Limited Companies: Financial Statements — common mistakes

In Paper 3 questions, you will often be required to construct the equity section from scratch using information from a trial balance and additional notes. Pay close attention to share issues and revaluations during the year.

Examiners often test the schedule of non-current assets by providing incomplete information. You might need to calculate the depreciation charge for the year, the profit/loss on disposal, or the value of additions. Remember that depreciation is an expense in the SOPL, and the profit or loss on disposal is an adjustment to profit.

Directors' remuneration is a payment to them for their service of managing the company, making it an operating expense similar to any other employee's salary. Dividends, on the other hand, are a distribution of profits to the owners (shareholders) of the company. They are a return on investment, not a cost of running the business.

An interim dividend is declared and paid during the financial year, based on the company's performance to date. A final dividend is proposed by the directors after the financial year has ended and must be approved by shareholders at the Annual General Meeting (AGM). In the financial statements for the year, both interim dividends paid and final dividends proposed are deducted in the Statement of Changes in Equity.

Generally, a company can only pay dividends out of its accumulated distributable profits (retained earnings). If a company makes a loss in the current year but has sufficient retained earnings from previous years, it may still be able to pay a dividend. However, if it has no retained earnings, it cannot legally pay a dividend.