Class 12 Accountancy Notes
Unit – 7: Financial Statements of a Company
Q.1. Explain the term “Financial
Statements”. What are its Ideal Characteristics? 2012, 16, 17, 19
Ans: Financial
statements are the summarized statements of accounting data produced at the end
of accounting process by an enterprise through which accounting information are
communicated to the internal and external users.
In the words of Myer,” The
financial statements provide a summary of accounts of a business enterprise,
the balance sheet reflecting the assets, liabilities and capital as on a
certain date and income statement showing the result of operations during a
certain period”.
Nature
of Financial Statements: 2018
a) Recorded
Facts: The Financial statements are statements prepared on the basis of
recorded facts; they do not depict the unrecorded facts.
b) Accounting
Conventions: Certain accounting conventions are followed while preparing financial
statements such as convention of ‘Conservatism’, convention of ‘Materiality’,
convention of ‘Full disclosure’, convention of ‘Consistency’.
c) Accounting
Concepts: While preparing financial statements the accountants make a number of
assumptions known as accounting concepts such as going concern concept, money
measurement concept, realisation concept, etc.
d) Personal
Judgement: Personal judgement also has an important bearing on financial
statements. For example, selection of one method out of various methods of
charging depreciation, inventory valuation etc., depends on the personal
judgement of the accountant.
e) Legal
implications: Financial statements are prepared following the legal obligations
of the country. For example, while preparing the financial statement of an
Indian company, the requirements as per the companies Act, 2013 and its
amendments from time to time must be followed.
Characteristics
of Ideal financial Statements are:
a) Understandability: The
information must be readily understandable to users of the financial
statements.
b) Relevance: The information must be
relevant to the needs of the users, which is the case when the information
influences the economic decisions of users.
c) Reliability: The information must be
free of material error and bias, and not misleading.
d)
Comparability: The information must be comparable to the
financial information presented for other accounting periods.
Q.2. What are various types of
financial statements? Explain them. 2016
Ans: A set of financial statements includes (Types):
a) Profit and
loss account or Income statements
b) Balance
sheet or Position statements
c) Cash flow
statements
d) Funds flow
statements or
e) Schedules
and notes to accounts.
a) Profit
and loss account or income statement: Income
statement is one of the financial statements of business enterprises which
shows the revenues, expenses, and profits or losses of business enterprises for
a particular period of time. Its main aim is to show the operating efficiency
of the enterprises.
b) Balance
sheet or Position statement: Balance
Sheet is sometime called statement of financial position. It shows the
balance of assets, liabilities and equity at the end of the period of time. Its
main aim is to show the financial position of the enterprises as on a
particular date.
c) Cash
flow statement: Refer next chapter
d) Funds flow statement: Fund Flow is a statement which is prepared to show the increase or
decrease in funds i.e., working capital and the utilization of such funds of a
business during the accounting period.
Q.3. Draft a Format of Revised Balance
Sheet of a Company and Statement of Profit and Loss. (MOST IMPORTANT PART) 2012,
2013, 2014, 2015, 2016, 2017, 2018, 2020
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FOR DETAILED EXPLANATION OF PROFORMA OF BALANCE SHEET]
Proforma
of Balance Sheet
Name of
the Company …………………………………….
Balance
Sheet as at……………………………………..
Particulars |
Note No. |
Amount (Current Year) |
Amount (Previous Year) |
I. EQUITY AND
LIABILITIES (1)
Shareholders’ Funds (a) Share capital (b) Reserves
and surplus (c) Money
received against share Warrants (2)
Share application money pending allotment (3)
Non – current liabilities (a) Long term
borrowings (b) Deferred
tax liabilities (net) (c) Other long
term liabilities (d) Long term
provisions (4)
Current liabilities (a) Short term
borrowings (b) Trade
payables (c) Other
current liabilities (d) Short term
provisions |
|
|
|
Total |
|
|
|
II ASSETS (1) Non-Current
Assets (a) Fixed
assets (i) Tangible
assets (ii) Intangible
assets (iii) Capital
work in progress (iv) Intangible
assets under development (b) Non-current
investments (c) Deferred
tax assets (net) (d) Long term
loans and advances (e) Other
non-current assets (2) Current
Assets (a) Current
investments (b) Inventories (c) Trade receivables (d) Cash and
cash equivalents (e) Short term
loans and advances (f) Other
current assets |
|
|
|
Total |
|
|
|
Proforma
of Statement of Profit and Loss
Name of
the Company …………………………………….
Profit and
Loss for the year ended on ……………………………………..
Particulars |
Note No. |
Amount (Current Year) |
Amount (Previous Year) |
I. Incomes: i. Revenue form
operations ii. Other
income |
|
|
|
Total |
|
|
|
II. Expenses: i. Cost of
material consumed ii. Purchase of
stock-in-trade iii. Change in
inventories of finished goods, work-in-progress and stock-in-trade iv. Employees
Benefit expenses v. Finance Cost vi.
Depreciation and amortization expenses vii. Other
expenses |
|
|
|
Total |
|
|
|
III. Net Surplus before tax (I – II) IV. Less: Provision for tax |
|
|
|
V. Net Surplus after tax (III – V) |
|
|
|
Q.4. Explain the purpose of preparing
various types of financial statements. 2019,
2020
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ALSO READ (AHSEC ASSAM BOARD CLASS 12):
1. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE NOTES
2. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION (THEORY)
3. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION BANK (PRACTICAL)
4. AHSEC CLASS 12 ACCOUNTANCY PAST EXAM PAPERS (FROM 2012 TILL DATE)
5. AHSEC CLASS 12 ACCOUNTANCY SOLVED QUESTION PAPERS (FROM 2012 TILL DATE)
6. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE MCQS
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Ans: Objectives
and purposes for which financial statements are prepared:
a) To provide
information about economic resources and obligations of a business.
b) To provide
information about earning capacity of the business and it
ability to operate of profit in future.
c) To provide
information that is useful in predicting the future earning power of the
enterprise.
d) To judge the effectiveness
of management.
e) To provide
the base for tax assessments.
f) To provide
reliable information about the changes in economic resources that result from
profit directed activities.
g) To show
the financial strength and weakness of the enterprise.
h) To provide
reliable information about the changes in cash position and net economic by
comparing two period financial statements.
i)
To Satisfy the requirements of various users
such as corporate managers, executives, bankers, creditors, shareholders
investors, labourers, consumers, and government institution.
Q.5. Who are the users of Financial
Statement? What types of information provided by it? Explain its importance and
limitations. 2012,
2013, 2015, 2016
Ans: Users of Financial Statements: Users of
accounting information may be categorised into
(1) Internal Users: Owners, Management,
Employees and Workers.
(2) External Users: Banks and Financial
Institutions, Investors and Potential Investors, Creditors, Government
authorities, Consumers.
Information provided by the financial statements
a) A balance
sheet (or statement of financial position) summarizes the financial position of
an accounting entity at a particular point in time.
b) An income
statement summarizes the results of operations for a given period of time.
c) A
statement of cash flows summarizes the impact of an enterprise's cash flows on
its operating, financing, and investing activities over a given period of time.
d) A
statement of retained earnings shows the increases and decreases in earnings
retained by the company over a given period of time.
Uses
and Importance of Financial Statements to its various users
a)
To Management: Management is interested in knowing the existing profits,
earnings per share, chances of survival, possibility of growth and
diversification etc. from the financial statements so that is can frame
suitable strategy for its entity.
b)
Potential investors: Potential investors are keen to know the earning
potential of the business. They want to know how safe the investment already
made is and how safe the proposed investment will be.
c)
Bankers and financial institutions: These institutions are interested in
the security of the loan advanced, entity’s capacity to repay the principal
interest as per terms. Financial statements help these institutions to check
the operating efficiency and financial position.
d) Shareholders:
Shareholders of the business are interested to know the earning capacity of the
business and its prospects of future growth.
e)
Taxation authorities: Income tax authorities are interested in knowing
the profits of the business so that income tax can be imposed thereon.
Financial statements help them a great deal in determining the taxes payable.
Limitations of financial statements: 2017, 2018, 2019
Financial Statements
suffers from various limitations which are given below:
(i)
Historical Records: The information given in these statements is historic in nature and does
not reflect the future.
(ii)
It Ignores Price Level Changes: Business transactions and events are recorded at historical cost and
changes in prices over the years are ignored.
(iii) Qualitative
aspect Ignored: Financial statements considered only
those items which can be expressed in terms of money. Financial Statements
ignores the qualitative aspect.
(iv) Not free from
Bias: Financial statements are largely
affected by the personal judgments of the accountant.
(v)
Variation is accounting practices: Different firms follow different accounting practices. Therefore, a
meaningful comparison of their financial statements is not possible.
Q.6. Mention three items shown under
the Reserves and Surplus of Company’s Balance Sheet. 2016
Ans: Reserves and Surplus: Under this head the following items are
shown:
a) Capital
Reserve
b) Securities
Premium (Reserve)
c) Capital
Redemption Reserve.
d) Debenture
Redemption Reserve
e) Revaluation
Reserve
Q.7. What are contingent liabilities?
Mention two items included under this head? 2013,
2019
Ans: Contingent Liabilities: Those liabilities which may or may
not arise because they are dependent on a happening in future. It is not
recorded in the books of accounts but is disclosed in the Notes to Accounts for
the information of the users. Examples:
a) Claims
against the company not acknowledged as debts.
b) Guarantees.
c) Other
money for which the company is contingently liable.
Q.6. Difference between Balance Sheet
of a Company and Balance sheet of a Partnership Firm. 2015
Basis |
Company’s
Balance sheet |
Firm’s Balance
Sheet |
1. Format |
Balance sheet is prepared in a format
prescribed in Schedule III of the Companies Act, 2013. |
Firm’s balance sheet is prepared in a
traditional format. |
2. Capital |
Total capital of a company is shown under
one head named as “Shareholder’s fund”. |
More than one capital account is shown in
balance sheet depending on the number of partners. |
3. Period |
Figures of current year and previous year
are shown together in a company’s balance sheet. |
Balance sheet of a firm is prepared for
current year only. |
4. Presentation of assets and liabilities |
Assets and liabilities are shown under
different head in a company’s balance sheet. |
Assets and liabilities are grouped or
marshaled on their respective side. No separate head for different categories
of assets. |
5. Reserves and Surplus |
Reserves and Surplus are shown separately
under the head “Reserves and Surplus”. |
Reserves and surplus are normally
distributed between/amongst the partners at the end of accounting year. |