Class 12 Accountancy Notes
Unit – 7: Financial Statements of a Company
Important Notes for March 2025 Exam [AHSEC Class 12 Accountancy Notes]
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.
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,
2022
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 from 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/uses of preparing various types of financial statements. 2019, 2020,
2022, 2023
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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 its
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, 2023, 2024
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, 2024
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: ACCOUNTANCY CHAPTERWISE COMPLETE NOTES
1. BASICS OF PARTNERSHIP (INCLUDING GOODWILL)
2. RECONSTITUTION OF PARTNERSHIP (ADMISSION, RETIREMENT AND DEATH)
3. DISSOLUTION OF PARTNERSHIP FIRM
4. ACCOUNTING FOR SHARE CAPITAL
5. ISSUE AND REDEMPTION OF DEBENTURES
6. FINANCIAL STATEMENTS OF A COMPANTY
7. FINANCIAL STATEMENTS ANALYSIS
8. RATIO ANALYSIS
9. CASH FLOW STATEMENTS
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. |