Financial Statements
Limited Companies
Limited company questions test your ability to prepare an income statement with corporation tax, a statement of changes in equity, and a statement of financial position — including correctly classifying share capital, retained earnings, and long-term liabilities.
Dividends paid reduce retained earnings — they are not an expense in the income statement. Debenture interest is an expense (goes in the income statement); dividends are an appropriation (goes in equity). Common mistake: confusing ordinary and preference dividends, and forgetting that proposed dividends remain a current liability until paid.
Key Concepts to Revise
Income Statement
Deduct debenture interest and corporation tax as expenses to arrive at profit after tax. Dividends come after — they are not expenses.
Retained Earnings
Opening retained earnings + profit after tax − dividends paid/proposed = closing retained earnings shown in equity.
Share Capital & Equity
Ordinary share capital + share premium + retained earnings = total equity. Preference shares may be equity or liability depending on terms.
SFP Classification
Debentures are non-current liabilities. Proposed dividends and corporation tax payable are current liabilities. Shares are equity.