Topic 2:

INTRODUCTION TO COMPANIES

Learning objectives

To enable students to:

✓ Understand the important characteristics featured by companies
✓ Explain the capital structure of companies
✓ Explore the reporting environment accommodate to companies

Exam based question

Exam question of this topic typically tested on the theoretical background of companies
in terms of its features, financial instruments and capital structure.

Tips on how students might improve performance:

✓ Identify correctly the keyword in the given question (such as identify, explain
briefly, list down, etc.) so that you can directly answers the question.
✓ Organize your answer in a suitable manner in correspond to question. For
instance, in comparing/contrasting, the table’s format can help you present your
answer efficiently.
✓ Avoid from overwrite. The best way to represent your points is by giving
examples where necessary.
✓ Pay attention at how many marks the question worth. For example, if question
is worth 3 marks, you would assume that the examiner is looking for three
different points only.

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Activity 1 – True/False questions

You are required to circle the correct answer. (T) if the statement is true and (F) if the
statement is false.

1. The name of every public company must end with the words
‘Berhad’’ or the abbreviation ‘Bhd’. While the name of every
private company must end with the word ‘Sendirian Berhad’ or
the abbreviation ‘Sdn. Bhd’. T F

2. Private companies can offer shares and debentures for sale to

T F
the public.
3. The maximum number of a public company is limited to 50
T F
members.
4. The sole proprietor has total control and full decision-making
T F
power over policies, profits and capital investment.
5. A partnership has a perpetual existence. It may be not be
dissolved by the admission, death, insolvency, withdrawal of a
partner. T F

6. Shares of public limited company can be listed on stock

T F
exchange, or advertised for sale.
7. The liability of members of companies limited by guarantee is
restricted to paying an amount which they have agreed to pay
in the event of the company going into liquidation. T F

8. The return on investment for ordinary shareholders is in form

of a fixed rate of interest on the nominal value of the
investment provided. The payment is compulsory regardless
of whether the company is making profit or not. T F

9. The continuity of the business for company is not affected by

the death, bankruptcy, retirement or mental disorder of any
T F
shareholder
10. A redeemable preference share is classified as part of the
share capital of a company.
T F

11. Statutory companies are registered companies incorporated

under the Companies Act 2016.
T F

12. The owner of companies is called as shareholders and the

management is being delegated to a board of director.
T F

13. The maximum number of professional partnership is limited to

20 members.
T F

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 14. The constitution of company specifies the rules governing a
company such as the objective of incorporation and the rights
T F
and powers of the company

15. Profits of company are subject to income tax while profits of

partnership and sole proprietorship are subject to corporate
T F
tax.

16. The incorporation of private and public company in Malaysia

could be made at Companies Commission of Malaysia.
T F

17. The capital structure of company defined as how company

finances its overall operation by using different sources of
T F
fund.

18. The liability of sole proprietor is limited. The sole proprietor

himself is not personally liable for the debt of the business.
T F

19. Floating charge require the debentures to be secured to a

specific asset.
T F

20. The financial statements of public and private company are

required to be audited by external auditor.
T F

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Exam based questions

1) Identify five (5) types of company.

i. _______________________________________________________________

ii. _______________________________________________________________

iii. _______________________________________________________________

iv. _______________________________________________________________

v. _______________________________________________________________

2) State any three (3) characteristics of company.

i. _______________________________________________________________

ii. _______________________________________________________________

iii. _______________________________________________________________

3) Encik Muszaili and Encik Mustafar own a partnership business named Mesra
Enterprise. They are interested to convert their business into a company due to
advantages in terms of the liability protection that they heard from their colleague.
However, they did not know exactly the differences between partnership business
and a company.

You are required to explain the differences between partnership and a company in
terms of:

Partnership Company

Management The partners themselves Management is delegated to a

manage the business, except Board of Directors who in turn
for sleeping partner appoints executive officers to
manage the company’s
affairs.

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 Liability Unlimited liability. Partners are Limited liability. The owner’s
personally liable for the debts of liability is limited normally up
the to the amount of the share
capital contribution in the
company. Shareholders are
not personally liable for the
company’s debts.

business
Capital The amount of capital of the The capital can be raised
Contribution partnership business is limited largely by issuing shares or
to contribution by the partners. obtaining debentures from the
public.

4) Distinguish ordinary shares from preference shares.

Ordinary shares Preference shares

i.

ii.

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5) Capital structure of company demonstrates how company finances its overall
operation and growth by using different sources of fund, i.e. through equity or debt.
Equity fund may come in the form of proceed of share issuance while debt comes
from the money borrowed from lenders.

You are required to explain briefly the differences between them in terms of the
following criterion:

Equity Instrument Debt Instrument

i. Return on The return on investment for The debenture holders will

investment shareholders is in the form of receive return in form of a fixed
dividend, where return is fixed rate of interest on the nominal
for the preference
value of the debentures
shareholders but not fixed to
ordinary shareholders. provided. The payment is
However, payment compulsory regardless of
whether the company is making
profit or not.

t comp

ii. Claim on
assets

iii. Claim on Shareholders have a residual Lenders have prior claims on

income claim after all lenders such as
creditors and debenture
holders, have been paid.
Dividends are paid at the
discretion of the boards of
directors, not a contract
obligation to the company.
their fixed interest payments
which must be paid before
dividends can be paid to
shareholders. Interest
payments are a contractual
obligation of the company when
they borrowed from lenders.

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 iv. Right to a Equity means ownership and Debt represents an obligation
voice in those who owns an equity to the company to repay to its
management share (ordinary) of a loan provider, called debenture
company owns a part of the holders. The loan provider has
company. They can no say in the decision making of
influence the decision the company; no voting rights.
making in the company; have
voting rights.

6) The following is a list of terms used in connection with the share capital of company.
Describe all of the followings:

i. Issued
capital

ii. Called up
capital

iii. Uncalled
capital

iv. Paid up
capital

v. Unpaid
capital

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7) Nurkasih Bhd. incorporated on January 20x6 emphasizing in selling beauty and
health products. On 1 January 20x7, the company issued 10,000,000 of its ordinary
shares at RM2.00 each. The company called up on the issued capital for RM0.80
each. All the shares were fully subscribed and paid for when the call was made,
except for two shareholders who hold 500,000 shares each did not pay the call
money.
You are required to compute the value (units of shares and RM) of the following:

= RM2 X 10,000,000
= RM20,000,000
Issued capital

= RM0.80 X 10,000,000
= RM8,000,000
Called up
capital

= RM1.20 X 10,000,000
= RM12,000,000
Uncalled
capital

= RM0.80 X 9,000,000
= RM7,200,000
Paid up capital

= RM0.80 X 1,000,000
= RM800,000
Unpaid capital

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8) Debentures are often secured by charging to certain assets of company. There are
two types of charge that can be granted by a debenture to lenders.

Define the following types of charges:

Floating
charge

Fixed charge

9) Match the suitable terms for the listed explanation.

Convertible loan
Cumulative preference shares
Convertible preference shares
Debentures
Shareholders’ equity

a. A preference share that can be converted to ordinary shares.

b. A preference share which the annual fixed rate dividend accrues until it
can if the dividend cannot be paid in the respective year.
c. Company’s net assets that belong to the shareholders
d. Loan capital with a fixed rate of interest payable
e. Bond that can be converted into a specific number of shares, usually
ordinary shares.

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10) Compare the public and private company in terms of following:

Public company Private company

Name

Issuance
of shares

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