AHSEC - 12: Financial Statements of a Company Important Notes for MAY' 2021 Exam | Revised and Reduced Syllabus

Class 12 Accountancy Notes

Unit – 7: Financial Statements of a Company 

Unit – 7: Financial Statements of a Company FOR 2021 EXAM

Q.1. Explain the term “Financial Statements”. What are its nature and 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.

********************************************

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

********************************************

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

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

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.

********************************************

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

********************************************

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.