notes/ Bonds)
o Treated as non-current liability in the SOFP

Debentures
o Financial instruments (certificates stipulating the amount of interest payable) ISSUED by
companies that enable them to borrow from investors

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 o Long-term loans, usually redeemable (repayable) at a specific date and carrying a fixed
rate of interest
o Repayment is spread over a period
o Interest on the face value of the debenture is paid out of profits and before dividends on
any type of share.
o Interest has to be paid out regardless of the level of profits or availability of cash

Debentures

Simple or
Mortgage
Naked
Debentures
Debntures
Mortgage Debentures
o Secured against the value of assets
o During defaults on an interest payment, the assets can be taken as payment. This gives
advantage over creditors of the company.

Simple or Naked Debentures

o No prior rights to control the assets under any circumstances.

Example 1
A limited company issued $400 000 7 per cent debentures 2018 – 2020.

REQUIRED
a) Calculate the interest.
b) Record the journal entry.
c) Explain the representation of 2018 – 2020.

Difference between shares and debentures

Shares
Shareholders are members of the company,
represents ownership of company
Share capital is shown in the SOFP under
Equity
Debentures
Debentures holders are NOT members of the
company
Debentures are shown in the SOFP as Non-
current liabilities unless they’re due for

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Shareholders are the last people to be repaid
when a company is wound up.
Dividends may only be paid if distributed
profits are available
Dividends are an appropriation of profit.
Shareholders (ordinary shareholder) enjoy
voting rights
redemption within one year, when they must
be shown as current liabilities.
Debenture holders are entitled to be repaid
before the shareholders when a company is
wound up.
Interest on debentures must be paid even if the
company has not generated a profit.
Debenture interest is an expense which is
shown under Finance Costs in the Income
Statement.
Debenture holders do NOT normally enjoy
voting rights

Difference between Liabilities, Provisions and Reserve

Liabilities Provisions Reserve

Future sacrifices of economic
benefits that the entity is
presently obliged arising from
past transactions.
Amounts owing may be
determined with substantial
accuracy
Eg: Trade Payables
Created to provide for Any amounts that are set aside
liabilities that are known to for the future use and NOT
exist but the amount of included in the definition of
provision is NOT readily provisions and liability.
determined.
Eg: Provision for doubtful Eg: Revaluing non-current
debts assets

Further issuance of shares

 Choose to ↑ issued share capital by creating
 Bonus issue, OR
 Right issue
to existing shareholders.

1. Bonus Issue
 Use their reserve to issue FULLY PAID-UP bonus shares to EXISTING ordinary
shareholders in the ratio of the existing shareholdings.
o If a bonus issue for 1 for 4 was made, shareholders will receive 1 new share
FREE OF CHARGE for every 4 already held.
 Shareholders own the reserve, ∴ NO PAYMENT REQUIRED

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 A way of releasing reserves to the shareholders without the impact on cash flow (no inflow
nor outflow)
 Either capital reserve or revenue reserve can be used to issue, however, coy will use capital
reserves 1st.
 Effect: ↑ amount of shares, ↓ reserves (normally share premium, if insufficient, the remaining
reduction is made by reducing revenue reserves).

The journal entry to account for a bonus issue is as follows: -

DR Reserves
CR Ordinary Share Capital

Equity will NOT change, NO cash involved, ONLY

the number of shares will ↑.

Example 1
TFN Company has 12,000,000 ordinary shares of $0.50 in issue, and a share premium of
$7,000,000.
It decides to make a 1 for 2 bonus issue.
What are the effects of the bonus issue?

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Example 2
1801 Plc statement of financial position at 30 June 2017 is:

$ 000
Non-current assets 1 550
Net current assets 250
1 800

Equity
Ordinary shares of $1 each 1 000
Share Premium 400
General Reserve 250
Retained earnings 150
1 800

Company has announced a bonus issue of 1 for 2. With the data above, prepare the journal entry
and redraft 1801 Plc SOFP.

Example 3
FYI statement of financial position at 30 June 2017 is:

$ 000
Non-current assets 12
Net current assets 5
17

Equity
Ordinary shares of $1 each 10
Share Premium 5
Retained earnings 2
17

Company has announced a bonus issue of 1 for 2. With the data above, prepare the journal entry
and redraft FYI SOFP.

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Example 4
The following is the summarized SOFP of Mandy Ltd.
$ 000
Non-current assets 1 400
Net current assets 350
1 750

Equity
Ordinary shares of $1 each 800
Share Premium 200
Revaluation Reserve 600
General Reserve 100
Retained earnings 50
1 750

The directors have decided to make a bonus issue of three new shares for every four already
held. They wish to leave the reserves in the most flexible form.

Redraft the SOFP.

Advantages and Disadvantages

Advantages Disadvantages
 It enables the company to liquidate capital  A bonus issue serves NO PRACTICE
reserves that cannot be used to pay a PURPOSE.
dividend. o No cash will be raised from the
issue.
 It is less expensive than making a rights
issue or an ordinary issue of shares.  If bonus issues > share premium account,
retained earnings will be ↓ by the bonus
 It enables the company to match long-term issue. This would convert profits that are
assets with long term capital. distributable as profits into long-tern share
capital that CANNOT BE
 If the company has not made a profit in the DISTRIBUTED.
current year, it enables it to reward
shareholders without paying a dividend.

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Right issue
 Issuing more shares, ↑ cash, ↑ issued share capital.
 To raise further the finance for the company
 EXISTING shareholders are given RIGHTS to purchase additional shares at a price
slightly ↓ the current market price, in proportion to the EXISTING shareholdings.
o It will be CHEAPER for the existing shareholders to buy right issues instead of
buying the same shares in the open market for a higher price.
 If the existing shareholders DO NOT want to take up and pay for the shares offered, they
have the option to sell the rights on the stock market.
 Rights issue gives existing shareholders the RIGHT to purchase enough shares in order to
maintain their original shareholding percentage. This is to avoid dilution.

Advantages and Disadvantages

Advantages
 A rights issue is a method of raising new 
capital in the form of cash. Companies
might need new capital to expand their
business.
Disadvantages
No guarantee of a positive response
o A right issue might be unsuccessful
when the stock market is depressed
and share prices are falling.

 The value of each share will be diluted as a

 Existing shareholders have the opportunity result of the increased number of shares
to buy a proportion of new shares, so that issued.
they retain the same proportion of the total
shares in the company.
 Existing shareholders’ holdings may be
 Price of new share is BELOW current diluted if they fail to exercise their rights
market pics and sell it to other investors.

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Example 1
Andy Company has 4 million shares of $1 each in issue. These shares are traded on the stock
market at a current market price of $4 each. The company now decides to make a 1 for 4 rights
issue at $3.20 per share.

Assuming all shareholders take up the rights, prepare the journal entry.

Example 2
A summary of Ashley Ltd’s SOFP is as follows: -
$ 000
Non-current assets 780
Current assets 170
Total Assets 950

Equity
Ordinary shares of $0.25 each 200
Share Premium 70
Retained earnings 330
600

Non-current liabilities 200

Current liabilities 150
Total equity and liabilities 950

The company now makes a 2 for 5 rights issue, and the new shares are issued at a price of $2.25
each.

REQUIRED

Prepare a summary SOFP of the company immediately after the rights issue. Ignore the costs of
the share issue.

Example 3

A summary of Ashley Ltd’s SOFP is as follows: -

$ 000
Non-current assets 1 100
Current assets 100
Total Assets 1 200

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Equity
Ordinary shares of $1 each 600
General Reserves 350
Retained earnings 250
1 200

The company now makes a 1 for 3 rights issue, and the new shares are issued at a price of $1.25
each (current market price is $1.30).

REQUIRED

Prepare a summary SOFP of the company immediately after the rights issue. Ignore the costs of
the share issue.

Bonus issue Rights issue

 Shareholders DO NOT pay for shares  Subscribers pay for shares

 The net assets remain unchanged.  The company’s net assets are increased by
cash received.

 All the ordinary shareholders will receive  Shareholders do not have to exercise their
their bonus shares rights to subscribe for the new shares

 Shareholders may sell their bonus shares if  Shareholders may sell their rights if they do
they do not wish to keep them. not wish to exercise them

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Shares Payable in full on application
1. Shares issued at par

Eg: 1,000,000 ordinary shares with a nominal value of $0.10 each are to be issued.
Applications, together with the necessary money are received for exactly 1,000,000 shares. The
shares are then allotted to the applicants.

1) Offer by the Applicants

Bank account
$ $
Application of shares (1) 100,000

Application of shares account

$ $
Bank (1) 100,000

However, applicants DO NOT always become shareholders.

Share applicants account: An intermediary account pending allotments being made.

a. Application: The applicant must make an offer for the shares being issued,
accompanied by the necessary money.
b. Application are vetted.
c. The allotments of shares are made by the company.
- Offer are accepted by the company and the applicants become shareholders.

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 2) Acceptance by the company

Bank account
$ $
Application of shares (1) 100,000

Application of shares account

$ $
Ordinary Share Capital (2) 100,000 Bank (1) 100,000

Ordinary Share Capital account

$ $
Application of shares (2) 100,000

 NO entry must be made in the same capital account until the acceptance by the company.
1) Until this point, the share capital will only exist.

Example 1
Eg: 100,000 ordinary shares with a nominal value of $0.20 each are to be issued.
Applications, together with the necessary money are received for exactly 100,000 shares. The
shares are then allotted to the applicants.

2. Shares issued at a premium

1,000,000 ordinary shares with a nominal value of $0.10 each are to be issued for $0.25 each.
Applications and the money are received for exactly 1 million shares.

Bank account
$ $
Application of shares (1) 250,000

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 Application of shares account
$ $
Ordinary Share Capital (2) 100,000 Bank (1) 250,000
Share Premium (3) 150,000
250,000 250,000

Share Premium account

$ $
Application of shares (3) 150,000

Ordinary Share Capital account

$ $
Application of shares (2) 100,000

*(2) Share capital is shown at nominal value, NOT total issued value.
∴ $150,000 share premium must be credited to a share premium account.

Example 2
100,000 ordinary shares with a nominal value of $0.20 each are to be issued for $0.35 each.
Applications and the money are received for exactly 100,000 shares.

3. Oversubscription and undersubscription for shares

2) A company invites investors to apply for its shares, it is rare if
applications for shares = exact no. of shares to be issued

3) Oversubscribed: Shares applied > shares available for issue

4) Undersubscribed: Shares applied < shares available for issue

 Undersubscribed
1) For a new company,
Applications < minimum necessary shares for operation, application monies are
returned to the senders.

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 2) For an established company,
The statement above DOES NOT apply.
 Eg: 1 million shares of $0.10 each are available to be issued, but only 700,000
shares are applied for, then only 700,000 shares will be issued. NO ENTRIES
being needed for the 300,000 shares not applied for, as they DO NOT
represent a transaction.

 Oversubscribed
1) Rationing is applied so that the issue is restricted to the shares available.
2) The process of selecting which applicants will get how many shares depends on the
policy of the company. ↓ no. of shares to be issued = no. of shares available
 Eg: Large shareholders → ↓ administrative costs
 Conversely, directors may prefer more shareholders will small holdings, ↓ amt
of voting power in one individual’s hands.
 Eg of processes:
 Scaling down applications
 Drawing lots
3) Excess application monies received will be refunded by the company.

Example 1

1,000,000 ordinary shares of $0.10 nominal value each are issued at par payable in full.
However, 1,550,000 shares are applied for. Prepare the necessary ledger account.

Bank account
$ $
Application of shares 155,000 Application of shares (refunds) 55,000

Application of shares account

$ $
Ordinary Share Capital 100,000 Bank 155,000
Bank 55,000
155,000 155,000

Ordinary Share Capital

$ $
Application of shares 100,000

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Example 2
100,000 ordinary shares of $0.25 nominal value each are issued at par payable in full. However,
120,000 shares are applied for. Prepare the necessary ledger account.

(Sangster, A 2016)

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Simple Statement of Cash Flow
Importance of Cash Flow

 Report on company’s cash resources

 Businesses must have a sufficient cash level, otherwise they would NOT survive
 A business can make a LOSS but still be able to sustain the business if there’s sufficient
cash or access to liquidity (cash, assets that can be quickly turned into $ and new
sources of borrowings).
 A business that is PROFITABLE cannot survive if it CANNOT pay its obligations
when they fall due, because it DOES NOT HAVE enough cash or access to other
sources of liquidity.

PURPOSE
 Summarises the resources from which the business has
o Obtained cash (cash inflows)
o The usage of cash (cash outflows)
o ↑ or ↓ in the amount of cash between beginning and at the end of period

 Show what the cash flows of the entity have been

 Make assessments of what cash flows of the entity might be in the future.

Differences between cash flow and profit

PROFIT ≠ CASH FLOW

Items in Income Statement that DO NOT Items DO NOT appear in the Income
represent a cash flow. Statement
 Depreciation expenses  Purchase of new non-current assets
 Gain or loss on the disposal of non-current  Cash flow from the sale of non-current
assets assets
o Income Statement ONLY includes
the gain/loss on the disposal of
noncurrent assets, but ≠ the cash
proceeds from the sale

 Cash flows relating to financial

transactions, such as OBTAINING cash
by issuing shares or obtaining loans, the
repayment of loans, payment of dividends
to ordinary shareholders

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 Information that DO NOT appear in the Income Statement should be disclosed in the
Statement of Cash Flow. Acquisition of NCA can provide useful information about the
company’s investment in key resources.

Statement of
Cash Flow

Operating Investing Financing

Activities Activities Activities

Cash from OPERATING ACTIVITIES A

Cash used in (obtained from) INVESTING ACTIVITIES B
Cash paid or received in FINANCING ACTIVITIES C
= ↑ or ↓ in cash in the period A+B+C

A, B or C could be
POSITIVE or NEGATIVE
cash flows

1) Operating activities: Profit (normal trading)

2) Investing activities: ∆ in NCA
3) Financing activities: Long term finance of the company

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Source of Finance

Internal sources of finance External sources of finance

Short-term financing
Long-term financing
Cash management Bank overdrafts
Credit Control Short-term bank loans
Inventory management Debt Factoring
Hire Purchase
Trade & Other payables
Retained earnings Share Capital
Debt Capital – Debentures
Convertible Loan stock
Long-term bank loans
Leasing
Sales and Leaseback

1. Cash Management
 Companies must have sufficient cash to carry on their daily activities
 Sufficient is meant by optimum level of cash. Having too little leads to liquidity
issues, cannot meet its short-term obligations.

 Cash budgets are used by managers to estimate the cash requirements of the
company.

2. Credit Control
 Management of trade receivables.
 Facilitate smooth cash inflow into the business
 The money received can be used to pay suppliers and fund operational expenses
 Sound management of receivables includes conducting business with trustworthy
customers and efficient collection of debt
 ↓ irrecoverable debts, ↓ risk of payments delay (lengthen collection period), ↓
administrative costs

3. Inventory Management
 Holding of inventory is necessary to ensure demands for finished products are met on
time.
 Prevent shortage of raw materials or components (JUST IN TIME JIT System), ↓
inventory costs and risk of stock obsolescence.

4. Bank Overdrafts
 Bank agrees to business borrowing up to an agreed limit as and when required. It is
flexible but expensive.
 ↑ interest charges and in addition the risk to the business is that if the bank becomes
concerned about the stability of one of its customers, it can ‘call in’ the overdraft and
force the company to pay it back. This will lead to business failure.

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5. Debt Factoring
 When business sells goods on credit, it creates trade receivables.
 The longer the time allowed to pay up, the more finance the business has to find to
carry on trading.

1. The company sells goods on

credit to the customer payable
in 30 days.
Company Customer
2. The company sells
the invoice, or
3. The factor pays receivables to the
factor at a discount 4. The customer
the company pays the factor
remaining after 30 days
balance less an 3rd party Financial
administration Company
fee.
Factor

6. Hire purchase

 Purchase non-current assets using a hire purchase agreement. This means that the cost of
the asset is spread over several time periods.
 Purchaser will show the asset on their SOFP (substance over form). The amount still
outstanding on the agreement will be shown as a payable.

7. Trade & Other Payables

 Trade and other payables provide short-term finance.
 However, this form of financing must be used with caution. If payables feel that their
credit terms are being abused, they may revert to requiring their supplies of goods and
services being purchased on a cash basis only.

8. Share Capital, Loan Capital

9. Convertible Loan Stock

 A form of debenture that pays fixed rate of interest to the holders (Investors), it is
generally lower than normal debentures. Additionally, the holders (investors) have the
right to exchange the convertible loan stock into shares at some future date.

10. Leasing
Short-term lease: operating lease

Compiled by: Cheryl. TYX

For Internal Use ONLY
  A business may lease non-current assets rather than purchase them. Once again, this
action will conserve cash in the short term. Rental charges will be shown in the Income
Statement as an expense.

Long-term lease: finance lease:

 Leasing the asset for a long period that is covers substantially the asset’s useful life. A
finance lease obligation (liability) will be recognised and at the same time the asset is
recognised (Substance Over Form).

11. Sale and leaseback

 This involves a business selling non-current assets to a leasing company and then leasing
them for continued use within the business. A cash sum is released immediately and
rental payments are made for future use of the assets.

Compiled by: Cheryl. TYX

For Internal Use ONLY