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Business Information: Public and Private Companies Report

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Updated: Jun 29th, 2020

Public company

A public company can be defined in terms of how it trades its stock to the public through the stock market. Barry (2007) notes that these companies are obliged to file definite reports with the United States Securities and Exchange Commission normally termed as (SEC). In a case of a publicly traded company, the securities are held by investors.

One of the advantages attached to public company is its ability to raise capital through sale of securities in the stock market. Persons to act as directors of a public company must strictly adhere to the rule of signing the consent. Furthermore, public companies cannot commence business unless it has been issued with a certificate of commencement (Barry, 2007). This observation contradicts with a private company which can commence its business upon incorporation.

Private company

This type of company is not allowed legally to offer its shares to be traded in the stock market a fact which makes it appropriate for small businesses which does not require immense amount of capital. In a situation where private company is limited by shares, liabilities of the company can only be settled up to the value of the share held by shareholder. The memorandum of association is usually shaped in a manner prescribed by the secretary of state. Another aspect is the Impossibility of one party to give the share to another third. This form of restriction is found in an article of association. On the contrary, public companies do not restrict transfer of shares to a third party.

Meaning of limited liability

In relation to investment, limited liability guards an investor from loosing more than the amount invested in the business (Claessens, 2000). This means that in case the business goes into liquidation, an investor will not be responsible for the debts of the company which exceeds the capital contributed. Company law separates ownership and liability and specifies that an investor cannot loose more than money paid for the shares in the business.

Corporate Governance in the UK

In a study done by Sun (2009), ‘the codes and regulations stipulate clearly the typical level of good practice with reference to specifics like; accountability, audit and contact with share holders, remuneration of directors, and composition of the board with their development criterion’. The listing rules states vividly that ‘‘all companies incorporated in the UK and have been listed on the London Stock Exchange must report on their application of combined codes while giving account details to the owners of the business venture”, Sun (2009). The details of the Turnbull Report give guidelines on corporate governance in the UK with respect to internal controls (including finance, management of risks, compliance and operation of accounting entries).

Before mentioning the principles of corporate governance, it is critical to examine some of its major component such as; honesty, accountability, openness, and mutual respect. Shareholders ought to be given respect and attention which they deserve as owners of the business venture. This is the first principle in corporate governance. To achieve this principle, efficient and effective communication standard should be practiced by the directors of an organization. Shareholders should also be encouraged to actively participate in the annual meetings so as to obtain relevant and explicit information on the progress of the company.

The principle of disclosure and transparency justifies a reason why directors and management team should furnish shareholders with correct details on welfare of the company. Internal control measures which are efficient ought to be maintained by the company in a bid to safeguard its assets. A full disclosure of account details is of paramount importance in corporate governance.

In the sphere of making decisions, high level of integrity and good ethics must be employed by management (Sun, 2009). This will go along in avoiding infringement of laws leading to subsequent law suits. The board of directors must possess relevant skills in order to understand the operation of the business consequently examining the performance rates of the management.

Income statement

This is also termed as the profit and loss account and gives details on revenues with expenses (and cost such as depreciation and write offs) during a given accounting period (Barry, 2007). The main objective of an income statement is to show target audience if the business venture is making profits or operating at a loss in a given accounting period. The process of preparing an income statement can either take two steps or a single step.

When expenses are subtracted from income, it forms an income statement in a single move. Multiple step approach first finds the gross profits then subtracts the calculated operating expenses. This will give a result of income from business operation. In a further calculation, various elements are first classified together before adjusting it for taxes at a final level. Investors normally use details of an income statement to make decisions regarding investment after calculating financial ratios like gross profit margins, operating profit margins and the net profit margins.

A balance sheet defines a business at a given time say 11th of May 2010. This means that assets and liabilities are compared with the owner’s equity at that date. On the contrary, income statement gives the performance of the business over a given time period.

Cost of sales represents the direct costs of producing the new variety of the soft drink. To be included in this category of costs are the salaries of employees working in the factory, the costs of raw material acting as inputs into the system, electricity bills and other special utilities to run the business venture. In simple terms, cost of sales relates directly to production of the new product for the customer. An illustration is:

2010/11/05

New Pacific Drink Inc

Income statement

Sterling pounds (M)
Sales
Cost of sales
Gross profits Selling, general and administrative expenses
Other operating expenses
Operating income

Interest expenses
Income before tax
Tax provision

Net income from business operation

200
50
15010
8
132

2
130
3

127

Depreciation

This is an expense which is not cash in nature. Depreciation represents the wearing out of assets as they are being used in the business to generate income. Assets bought into the business are only useful for a specified time period after which they are rendered obsolete or non functional. For this reason, the cost of the asset is distributed over the time period it was productive to the business. One of the reasons for distributing this cost is that another asset must be bought to replace the old one. Various companies have varied approaches in measuring depreciation of assets. It can accelerate depreciation of assets to reduce a statement of profits or rather decelerate depreciation to overstate profits. Reducing balance basis can be employed when calculating depreciation of assets.

Full costing

This is also called absorption costing and it includes all the costs related to manufacturing. In an observation made by Claessens (2000) ‘the costs are the direct raw materials, direct labor and manufacturing overheads’. Benefit attached to the use of full costing is ability to measure and report a product at its complete cost. In a multi product environment, costing techniques to use include: activity based costing, variable costing and the already mentioned absorption costing.

The problem of indirect costs

In relation to full costing, costs are obtainable even in absence of cash outlay. The problem with indirect cost is that of charging overheads to different products being produced. Table below illustrates absorption costing.

Product A Product B Product C
Direct raw materials
Direct labor
Variable factory overheads
Fixed factory overheads
Total product cost
Selling price
Gross profits
10
9
7
6
32
36
4
9
6
7
6
28
30
2
8
5
7
6
26
32
6

Activity based costing

This is a recent approach in costing meant to provide a more accurate cost of products. To achieve this accurate cost, the products are traced by the use of activities. Activity based costing uses both production volume and non production volume as bases for costing. Furthermore, costs are assigned to products consequently enabling management to formulate better budgets while gaining knowledge of how to run the business.

To illustrate activity based costing, time spent by a labor force working on a piece of land can be measured and subsequently deduce their rates. A salary paid to the labor force is then compared with the output from the piece of land to arrive at a profit or a loss. This is a simple illustration of an activity based costing using the land as the basis of costing. One of the criticisms to this method is the difficulty of tracing a base for a detailed manufacturing process. Some products undergo various processes before its final formation making it difficult to use activity based costing.

Reference list

Barry, J., & Jermakowicz, E., 2007. Interpretation and Application of International Financial Reporting Standards. Chicago: John Wiley & Sons, Inc.

Claessens, S., Djankov, S., & Lang, L., 2000. The Separation of Ownership and Control in East Asian Corporations. Journal of Financial Economics, 58 (5), 81-112.

Sun, W., 2009. How to Govern Corporations So They Serve the Public Good: A Theory of Corporate Governance Emergence. New York: Edwin Mellen Publishers.

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