Financial Accounting WASSCE (PC 2ND), 2020

Section A: Theory of Financial Accounting

Question 4:

a) What is definition of ordinary shares

b) differences between private and public companies of activity ratio

c) characteristics of limited liability companies

Observation

Majority of the candidates that attempted this question on definition of ordinary shares and differences between private and public companies and characteristics of limited liability companies performed well.

Valuable marks were gained in this question but in contrast some candidates lost some marks by confusing differences between private and public companies with the characteristics of limited liability companies. In all, performance in this question was quite impressive.

(a)        Ordinary share:
- This is part of a company’s capital that entitles the holder to residue of
profit after payment of preference share dividends/prior interests;
OR

It is that part of a company’s capital which do not carry a fixed rate of dividend but will only attract dividend if there is sufficient profit.

194

(b) Differences between Private company and Public company

SN	Private Company	Public Company
	The name of the company ends with ‘Limited Company’ or LTD.	The name of the company ends with ‘Public Limited Company’ or PLC.
	It prohibits invitation to the public to acquire any of its shares or debentures.	It allows the public to subscribe for its shares or debentures .
	It prohibits any invitation to the public to deposit money for fixed periods or payable at call, whether bearing or not bearing interest.	It may invite the public to deposit money for fixed periods or payable at call, whether bearing or not bearing interest.
	It is not obliged to publish its accounts.	It is under statutory obligation to publish its accounts.
	Its shares cannot be traded on the floor of the stock exchange.	Its shares can be traded on the floor of the stock exchange.
	Its owners are usually actively involved in the management or running of the business.	Usually, the management of the business is vested in the board of directors who may not necessarily be members of the company.
	Membership is 2 to 50(fifty).	Membership is seven to infinity.

(c) Characteristics of a limited liability company

Separate Legal entity: A limited liability company is a corporate body having the status of a separate being. In other words the company can sue and be sued.
Perpetual existence: A limited liability company can continue in operation even without the original owners. The death of a shareholder or disposal of his shares does not end the business.
Limited liability: The liability of a member is limited to the value of any unpaid amount on the shares held in the company.
Preparation and presentation of accounts: It must prepare and present accounts to members at an annual general meeting.
Board of directors: The management of a company is vested in the board of directors who are appointed by shareholders.
Annual General Meetings: Companies are obliged to hold meetings at least once in a year.
Issue of shares: The main source of capital is from issue of shares;
Voting rights: Voting at meetings is based on the number of shares held by a member;
Sharing of profits: Residue of profits in a company is distributed to members based on percentage of shareholdings;
Certificate of Incorporation: A company comes into existence upon the issuance of a Certificate of Incorporation by the Registrar of companies;
Regulations/Memorandum of Association and Articles of Association: The business of a company is set out in a legal document called the Company’s Regulations.