Unit -7 long time planning

Capital budgeting

Capital budgeting is the process of decision to invest the capital funds long term investment planning or it is the process of accruing the long term assets.in

selection of the most suitable investment proposal ,capital budgeting considers cash flow generated rather than net profit. Pay back period, Net present value, Internal rate of return, Modified rate of return ,Discounted pay back period are the evaluating techniques to analyze profitability of investment.

  

leverage

The term leverage may be defined as the acquisition and employment of an assets or source of fund for which the firm has to pay fixed cost or fixed return. the ability of firm to utilize such fund efficiently which results in maximization of the shareholders return is also covered by the term leverage.leverage also facilitates the appropriate section of sources of fund among the various alternatives available.

Types of leverage

a.operating leverage : degree ofoperating leverage is the relationship between firms percentage change in sales and percentage changein operating profit.the leverage associated with the employment of an asset for which a firm has to pay fixed cost may be termed as operating leverage. Occurs leverage occurs due to fixed operating cost.if a firm use high fixed cost has higher operating leverage and also operating profit increase.

B .financial leverage :degree of financial leverage is the relationship between percentage change in earning per share and percent change in EBIT. financial leverage is related to the financing activities of a firm. The sources of fund can be categorized into fixed return source and variable return of sources. Fixed return sources of capital includes bank loan, debenture and preference shares. The firm having more debt and preference share capital in its capital structure has higher degree of financial risk and greater amount of risk.

C. combined leverage :the combination of operating and financial leverage is called total or combined leverage. operating leverage measures the operating risk whereas financial leverage financial risk. Total leverage measure the total risk of the business. Combined leverage is the relationship between percentage change in earning per share and percentage change in sales.

Indifference point of  EBIT

Different financial plan show different level of earning per share (EPS). A company must choose the financial plan having highest eps to maximize the return to shareholders .Indifference point of EBIT is that amount of EBIT at which both financial plans will be equally beneficial to the company.at the level of indifference point, the company is in situation of choosing either the plan because both plan have equal  EPS.

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Unit -6 Price level change

Meaning :

The general tendency in changes of  prices of goods and services over a time is called price level. The rise in general price level is called inflation . during the period of inflation ,purchasing power of money declines. The fall in general price level is deflation . During the period of deflation , pur

chase power of money increase. Price level change means increase or decrease in purchasing power of money over a period of time.  The accounting which considers price level change is called “accounting for price level changes.”

Limitations of historical cost accounting

No consideration of price level changes

Unrealistic fixed assets value

Insufficient provision for depreciation

Unrealistic profit

Consequence of over stated profit

Current purchasing power  (cpp )method

Cpp method was evolved by the institute of the chartered accountants in England and wales in may 1974. It is the preparation of a supplementary statement based on current purchasing power, using the retail price index as an index of general price change. It involves the re statement of some or all of the items in the historical financial statement for the changes in general price level. Under this method ,financial statements are prepared on the basis of historical cost. This methods take to consideration the changes in the value  of items as a result of general price level, but it does not account for changes in the value of individual items.

Current cost accounting (cca) method

Current costing method is an alternative of cpp method. Cca approach recognizes the changes inn the price of individual caused by the changes in general price level. This method includes the process of preparing and interpreting financial statement in a such way  that relevant changes in the price is considered significantly. Under this method, each financial statement is required to be restated in terms of the current value of such items to provide current information.

Gearing adjustment

Due to the price change accounting statement such a balance sheet , p/l account do not truly reflect the value of assets and liabilities of a firm. Total capital of a company may comprise shareholder’s equity and borrowing. gearing is the ratio of average borrowed capital and average shareholders equity. Gearing adjustment measures the trend of change in price level of total adjustment.

Gearing adjustment =gearing ratio*Total current cost adjustment

Where,

Gearing ratio =                  NB      

             NB + SHE

       Total current cost adjustment =cosa+mwca+ depreciation adjustment

NB= average net borrowing

She= average share holders equity

Cosa= cost of sales adjustment

Mwca= monetary working capital adjustmet

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UNIT -5 Depreciation and its effect in financial statement of a company

Depreciation meaning :

In general words ,depreciation is the reductioassets across its useful life ,roughly corresponding to normal wear and tear.

n in the value of an assets due to usages , passage of time, wear and tear, technological outdating or obsolescence ,depletion or other such factors. In accounting , depreciation is a term used to describe any method of attributing the historical or purchase cost of an

Causes of depreciation

• Wear and tear
• Depletion
• Obsolescence
• Exhaustion
• Effluxion of time

Objectives of providing depreciation

To calculate proper profit

To show the assets as its real value

To replace the assets

To reduce tax liability

To ascertain accurate cost of production

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UNIT -4 COMPANY GROWTH, MERGER, COMBINATION AND LIQUIDATION

Amalgamation

When two or more companies carrying on similar business go into liquidation and a new company is formed to take over their business, it is called amalgamation. The company which go into liquidation are vendor or amalgamating companies where as new company which is formed to take over the business of liquidating company is called purchasing or amalgamated company.

Features of amalgamation

1.Two or more companies are liquidated

2. a new company is formed to take over the business of liquidating companies.

3.the nature of business of existing companies is similar

4.generally, purchase consideration is discharged by  equity shares of purchasing company

Absorption

Absorption is the process under which an existing large company purchase of business of another small company doing similar business. In other words , when an existing company takes over the business of one or more existing companies carrying on similar business, it is called absorption.

Features of absorption

1.one or more companies are liquidated

2. no new company is formed

3.nature of business of both companies are same

4.generally, large company absorbs the business of smaller company

Reconstruction

When a company is suffering from loss for past several years and suffering from financial difficulties ,it may go for reconstruction. In other words ,when a company ‘s balance sheet exhibits huge accumulated losses, heavy fictitious and intangible assets or is in financial difficulties or is over capitalized , and then process of reconstruction is restored. Reconstruction may be internal and external

A. internal reconstruction :  internal  reconstruction refers to the internal re-organization of the financial structure of a company.

B .External reconstruction :when company is suffering loss from past several years and facing financial crises, the company can sell business to another newly formed company. Actually ,the new company is formed to take over the assets and liabilities of the company. this process is called external reconstruction.

Purchase consideration

In the procedure of two or more companies,the purchasing company has to pay price to the vendor or liquidated company for taking over its business. The price paid by the purchasing company to the liquidated company is called purchase consideration. In other words it is the cost payable by purchasing company to the vendor company for the ownership of net worth of vendor company as a agreed between the concerned parties. There are various methods of determining the purchase consideration as

* Lump sum method

*net payable method

*net assets method

*mixed method

*intrinsic value of share method

Holding company and subsidiary company

A holding company is one which controls one or more other companies. This is done by means of holding more than 50% shares in that company or companies or by having power to appoint the whole or majority of the directors of those companies. A company controlled by holding company is known as subsidiary company. This is also form of business combination. In this type of combination ,the legal entity of the absorbed company is not to distribute.

Capital profit and revenue profit

Profit earned by subsidiary company up to the date of acquisition of shares by holding company are capital profits or pre-acquisition profits. Thus, to decide whether profit/losses and reserve of the subsidiary company are the capital profits, the date of purchase of shares by holding company is deciding factors. Any increase or decrease in value of fixed assets will also be treated as capital profits.

Profit earned by the subsidiary company after the purchase of shares by the holding company are the revenue profits or post acquisition profits. If the fall in the value of the assets occurs after the date of acquisition ,the loss is treated as an ordinary revenue loss.

Minority interest :

The share of the outsiders in the subsidiary company is called  minority interest .Minority interest consists of the nominal value of shares held by the minority plus proportionate share in company’s profits and minus their plus proportionate share of company’s losses. the minority interest is calculated as follows

Paid-up value of equity shares held by outsiders            = ***

Paid-up value of preference shares held by outsiders     = ***

Add. Proportionate share in capital profit                       = ***

Add. Proportionate share in revenue profit                     =****

                                                                                        ---------------               

                                                     Minority interest            ****     

Unrealized profit

When the holding company and its subsidiaries make transactions with one another, some goods may remain unsold and shown in the balance sheet . In such case, only the selling company shows the profit on the total goods where the buying company does not show its profit on the goods unsold. Hence , the amount on the unsold goods is called unrealized profit as the profit can be realized only after the sales of the stock.

  

Corporate liquidation

Corporate liquidation is the legal procedure of a company by which the corporate life of a company is brought to an end. In other words liquidation is the process of law, where by a company’s affairs are wound up to the terminate its corporate life. Hence , the termination of legal existence of  company by closing its business is known as liquidation.

Ineffective management, lack of proper material and quality control ,wrong working site selection poor industrial relation are the internal reasons where as financial constraints, change in demand and government ,civil unrest are the external reasons for liquidation.

Condition of compulsory winding-up of a company as per company act

According to company act 2063, a company maybe wound up by the registrar office under the following circumstances

A .when the company passes a special resolution to be wound up by the registrar office.

B.when the company has made defaults in delivering the statutory report to the registrar or holding statutory meeting

c.when the company fails to commence its business within a year of its incorporation or suspends its business for ayear

d.when the company is unable to pay debts

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UNIT -3 ANALYSIS OF FINANCIAL STATEMENT OF A COMPANY

Ratio analysis: ratio is an expression of quantitative relationship between two figures or numbers. It is expressed when one figure is compared with another. Ratio analysis determines and interprets the numerical relationship between figures of financial statements. Hence ratio is used for evaluating the financial positions and performance of a firm.

Importance of ratio analysis

a. Financial positions analysis: accounting ratio reveal the financial position of a concern

b. simplifying accounting figures: accounting ratios simplify ,summarize and systematize the accounting figures to make them understandable

c. assess the operational efficiency : it helps to assess the operational or working efficiency of a concern

d. forecasting :it is useful in financial forecasting and planning

e. comparing performance between companies

limitations of ratio analysis

1.based on historical information

2. ignore qualitative aspects

3. fails to disclose current worth of enterprise

4.not free from bias

5.arthematical window dressing 

Types of ratio

A. liquidity ratio: liquidity ratios measure the short term solvency or liquidity of a firm .liquidity is the ability of a firm to meets it short term obligations. they reflect the short term financial strength of business. Current ratio and quick ratios are calculated under leverage ratio.

Current ratio =                        current assets  

                                            Current liabilities

Quick ratio    =current assets-prepaid expenses-closing stock

                                                     Current liabilities

B. leverage ratio: leverage ratio shows the long term solvency or liquidity of a firm. they indicate whether firm is financially sound or solvent in relation to its long term obligations. they show firms ability to pay interest regularly and repay the principal on the due date.  long term solvency of a firm can be measured through debt equity ratio and debt to total capital ratio.

C. Turnover ratio: activity or turnover ratios describes the relationship between the firm’s level of activity assets employed to generate the activity. they are also used to forecast a firm’s capital requirement both operating and long term. Inventory turnover, fixed assets turnover ,total assets turnover, capital employed turnover are the activity ratio.

D. Profitability ratio : the sustainability of a firm depends on income earned and profit earned. moreover, a firm should earn sufficient profit on each rupee of sales to meet the operating expenses and  to avail returns to the owners. Gross profit margin , net profit margin , return on assets , return on shareholders equity , return on capital employed ,earning per share are the profitability ratios

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UNIT -2 FINANCIAL STATEMENT OF THE COMPANY

Meaning and concept :

financial statement analysis is the process of classifying, evaluating and interpreting the relationship between different heads of account of financial statements. This provides relevant information to the management and other interested persons and institutions to understand the result of performance and position of the entity.

Financial statements analysis helps to know solvency and profitability position of the organization for a given period of time. This supports to the management, creditors ,lenders and shareholders to make decision for the future action. The financial statements involve income statement, statement of retain earning , balance sheet and cash flow statement.

Objectives of financial statement analysis :

i.To judge liquidity :analysis of financial statement helps to judge the short term solvency position of the company. It can be determined by comparing the amount

ii. To assess solvency : financial statements analysis supports to assess long term solvency position of the company. It can be determined by comparing the amount of long terms debs with shareholders fund and long term assets.

iii.To judge profitability : financial statement analysis judges the profitability position of the company. The amount of gross profit and net profit compared with sales ,assets, shareholders fund and other heads of accounts.

iv. To judge operational efficiency :the comparison of actual revenues and expenses for aperiod with the standard determined helps to judge the operational strength and weakness of the company.

v.To help for planning and budgeting :planning and budgeting should be prepared on the basis of past financial information and estimation about probable change in environment. Financial statements helps for planning and budgeting for future performance.

vi. To compare inter company performance :a comparative study of financial statements of the different companies in different way helps to know their probable strength and weaknesses.

Significance or impratance of financial analysis

a. helps to know liquidity and solvency

b. helps to know turnover and profitability

c .helps in evaluation of performance

d. helps to planning and budgeting

e. helps for determination standard and control

limitations of financial statement analysis

1. Only focus on quantitative aspects

2. may misled to the user

3. not reveal the current worth

4.based on personal judgment

Worksheet

worksheet is the device that has been used for assisting the accountant in performing certain task. It is simply a rough sketch for final account made by the accountants. It shows the details of accounting works and adjustments to check their arithmetical accuracy before preparing financial statements.It is also known as extended trial balance. This makes easy to prepare adjusted trial balance and financial statement like income statement, retained earning and balance sheet. Generally, two types of format are found in practice :

a. ten column worksheet

b. twelve column worksheet

Income statement

Income statement reports the result of company operations during the particular period of time. In other words, it depicts the success or failure of a company’s operations. It consists of the incomes with the expenses occurring during a period. The main objective of preparing income statement is to know about the net income or net loss of an accounting year.

Balance sheet

It is a statement that reports the assets and claim to the assets on a specific point of time. the claims of creditors called liabilities where the claims of owner are called shareholders equity. The relationship among the different components of a balance sheet is presented below.

Assets =shareholders equity + liabilities

Statement of Cash flow

A statement that shows the cash receipts and payment (also called inflow and outflow) during a particular period of time is called cash flow statement. It shows the effects on the position of cash under operating, investing and financial activities.

Value added statement

The value added is the difference between sales revenue and purchase price of products and services. It is ascertained by deducting cost of purchase from sales revenue.so, sales price of product is higher than cost. In other words excess of market value over the cost of material is known as value added.

Value added = sales revenue – cost of bought in material and services

Value added statement is a useful means to inform operating results of the companies to the concerned bodies such as workers, staff and shareholders as well as government and financial institutions.

Advantages of value added

1.helps to the worker in developing their positive attitude towards the business

2. informs the concerned bodies regarding size and importance of business

3. helps in preparing budgets

4. helps in initiating and presenting productive incentive plans to increase the productivity of workers

5. economist determine the national income on the basis of value added

6.enables to develop important ratios

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part V

Concept of share and share capital

Shares : shares means allotted portion of share capital of company. Each share in a company is valued at rupees hundred. Investors are known as shareholders, who take risk of company operation and its performance. They get income on their investment on shares in terms of dividend from the company which is part of the profit of the company. Shares of a company may be classified as :

1.equity share :In general ,shares which are not preference shares, are equity shares. The holders of these shares have not preferential right in the payment of annual dividend and repayment of their investment. Equity shareholder having voting right in the election of the member of board of directors, therefore they can participate in the management of company.

2. preference share: preference shares are those shares, which carry a preferential right firstly as to payment of annual dividend and secondly as to the return of capital when company is wound up. These shares carry a preferential right of dividend at a fixed rate before any dividend paid to equity share holders. However ,preference shareholders having no voting rights in the election of board of directors.

Features of equity shares :

a. participation in management: Equity shareholder having voting right in the election of the member of board of directors, therefore they can participate in the management of company.            

b. fixed fund: Equity share capital is of fixed fund up to the existence of the company .therefore, the company can mobilize such fund in long term profitable projects.

c.no fixed dividend :The amount of annual dividend payable to the equity shareholder depends upon the volume of profit. If the company earned no profit ,there is no obligation to pay dividend .

d. transferability of shares: Equity shares of public limited company can easily transferable from one person to another without any pre-permission from the company management.

e. no collateral security to issue: For issue of equity shares ,it is not necessary for a company to keep it’s any assets  as a mortgage or security.

f. good scope of investment : the face value of equity share is only rupees hundred and there is also voting right vested to such share holder . therefore it is taken as a good scope of investment ,even to the small investors.

Difference between equity share and preference share

Basis	Equity shares	Preference shares
Concept	Ordinary shares means a share other than a preference share.	preference shares are those shares, which carry a preferential right firstly as to payment of annual dividend
Participation in management	The shareholder of equity shares have voting rights and participate in the management of company.	Preference shares have no voting right in the election of board member.
Payment of dividend	Equity shareholders will get annual dividend on the profit of company only after distribution to preference shareholders.	Preference shareholders have preferential right to get annual dividend before distribution to equity share holders.
Rate of dividend	There is no any fixed rate of annual dividend.	A fixed rate of annual dividend is paid to preference shareholder.
Conversion	These shares cannot be converted into converted into other securities.	On the basis of term of issue a preference shares may be converted into ordinary shares
Redemption	The amount of such shares will be repaid to investors only at the liquidation of the company.	In case of redeemable preference, capital investment will be repaid at the expiry of predetermined time.

Share capital : share capital is known as own capital and it is the primary source of collecting amount for the company. In other words, share capital means the capital raised by a company by issue shares. According company act 2063 share is the divided unit of share capital of the company. Share capital of company is divided into certain fixed number of units of hundred or rupees divisible of ten each. These units are known as shares which represents the shares in the capital of company. The person or institution holding some units of shares is called shareholders.

In the process of issue of shares the following terms should be taken into consideration

1.Authorized capital : it is also known by registered capital of the company. It is the nominal units of share capital which the company is authorized to issue by its memorandum of association. This is the maximum capital which company can have in its life time. For instance ,the share capital of A. ltd is rs 10,000,000 divided into 100,000 shares of 100 each.

2.Issued capital :it is the part of authorized capital that is offered to the public for subscription. A company does not issue all the authorized capital at a time but keeps unissued for future requirement. For instance , A ltd. issued 50,000 shares (i.e. 50% of 100,000 shares) of rs. 100 each

3.Called up capital : it is the part of issued capital which is actually called up from the public on installment. A company is not  allowed to collect all the issued value of shares at a time; it should be collected in the installment like as a share application, share allotment and shares calls. For instance , A ltd. Issued 50,000 shares of 100 each but called up capital value maybe be rs 25 on application, 50 on allotment and 25 on first and final call, as it is published in prospects.

4.suscribed capital :it is part of issued and called up capital which has been applied by the public for getting shares of the company. In subscribed capital there is three possibilities i.e. equal subscription, under subscription and over subscription. For instance , A ltd .issued 50,000 shares of 100 and if all shares are taken up by the public then subscribed capital will be equal to share capital.

5.Paid up capital :it is the part of called up capital which is actually receive in cash as a capital from shareholder. If all the called up capital has been received, paid up capital will be equal to called up capital. When any part of called up capital is not received that is known as calls in arrears and in such situation, paid up capital will be called up capital minus calls in arrear.

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part IV

Memorandum of Association

The memorandum of association is one of the most important document for company formation. It is just like charter or constitution of the company. It defines all the rules and regulation of the company for legal formalities and procedures. It is also provides information of capital ,liability of shareholder , a nature of business, objectives and other external rules and regulations. Section 18 of company act 2063 contains the following matter in the memorandum of associations.

a. name of company

b. the address of the registered of the company

c. objectives of the company

d. the acts to be carried out to accomplish the objectives of the company

e. the figures of authorized capital and the figure of share capital to be issued by the company for the time being and the figure of capital undertaken to be paid by the promoter of the company

f. the types of shares of the company, the rights and power inherent in such shares, value of each share and number of different types

g. the restriction ,if any on the purchase or transfer of shares

h. terms and condition of payment of share amount

i. provision of limited liabilities of share holders

j. other necessary documents

Article of association

Articles of association are the document of the internal management of the company. the contain rules ,regulations  and bye-laws of the company for its systematic management. The company should manage the business activities, internal structure and internal control system on the basis of rules and regulations mentioned in articles of associations. They are subordinate to memorandum of association. It provides framework to maintain internal control to gain defined objectives.

According to section 20(ii) of company act 2063, the company articles of association contain the following contents :

1.procedure of convening the general meeting of the company and notice to be given for such meeting

2.proceeding of general meeting

3.number of directors, provision of alternative director ,if any and tenure of directors

4.provision relating to the minutes of decisions of the general meeting and the board of directors and duplicate copies and inspection thereof

5.if a person has to subscribe shares to become a director of a company , minimum number of shares

6.in the case of public company, qualification and number of independent directors

7.power and duties of board of directors and the managing directors

8. authority of directors and delegation of authority

9.lien of shares

10.different class of shares and the rights , power and restrictions attached to such shares

11.provision relating to calls on shares and forfeiture of shares

12.provision relating to transfer of shares

13.use of company’s seal in its transaction , if it is to be used

14.matters on the buying back of shares by the company

15.appoinment of a company secratery

16. amalgamation of the company

17.accounts ,books of account and audit of the company

Prospects

Prospectus is the profile of public limited company and provides past and present information and also future policies and programs of the company. Generally it is issued to the public while issuing shares and debentures. In other words , it is an invitation to the general public to subscribe the shares and debenture s of the company.

According to section 23 (1) of the company act 2063 ,the prospects should involve the following contents.

a.The objectives of the company, the main point mentioned in the memorandum and articles of association, and the place where such memorandum and articles of association can be obtained.

b.minimum number of shares must be subscribed in order to qualify for the post of directors and salaries,allowances

c.particulars of cash payment obtain or to be obtained by the promoters or directors of the company in form of remuneration

d.arrangement relating to bonus shares

e. arrangement ,if any, for reserving shares for shareholder employee or any other person.

f. a biographic introduction of directors

g. reasons and justification for adding premium

h. arrangement relating to representation in the board of directors of shareholders

i. reasons for obtaining loan by debenture

j. brokerage on shares and debenture

h. amount needed for business and the estimated

k. the balance sheet and profit and loss account of the company and the place where these can be inspected

l. in case of new company ,particulars of preliminary expenses incurred in case of its establishment

m. specific rights of preference shareholders and restriction them

n.  other necessary documents 

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part III

Advantages and privileges of public limited company
1.Adequate capital :

comparatively , capital investment in company is more than partnership firm and sole trading concern. The company can collect capital by issuing shares or debentures among unlimited peoples for subscription. With large capital , it can operate large scale business. The large scale production and distribution minimizes per unit cost or services.

2.Limited liability:

 The liability of shareholders of the company is limited up to their capital investment .The company can borrow loan for expansion and diversification of business or purchase good on credit during regular business , but in its own name.

3.Perpetual existence :

company is an artificial person created by law. As a corporate body its existence is perpetual. The death, retirement, lunacy of shareholders or promoters do not affect in regular function of the

company. Similarly , it performs function without any interruption even if any change in management , member of board of directors , working procedure etc.

4.Transferability of shares :

shares of joint stock company, especially shares of public limited company are easily transferable from one person to another . such transfer of shares does not affect the regular function of the company and prior permission from management is not required.

5.Effective management :

Management is the back bone of an institution and success of it depends upon its management system. In company for the function of management, members of board of directors elected. They are the representatives of the shareholders and responsible for management of the company.

6.Easy to obtain loan :

 for the expansion of the business ,the company can obtain loan in easy manner. It performs business in large scale with the investment of maximum capital and, as perpetual existence; it also performs business for long duration of time

7.Accountilibity:

8.social value :

company performs activities which are directly or indirectly beneficial to the society . it provides employment opportunities to skilled or unskilled people according to their ability.

9.Based on democratic management :

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part II

Types of company 

Joint stock company may be classified into various types from different angles .They are

A.On the basis of corporation/formation

a.charterd company

a charter company is established by the special royal charter or sanction by the head of nation. Before the enactment of the company act the procedure of forming a company is by means of royal chartered. The special privilege and right of company are granted in the charter. East india company, the bank of England are the example of chartered company

b.statuory company :

a company, which is formed or incorporated by a special act of parliament is known as  statutory companies. such company is governed by their respective acts and do not have any memorandum or articles of association. Nepal rastra bank, Nepal airlines are the example of it.

c.Registered company :

a company registered according to the provision of the company act is known as registered company. The procedure of establishment ,right, duties ,working area and procedures of winding up such company are cleared at the time of incorporation. In the context of Nepal , a registered company should be incorporated according to the provision of company act 2063.

B.On the basis of liability

i.Limited company :

this type of company is registered with certain number of shares; the liability of shareholder is limited up to the extent of the face value of shares held by each of them. It means shareholders have no extra burden for the payment of debt.

ii.Unlimited company:

it is just like an ordinary partnership. Under this type of company, shareholders are liable for all liabilities of the company. The company of unlimited liability is rarely found in present world.

iii.Company limited by guarantee :

under this type of company, the liability of shareholder is limited to a specified amount as mentioned in the memorandum of association. The amount of guarantee may differ from shareholder to shareholder

C.On the basis of members :

1.Private limited company:

It is one of the registered companies incorporated according to the company act in the concern department. According to the company act 2063 ,the minimum number of shareholder may be one and maximum shareholders should not be exceed fifty .A private limited company cannot issue shares to the public for subscription and remain limited to some limited number of shareholders .For quick identification of such company the word “pvt. ltd” is written after the name of company.

2.Public limited company :

 Companies other than private ltd. comes under public ltd.  Company. According to section 2 of the company act 2063 , public company means any company incorporated according to this act. The minimum numbers of the shareholders are seven and maximum is unlimited for the registration of a public limited company. A public ltd. Company can issue shares for public subscription and shares are easily transferable.For quick identification of such company the word “ ltd” is written at the end followed by the name of company.

D.On the basis of ownership :

a.Government company :

In this type of company ,government has minimum 51% of the paid up value of share capital of the company. The management of the company is taken by the government authority. In context of Nepal Janakpur cigarette factory, Birjung sugar mill ltd. Are the example of government company.

b.Non-government company :

 this type of company is established under private ownership .government has no involvement in the ownership of the company, if involvement is there that is less than 50% of total paid of share capital. Government do not interrupt in the regular business activities of the company, only completion of the few rules of government is sufficient.

E.On the basis of domicile

i.National company

ii. Foreign company

iii. Multinational

F. On the basis of control

a. Holding company

b.Subsidiary company

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part I

Meaning and concept

A company is an association of persons for economic gain having incorporated according to law, a separate legal existence and common seal.Capital of the company is raised by issuing transferable shares and managed by the representatives of the shareholders .In Nepal ,a joint stock company must be registered in accordance of provision of Nepal Company act 2063.The regular activities of company would not be affected due to change in management ,shareholders, board of directors and other internal factors. It can be dissolved only after completing legal procedures.

Characteristics/Features of a company:

The common features of a joint stock company are as follows

1.Legal personality: a joint stock company is an artificial person and enjoys the facility of natural person in certain aspects. It has a separate legal entity independent from its member. It can hold property, borrow debts, can carry on business and enter into contract in its own name.

2.Perpetual succession:joint stock company is corporate body. It is not affected by death, retirement or insolvency of its shareholders. Similarly, it performs business without any interruption even if change in management, change in members of BOD, change in method of operation and internal system.

3.limited liability : company is an artificial person and as such its members are not liable for the debts of the company. The liability of shareholders of the company is limited upto their capital investment.

4.Formation : public ltd. Company can start business only after getting certificate of commencement, along with registration certificate. for formation of a company , promoters group of shareholders have played major role and later on its membership increased by sale of shares.

5.Common seal : as an artificial persons, a company can not act or sign itself in official documents. Thus, it has common seal which is engraved name emblem of the company.

6.Management by representative : although all shareholders are the real owner of the company. but in practice , it is not possible that all the shareholders should involve in management of company. The management of the company is done by the representative of shareholders, known as members of BOD.

7.Transferability of shares :the shares of public ltdcompany are easily transferable from one person to another without prior permission from company management.

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