At the annual general meeting of the company, an ordinary shareholder complained that too much profit had been

retained instead of being paid out in dividends. Explain how ordinary shareholders can benefit from retained profits. These profits will be reinvested in the business * in replacing or buying new machinery/other developments * and the shareholder should benefit from a stronger/more profitable company * in the future and thus receive dividends *. The share value/market price might rise* In most trial balances, closing stock is not included but is shown as an additional note. Explain why closing stock has been included in the trial balance given at the start of Question 4. Stock is an asset (1); the double entry has already been completed (1), credited in trading account (1), debited in stock account (1). Entered once in trading account (1), but entry yet to be shown (1) as an asset in the balance sheet (1). Ordinary shares Advantages - will raise required amount (1) permanent capital (1) no need to pay dividends if low or zero profits (1) dividends only paid on 200 000 shares (1) Disadvantages - dilution of power for existing shareholders (1) existing directors may not be new shareholders choice (1) could lead to takeover (1) Debentures Advantages - will raise the required amount no dilution of shareholders power (1) can be repaid in the future (1) can budget for interest (1) - 30 000 per annum (1) interest becomes less of a burden with passage of time inflation (0-2). Disadvantages - interest must be paid (1) if not paid danger of holders taking action (1) more risky than ordinary shares (1). increased borrowings (1) may lead to borrowing restrictions in the future (1) Explain how a company can make a loss but still have an increase in cash. Timing differences (1) profits are recorded in the profit and loss account when the transaction is made (1) but the cash may not be received for some time (1). Other payments (1) payments for fixed assets (1) result in cash leaving the business but do not reduce profit (1).

Other receipts (1) share issues (1) or loans received will increase cash (1) but are not shown in the profit and loss account (1). Non-cash items (1) provisions are made in the profit and loss account (1) that do not involve the movement of cash (1) e.g. depreciation (1). Explanation of how a company can make a loss and still increase cash balance: Non-cash items (1) - provisions for depreciation (1) or bad debts (1) will reduce the profit figure (1) but have no effect on cash (1) +(1) for example. Timing differences (1) - the company may have recorded purchases (1) but not paid for them yet (1) +(1) for example. Other receipts (1). The company may have issued shares (1) or taken out loans (1) during the year and these will increase the cash balance (1) but not affect the profit figure (1) + (1) for

Discuss the extent to which cash is more significant for business survival than profit. Cash is essential for short term survival (1). Without cash, a business may not be able to meet its liabilities (1) and therefore may lose profit (1) or even be forced into liquidation (1) by its creditors (1). Also the business may not be able to pay dividends (1) and hence lose the confidence of shareholders (1). Profit is needed for long term survival (1) to ensure that funds (1) are generated (1) to enable the business to invest (1) and to pay dividends to shareholders (1).

Explain the role of an auditor. An auditor is an independent accountant (1), appointed by the shareholders (1) to verify (1) the accounts prepared by the directors (1) and report to the shareholders (1). An auditor ensures that the accounts comply with the Companies Acts (1) and Accounting Standards (1) and that they show a true and fair views (1).

Evaluate the use of a rights issue as a means of raising finance. A rights issue means that existing shareholders (1) are given the right to buy (1) new shares (1) in the company. It is a means of raising long term finance (1) without increasing gearing (1) or changing control of the business (1). It is an effective way of raising finance, provided the shareholders are willing to take up their rights (1). Rights issues are often made at a discount (1) to encourage the shareholders to subscribe (1). However, this may mean that less cash is raised (1).

Rights issue have the benefits of any share issue (1), that there is no repayment (1) and dividends do not have to be paid (1).

Identify two advantages of investing in preference shares. Preference shares carry a fixed rate of dividend. Preference shareholders are entitled to receive a dividend before the ordinary shareholders. In the event of liquidation, the preference shareholders would receive repayment of capital before the ordinary shareholders. Identify two advantages of investing in ordinary shares. Ordinary shareholders have the potential to receive a higher dividend than the preference shareholders. Ordinary shares are more likely to yield a capital gain. Ordinary shareholders have voting rights. Advise Wullie whether it would be to his advantage to change his business into a private limited company. Advantages would include Limited liability only his investment is at risk his private assets would be safeguarded. (0-2) If he wishes to expand he may find that raising further capital is easier - sell more shares (0-2) Raise loan or overdraft often cheaper (0-2) Seen as less risky (0-2) Does not have to pay dividends may wish to retain profits (0-2) If there are other shareholders, he could discuss marginal decisions with them (0-2) Disadvantages would include Diluted ownership if other shareholders are involved - may lose control of his business (0-2) May receive a lower return - profits shared (0-2) More shareholders more time to reach decisions (0-2) Explain two reasons why the employees of a limited company would find the published accounts useful. Reason 1: To assess the financial stability of the company (1) which affects job security (1). Reason 2: To compare the wages paid with the profits earned (1) to assess whether they are being adequately rewarded for their efforts (1).