Financial Statements of a Company — full notes
Paper No. 1: Financial Accounting · Financial Statements of a Company
Financial Statements of a Company
1. Ordinary vs preference shares
Ordinary shares carry voting rights; dividends aren't fixed, paid only if declared, and only after preference dividends are settled. Preference shares usually carry no voting rights but a fixed dividend rate, paid first.
2. Issuing shares — par value and premium
Shares have a par value (nominal value) but can be issued above it if investors are willing to pay more. The excess is share premium — not profit, not distributable as an ordinary dividend, a separate reserve.
Example: 500,000 ordinary shares of KES 10 par value issued at KES 12 each.
- Ordinary share capital: 500,000 x 10 = KES 5,000,000
- Share premium: 500,000 x (12 - 10) = KES 1,000,000
- Total cash raised: 500,000 x 12 = KES 6,000,000
3. Types of reserves
- Share premium — from issuing shares above par.
- Revaluation reserve — a non-current asset revalued upward; the gain isn't profit until sold, so it sits in equity, not the income statement.
- General reserve — profit directors set aside rather than distribute.
- Retained profits — accumulated profit not yet distributed; grows or shrinks with the year's trading result.
4. Tax — presentation only
Not computed for this syllabus, only located: in the income statement, Profit before tax less tax equals Profit after tax; in the Statement of Financial Position, unpaid tax is a current liability.
5. Worked example — Amani Traders Ltd
Continuing from section 2's share issue. Profit before tax KES 800,000. Tax KES 200,000 (given). Dividends declared KES 150,000. Opening retained earnings KES 300,000. Existing general reserve KES 100,000.
Income statement (extract):
| KES | |
|---|---|
| Profit before tax | 800,000 |
| Less tax | (200,000) |
| Profit after tax | 600,000 |
Movement in retained earnings:
| KES | |
|---|---|
| Profit after tax | 600,000 |
| Less dividends declared | (150,000) |
| Retained profit for the year | 450,000 |
| Add opening retained earnings | 300,000 |
| Closing retained earnings | 750,000 |
Statement of Financial Position (equity section):
| KES | |
|---|---|
| Ordinary share capital | 5,000,000 |
| Share premium | 1,000,000 |
| General reserve | 100,000 |
| Retained earnings | 750,000 |
| Total equity | 6,850,000 |
Tax payable of KES 200,000 sits under current liabilities, not here — it isn't equity, it's money owed.
Full balancing check: a KES 400,000 long-term loan, KES 180,000 trade payables, and the KES 200,000 tax payable give total liabilities of KES 780,000. Total equity + liabilities = 6,850,000 + 780,000 = KES 7,630,000, matching total assets.
6. A complete set of published financial statements (describe only)
Income statement, Statement of Financial Position, Statement of Changes in Equity, Statement of Cash Flows, and notes to the accounts. This topic covers preparing the first two.