Financial Statements of a CompanyClass 12 Accountancy Part 2 NCERT Solutions
21 Solutions
Generated by KedovoAI
Solution 1 of 21
Q1Do it yourself
Classify the following items in the balance sheet of a company under Major heads and Sub-heads
S. No. Items Major Head Sub-head (if any) 1. Goodwill 2. Forfeited shares 3. Acceptances 4. Preliminary expenses 5. Capital reserve 6. Loans from banks 7. Investment in shares and debentures 8. Interest accrued and due on debentures 9. Interest accrued but not due on Secured Loans 10. Interest accrued but not due on Unsecured Loans 11. Interest accrued on Investments
Solution
| S. No. | Items | Major Head | Sub-head (if any) |
|---|---|---|---|
| 1. | Goodwill | Assets | Non-Current Assets (Fixed Assets - Intangible Assets) |
| 2. | Forfeited shares | Equity and Liabilities | Shareholders' Funds (Subscribed Capital - Add: Forfeited Shares Account) |
| 3. | Acceptances | Equity and Liabilities | Current Liabilities (Trade Payables) |
| 4. | Preliminary expenses | Equity and Liabilities | Shareholders' Funds (Reserves and Surplus - deducted from Securities Premium/Statement of Profit and Loss) |
| 5. | Capital reserve | Equity and Liabilities | Shareholders' Funds (Reserves and Surplus) |
| 6. | Loans from banks | Equity and Liabilities | Non-Current Liabilities (Long-term borrowings) OR Current Liabilities (Short-term borrowings) |
| 7. | Investment in shares and debentures | Assets | Non-Current Assets (Non-current investments) OR Current Assets (Current investments) |
| 8. | Interest accrued and due on debentures | Equity and Liabilities | Current Liabilities (Other current liabilities) |
| 9. | Interest accrued but not due on Secured Loans | Equity and Liabilities | Current Liabilities (Other current liabilities) |
| 10. | Interest accrued but not due on Unsecured Loans | Equity and Liabilities | Current Liabilities (Other current liabilities) |
| 11. | Interest accrued on Investments | Assets | Current Assets (Other current assets) |
Q1Long Answer Questions
Explain the nature of the financial statements.
Solution
The nature of financial statements is complex as they are a combination of recorded facts, accounting principles, and personal judgements. The American Institute of Certified Public Accountants states that they are prepared to present a periodical review of progress by management. The following points explain their nature:
-
Recorded Facts: Financial statements are based on facts recorded in the accounting books. Transactions are recorded at their original or historical cost. Figures for assets like cash, receivables, and fixed assets are taken directly from these records. This means assets purchased at different times and prices are shown at their cost, not their current market value.
-
Accounting Conventions: Certain accounting conventions are consistently followed to make the statements comparable and realistic. For example, the convention of valuing inventory at cost or market price, whichever is lower, is applied. The convention of materiality allows small-value items like stationery to be treated as expenses in the year of purchase, even though they are technically assets.
-
Postulates (Assumptions): The preparation of financial statements relies on certain basic assumptions. The 'going concern' postulate assumes the business will continue to operate for a long time, justifying the use of historical cost for assets. The 'money measurement' postulate assumes that the value of money remains stable, ignoring inflation. The 'realisation' postulate dictates that revenue is recognised when a sale is made, regardless of when the cash is received.
-
Personal Judgements: Financial statements are not entirely objective and are influenced by the personal judgements of the accountant. For example, estimating the useful economic life of an asset for depreciation, making provisions for doubtful debts, and determining the market value of inventory all involve personal opinion and estimation. These judgements are guided by the convention of conservatism to avoid overstating assets and income.
Q2Long Answer Questions
Explain in detail about the significance of the financial statements.
Solution
Financial statements are of immense significance as they provide crucial information to a wide range of users for making economic decisions. Their importance can be detailed as follows:
-
Report on Stewardship Function: For shareholders and owners, financial statements are a report card on the management's performance. They show how effectively the management has utilized the resources entrusted to them, highlighting the gap between performance and expectations.
-
Basis for Fiscal Policies: The government relies on the financial statements of companies to formulate economic and fiscal policies, especially those related to taxation. The collective performance of the corporate sector, as revealed by these statements, influences industrial policy and economic planning.
-
Basis for Granting of Credit: Creditors, such as banks and financial institutions, analyze a company's financial statements to assess its creditworthiness, profitability, and solvency before extending loans or credit. The statements form the primary basis for their lending decisions.
-
Basis for Prospective Investors: Potential investors, both short-term and long-term, use financial statements to evaluate the safety, liquidity, and potential return of their investment. The statements help them assess the company's financial health and earning capacity, guiding their investment choices.
-
Guide to the Value of the Investment Already Made: Existing shareholders use financial statements to monitor the status and safety of their investment. The information helps them decide whether to hold, sell, or buy more shares in the company.
-
Aids Trade Associations: Trade associations can analyze the financial statements of member companies to provide services, set industry benchmarks, develop standard ratios, and design uniform accounting systems for the benefit of all members.
-
Helps Stock Exchanges: Stock exchanges use financial statements to ensure transparency in financial reporting and protect the interests of investors. They help brokers and analysts judge the financial position of companies and determine the prices of securities to be quoted.
Q3Long Answer Questions
Explain the limitations of financial statements.
Solution
While financial statements provide valuable information, they suffer from several inherent limitations that users must be aware of:
-
Do not reflect current situation: Financial statements are prepared using the historical cost principle. Assets and liabilities are shown at their original cost, which may not reflect their current market value. This is a significant limitation in times of changing prices, as the financial position may not represent the current economic reality.
-
Assets may not realise stated values: The values of assets shown in the balance sheet represent unexpired costs. There is no guarantee that these amounts will be realized if the assets are sold, especially in a forced liquidation.
-
Bias and Personal Judgement: The preparation of financial statements involves making estimates and using personal judgement. For instance, the choice of depreciation method, estimation of the useful life of assets, and provision for doubtful debts are subjective. This can introduce bias and affect the accuracy of the reported financial position and profitability.
-
Aggregate Information: Financial statements present summarised and aggregate data. While this provides a broad overview, it may conceal important details necessary for in-depth analysis and specific decision-making.
-
Vital Information is Missing: The statements do not disclose crucial non-financial information that can significantly impact the enterprise's future. For example, the loss of a major customer, termination of a key agreement, or changes in market dynamics are not reflected.
-
No Qualitative Information: Financial statements are purely quantitative and report only information that can be expressed in monetary terms. They ignore important qualitative aspects such as the quality of management, employee morale, industrial relations, and brand reputation, which are vital for assessing a company's long-term prospects.
-
They are only Interim Reports: The Statement of Profit and Loss shows results for a specific period, and the Balance Sheet shows the financial position on a specific date. They do not provide a complete picture of the company's earning capacity over time or its likely future position.
Q4Long Answer Questions
Prepare the format of statement of profit and loss and explain its items upto the as certainment of profit before tax.
Solution
The format of the Statement of Profit and Loss as per Part II of Schedule III of the Companies Act, 2013 is as follows:
Statement of Profit and Loss for the year ended ...
| Particulars | Note No. | Figures for the Current Reporting Period (Rs.) | Figures for the Previous Reporting Period (Rs.) |
|---|---|---|---|
| I. Revenue from Operations | |||
| II. Other Income | |||
| III. Total Revenue (I + II) | |||
| IV. Expenses: | |||
| Cost of materials consumed | |||
| Purchases of Stock-in-Trade | |||
| Changes in inventories of finished goods, work-in-progress and Stock-in-Trade | |||
| Employee benefits expense | |||
| Finance costs | |||
| Depreciation and amortisation expense | |||
| Other expenses | |||
| Total expenses | |||
| V. Profit before tax (III - IV) |
Explanation of Items:
-
Revenue from Operations: This is the primary source of revenue for a company. It includes revenue earned from its principal business activities, such as:
- Sale of products
- Sale of services
- Other operating revenues (e.g., sale of scrap) For a finance company, this would include interest, dividend, and other income from financial services.
-
Other Income: This includes income that is not earned from the company's main operations. Examples are:
- Interest income (for a non-finance company)
- Dividend income
- Net gain/loss on the sale of investments
- Other non-operating income (e.g., rent received).
-
Total Revenue: This is the sum of Revenue from Operations and Other Income.
-
Expenses: These are the costs incurred to earn the total revenue.
- Cost of Materials Consumed: For a manufacturing company, this is the cost of raw materials and other materials used in production.
- Purchases of Stock-in-Trade: This refers to the cost of goods purchased for the purpose of resale (for a trading company).
- Changes in Inventories: This represents the difference between the opening and closing inventories of finished goods, work-in-progress (WIP), and stock-in-trade. A decrease in inventory is added to expenses, and an increase is subtracted.
- Employee Benefit Expenses: These are expenses related to employees, such as salaries, wages, bonuses, leave encashment, and staff welfare expenses.
- Finance Costs: This primarily includes interest expenses on borrowings like debentures and loans. Other financing costs like bank charges are shown under 'Other Expenses'.
- Depreciation and Amortisation Expense: Depreciation is the charge for the diminution in the value of tangible fixed assets, while amortisation is the writing off of the cost of intangible assets.
- Other Expenses: This is a residual category for all other expenses that do not fit into the above classifications, such as rent, insurance, office expenses, etc.
-
Profit before tax: This is calculated by subtracting Total Expenses from Total Revenue.
Q5Long Answer Questions
Prepare the format of balance sheet and explain the various elements of balance sheet.
Solution
The format of the Balance Sheet as per Part I of Schedule III of the Companies Act, 2013 is a vertical format.
Balance Sheet as at ...
| Particulars | Note No. | Figures as at the end of Current Reporting Period (Rs.) | Figures as at the end of Previous Reporting Period (Rs.) |
|---|---|---|---|
| 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 |
Explanation of Various Elements:
I. EQUITY AND LIABILITIES
This side represents the sources of funds for the company.
- Shareholders' Funds: This represents the owners' equity. It includes:
- Share Capital: Capital raised by issuing shares (Equity and Preference).
- Reserves and Surplus: Profits retained in the business and other reserves like Capital Reserve, Securities Premium, etc. A debit balance in the Statement of P&L is shown as a negative figure here.
- Non-Current Liabilities: These are obligations that are due for settlement after more than twelve months from the reporting date. It includes long-term borrowings (like debentures, bank loans), deferred tax liabilities, and long-term provisions.
- Current Liabilities: These are obligations expected to be settled within twelve months or the company's operating cycle. It includes short-term borrowings, trade payables (creditors), other current liabilities (like interest accrued), and short-term provisions (like provision for tax).
II. ASSETS
This side represents the application of funds, i.e., the resources owned by the company.
- Non-Current Assets: These are assets held for long-term use and not intended for resale. They include:
- Fixed Assets: Tangible assets like land, buildings, machinery and intangible assets like goodwill, patents.
- Non-current Investments: Investments held for more than a year.
- Long-term loans and advances: Loans given by the company that are receivable after twelve months.
- Current Assets: These are assets that are expected to be converted into cash or consumed within twelve months or the operating cycle. They include:
- Inventories: Stock of raw materials, work-in-progress, and finished goods.
- Trade Receivables: Amounts due from customers for goods or services sold on credit (debtors and bills receivable).
- Cash and Cash Equivalents: Cash in hand, bank balances, and other highly liquid investments.
- Short-term loans and advances: Loans given by the company that are receivable within twelve months.
Q6Long Answer Questions
Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?
Solution
Financial statements provide essential information to various stakeholders who are interested in the affairs of an undertaking, helping them in their decision-making processes. Their usefulness to different parties is as follows:
-
Management: For internal use, management needs financial statements for planning, decision-making, and control. They use the information to judge the effectiveness of their policies and make strategic adjustments.
-
Shareholders/Owners: Shareholders use financial statements to assess the performance of the management and the profitability and financial health of their investment. This information helps them decide whether to retain, sell, or increase their shareholding.
-
Investors (Potential): Prospective investors analyze financial statements to evaluate the company's earning capacity and financial solvency. This helps them decide whether investing in the company would be a secure and profitable venture.
-
Creditors and Lenders: Banks, financial institutions, and suppliers (trade creditors) use financial statements to assess the company's ability to meet its debt obligations. They analyze the liquidity and solvency of the company before granting credit or loans.
-
Government and Tax Authorities: Government agencies use financial statements to formulate economic policies, grant subsidies, and determine taxation policies. Tax authorities use them to ensure the correct amount of tax has been paid.
-
Employees: Employees and trade unions are interested in the financial statements to assess the company's stability and profitability. This information is crucial for negotiating wages, bonuses, and better working conditions, and for gauging their job security.
-
Public: The public at large may be interested in a company's financial statements to understand its role in the economy, its social responsibilities, and its contribution to employment and community welfare.
Q7Long Answer Questions
'Financial statements reflect a combination of recorded facts, accounting conventions and personal judgements'. Discuss.
Solution
This statement by the American Institute of Certified Public Accountants accurately describes the nature of financial statements. They are not merely a collection of absolute facts but are a product of a structured process involving facts, established rules, and professional estimations. The discussion is as follows:
-
Recorded Facts: The foundation of financial statements is the data recorded in the books of accounts. Transactions are recorded based on evidence like invoices and receipts. For example, the amount of cash in the bank, the cost of a fixed asset purchased, and the amount owed to a creditor are all recorded facts. These are captured at their historical cost, which is an objective, verifiable fact at the time of the transaction.
-
Accounting Conventions: To ensure consistency and comparability, the preparation of financial statements is governed by a set of rules and conventions. These are the ground rules of accounting. Examples include:
- Conservatism: Valuing inventory at cost or market price, whichever is lower, to avoid overstating assets.
- Materiality: Treating small-value items like stationery as an expense immediately, rather than capitalizing them, to simplify accounting.
- Going Concern: Assuming the business will continue indefinitely, which justifies carrying assets at cost less depreciation rather than their immediate sale value. These conventions, while useful, mean the statements are prepared according to a specific set of rules, not just raw data.
-
Personal Judgements: Financial statements are not free from subjectivity. Accountants must use their professional judgement and make estimates in several areas. For example:
- Depreciation: The estimation of an asset's useful life and its residual value is a matter of personal judgement.
- Provision for Doubtful Debts: The amount to be set aside for potential bad debts is an estimate based on past experience and future expectations.
- Inventory Valuation: Deciding the 'market value' of inventory or assessing obsolescence requires judgement.
In conclusion, financial statements are a blend of objective data (recorded facts), standardized procedures (accounting conventions), and subjective estimations (personal judgements). This combination makes them a useful but imperfect representation of a company's financial reality. Users must understand this composite nature to interpret the statements correctly.
Q8Long Answer Questions
Explain the process of preparing income statement and balance sheet.
Solution
The preparation of the Income Statement (Statement of Profit and Loss) and the Balance Sheet is the final step in the accounting cycle. They are the end products of the accounting process, summarizing the financial activities of a company for a period and its financial position at the end of that period.
The process involves the following key steps:
-
Completion of the Accounting Cycle: Before preparing the final statements, all transactions for the accounting period must be recorded in journals, posted to ledgers, and a trial balance must be prepared to check the arithmetical accuracy of the books.
-
Making Adjustments: Adjusting entries are passed for items like outstanding expenses, prepaid expenses, accrued income, depreciation, and provisions. An adjusted trial balance is then prepared, which forms the basis for the financial statements.
-
Preparation of the Statement of Profit and Loss:
- All nominal accounts (accounts of incomes, expenses, gains, and losses) from the adjusted trial balance are transferred to the Statement of Profit and Loss.
- The statement is prepared in the vertical format prescribed by Schedule III of the Companies Act, 2013.
- It begins with 'Revenue from Operations' and 'Other Income' to arrive at 'Total Revenue'.
- Then, all expenses are listed under specific heads like 'Cost of Materials Consumed', 'Employee Benefit Expenses', 'Finance Costs', 'Depreciation', etc., to calculate 'Total Expenses'.
- The difference between 'Total Revenue' and 'Total Expenses' gives the 'Profit before tax'. After adjusting for tax, the final 'Profit/(Loss) for the period' is ascertained.
-
Preparation of the Balance Sheet:
- All real and personal accounts (accounts of assets, liabilities, and capital) from the adjusted trial balance are transferred to the Balance Sheet.
- The net profit or loss calculated from the Statement of Profit and Loss is transferred to 'Reserves and Surplus' under 'Shareholders' Funds' on the Equity and Liabilities side of the Balance Sheet.
- The Balance Sheet is also prepared in the vertical format prescribed by Schedule III.
- It has two main sections: 'Equity and Liabilities' and 'Assets'.
- Assets and Liabilities are further classified into 'Non-Current' and 'Current' categories.
- The total of the 'Equity and Liabilities' side must equal the total of the 'Assets' side, signifying that the accounting equation (Assets = Liabilities + Equity) is in balance.
Q1Numerical Questions
Show the following items in the balance sheet as per the provisions of the companies Act, 2013 in Schedule III:
Particulars (Rs.) Particulars (Rs.) Preliminary Expenses 2,40,000 Goodwill 30,000 Discount on issue of shares 20,000 Loose tools 12,000 10% Debentures 2,00,000 Motor Vehicles 4,75,000 Stock in trade 1,40,000 Provision for tax 16,000 Cash at bank 1,35,000 Bills receivable 1,20,000
Solution
Balance Sheet (Extract) as at ...
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| Non-Current Liabilities | ||
| Long-term borrowings | 1 | 2,00,000 |
| Current Liabilities | ||
| Short-term provisions | 2 | 16,000 |
| II. ASSETS | ||
| Non-Current Assets | ||
| Fixed assets | ||
| (i) Tangible assets | 3 | 4,75,000 |
| (ii) Intangible assets | 4 | 30,000 |
| Other non-current assets | 5 | 2,60,000 |
| Current Assets | ||
| Inventories | 6 | 1,52,000 |
| Trade receivables | 7 | 1,20,000 |
| Cash and cash equivalents | 8 | 1,35,000 |
Notes to Accounts
| Note No. | Particulars | Amount (Rs.) |
|---|---|---|
| 1 | Long-term Borrowings | |
| 10% Debentures | 2,00,000 | |
| 2 | Short-term Provisions | |
| Provision for Tax | 16,000 | |
| 3 | Tangible Assets | |
| Motor Vehicles | 4,75,000 | |
| 4 | Intangible Assets | |
| Goodwill | 30,000 | |
| 5 | Other Non-current Assets | |
| Preliminary Expenses | 2,40,000 | |
| Discount on issue of shares | 20,000 | |
| Total | 2,60,000 | |
| 6 | Inventories | |
| Stock in Trade | 1,40,000 | |
| Loose Tools | 12,000 | |
| Total | 1,52,000 | |
| 7 | Trade Receivables | |
| Bills Receivable | 1,20,000 | |
| 8 | Cash and Cash Equivalents | |
| Cash at Bank | 1,35,000 |
Note: As per accounting principles, Preliminary Expenses and Discount on Issue of Shares should be written off in the year they are incurred, first from Securities Premium and then from the Statement of Profit and Loss. If they are not written off, they are shown under 'Other Non-current Assets' or 'Other Current Assets' depending on the period over which they will be written off.
Q2Numerical Questions
On April 1, 2017, Jumbo Ltd., issued 10,000; 12% debentures of Rs. 100 each a discount of 20%, redeemable after 5 years. The company decided to write-off discount on issue of such debentures on March 31, 2018. Show the items in the balance sheet of the company immediately after the issue of these debentures.
Solution
Balance Sheet of Jumbo Ltd. (Extract) as at April 1, 2017
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| Shareholders' Funds | ||
| Reserves and Surplus | 1 | (2,00,000) |
| Non-Current Liabilities | ||
| Long-term borrowings | 2 | 10,00,000 |
| Total | 8,00,000 | |
| II. ASSETS | ||
| Current Assets | ||
| Cash and cash equivalents | 3 | 8,00,000 |
| Total | 8,00,000 |
Notes to Accounts
| Note No. | Particulars | Amount (Rs.) |
|---|---|---|
| 1 | Reserves and Surplus | |
| Surplus, i.e., Balance in Statement of Profit and Loss | ||
| (Discount on Issue of Debentures written off) | (2,00,000) | |
| 2 | Long-term Borrowings | |
| 10,000; 12% Debentures of Rs. 100 each | 10,00,000 | |
| 3 | Cash and Cash Equivalents | |
| Cash at Bank (10,00,000 - 2,00,000) | 8,00,000 |
Working Note:
- Discount on Issue of Debentures: 10,000 Debentures × Rs. 100 × 20% = Rs. 2,00,000
- Cash Received: (10,000 Debentures × Rs. 100) - Rs. 2,00,000 = Rs. 8,00,000
- As per the text, borrowing costs such as discount on issue of debentures should be written off in the same year. This amount is debited to the Statement of Profit and Loss, creating a negative balance under Reserves and Surplus.
Q3Numerical Questions
From the following information prepare the balance sheet of Gitanjali Ltd. Inventories Rs. 14,00,000; Equity Share Capital Rs. 20,00,000; Plant and Machinery Rs. 10,00,000; Preference Share Capital Rs. 12,00,000; Debenture Redemption Reserve Rs. 6,00,000; Outstanding Expenses Rs. 3,00,000; Proposed Dividend Rs. 5,00,000; Land and Building Rs. 20,00,000; Current Investments Rs. 8,00,000; Cash Equivalent Rs. 10,00,000; Short term loan from Zaveri Ltd. (A Subsidiary Company of Twilight Ltd.) Rs. 4,00,000; Public Deposits Rs. 12,00,000.
Solution
Balance Sheet of Gitanjali Ltd. as at ...
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 1 | 32,00,000 |
| (b) Reserves and Surplus | 2 | 6,00,000 |
| 2. Non-Current Liabilities | ||
| (a) Long-term borrowings | 3 | 12,00,000 |
| 3. Current Liabilities | ||
| (a) Short-term borrowings | 4 | 4,00,000 |
| (b) Other current liabilities | 5 | 3,00,000 |
| Total | 57,00,000 | |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Fixed assets | ||
| (i) Tangible assets | 6 | 30,00,000 |
| 2. Current Assets | ||
| (a) Current investments | 8,00,000 | |
| (b) Inventories | 14,00,000 | |
| (c) Cash and cash equivalents | 10,00,000 | |
| Total | 62,00,000 |
There seems to be a mismatch in the totals of the provided data. Re-checking the question data reveals assets total Rs. 62,00,000 and liabilities total Rs. 57,00,000. Assuming there is a missing item of Rs. 5,00,000 on the liabilities side (e.g., Statement of Profit and Loss credit balance), the balance sheet would tally. However, based strictly on the data provided, it does not balance. The solution below is presented as per the given items.
Corrected Solution based on given items:
Balance Sheet of Gitanjali Ltd. as at ...
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 1 | 32,00,000 |
| (b) Reserves and Surplus | 2 | 6,00,000 |
| 2. Non-Current Liabilities | ||
| (a) Long-term borrowings | 3 | 12,00,000 |
| 3. Current Liabilities | ||
| (a) Short-term borrowings | 4 | 4,00,000 |
| (b) Other current liabilities | 5 | 3,00,000 |
| Total Equity and Liabilities | 57,00,000 | |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Fixed assets | ||
| (i) Tangible assets | 6 | 30,00,000 |
| 2. Current Assets | ||
| (a) Current investments | 8,00,000 | |
| (b) Inventories | 14,00,000 | |
| (c) Cash and cash equivalents | 10,00,000 | |
| Total Assets | 62,00,000 |
Notes to Accounts
| Note No. | Particulars | Amount (Rs.) |
|---|---|---|
| 1 | Share Capital | |
| Equity Share Capital | 20,00,000 | |
| Preference Share Capital | 12,00,000 | |
| Total | 32,00,000 | |
| 2 | Reserves and Surplus | |
| Debenture Redemption Reserve | 6,00,000 | |
| 3 | Long-term Borrowings | |
| Public Deposits | 12,00,000 | |
| 4 | Short-term Borrowings | |
| Short term loan from Zaveri Ltd. | 4,00,000 | |
| 5 | Other Current Liabilities | |
| Outstanding Expenses | 3,00,000 | |
| 6 | Tangible Assets | |
| Land and Building | 20,00,000 | |
| Plant and Machinery | 10,00,000 | |
| Total | 30,00,000 | |
| 7 | Contingent Liabilities | |
| Proposed Dividend | 5,00,000 |
Q4Numerical Questions
From the following information prepare the balance sheet of Jam Ltd. Inventories Rs. 7,00,000; Equity Share Capital Rs. 16,00,000; Plant and Machinery Rs. 8,00,000; 8% Preference Share Capital Rs. 6,00,000; General Reserves Rs. 6,00,000; Bills payable Rs. 1,50,000; Provision for taxation Rs. 2,50,000; Land and Building Rs. 16,00,000; Non-current Investments Rs. 10,00,000; Cash at Bank Rs. 5,00,000; Creditors Rs. 2,00,000; 12% Debentures Rs. 12,00,000.
Solution
Balance Sheet of Jam Ltd. as at ...
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 1 | 22,00,000 |
| (b) Reserves and Surplus | 2 | 6,00,000 |
| 2. Non-Current Liabilities | ||
| (a) Long-term borrowings | 3 | 12,00,000 |
| 3. Current Liabilities | ||
| (a) Trade payables | 4 | 3,50,000 |
| (b) Short-term provisions | 5 | 2,50,000 |
| Total | 46,00,000 | |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Fixed assets | ||
| (i) Tangible assets | 6 | 24,00,000 |
| (b) Non-current investments | 10,00,000 | |
| 2. Current Assets | ||
| (a) Inventories | 7,00,000 | |
| (b) Cash and cash equivalents | 7 | 5,00,000 |
| Total | 46,00,000 |
Notes to Accounts
| Note No. | Particulars | Amount (Rs.) |
|---|---|---|
| 1 | Share Capital | |
| Equity Share Capital | 16,00,000 | |
| 8% Preference Share Capital | 6,00,000 | |
| Total | 22,00,000 | |
| 2 | Reserves and Surplus | |
| General Reserves | 6,00,000 | |
| 3 | Long-term Borrowings | |
| 12% Debentures | 12,00,000 | |
| 4 | Trade Payables | |
| Creditors | 2,00,000 | |
| Bills Payable | 1,50,000 | |
| Total | 3,50,000 | |
| 5 | Short-term Provisions | |
| Provision for Taxation | 2,50,000 | |
| 6 | Tangible Assets | |
| Land and Building | 16,00,000 | |
| Plant and Machinery | 8,00,000 | |
| Total | 24,00,000 | |
| 7 | Cash and Cash Equivalents | |
| Cash at Bank | 5,00,000 |
Q5Numerical Questions
Prepare the balance sheet of Jyoti Ltd., as at March 31, 2017 from the following information. Building Rs. 10,00,000; Investments in the shares of Metro Tyers Ltd. Rs. 3,00,000; Stores & Spares Rs. 1,00,000; Statement of Profit and Loss (Dr.) Rs. 90,000; 5,00,000 Equity Shares of Rs. 20 each fully paid-up; Capital Redemption Reserve Rs. 1,00,000; 10% Debentures Rs. 3,00,000; Unpaid dividends Rs. 90,000; Share options outstanding account Rs. 10,000.
Solution
Balance Sheet of Jyoti Ltd. as at March 31, 2017
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 1 | 1,00,00,000 |
| (b) Reserves and Surplus | 2 | 20,000 |
| 2. Non-Current Liabilities | ||
| (a) Long-term borrowings | 3 | 3,00,000 |
| 3. Current Liabilities | ||
| (a) Other current liabilities | 4 | 90,000 |
| Total | 1,04,10,000 | |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Fixed assets | ||
| (i) Tangible assets | 5 | 10,00,000 |
| (b) Non-current investments | 6 | 3,00,000 |
| 2. Current Assets | ||
| (a) Inventories | 7 | 1,00,000 |
| Total | 14,00,000 |
Note: The totals of the Balance Sheet do not match based on the figures provided in the question. Equity and Liabilities total Rs. 1,04,10,000 while Assets total Rs. 14,00,000. There appears to be a significant error in the question's data (likely the face value of shares). Assuming the Share Capital is Rs. 10,00,000 instead of Rs. 1,00,00,000, the balance sheet would appear as follows:
Revised Solution (Assuming Share Capital is Rs. 10,00,000)
Balance Sheet of Jyoti Ltd. as at March 31, 2017
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 1 | 10,00,000 |
| (b) Reserves and Surplus | 2 | 20,000 |
| 2. Non-Current Liabilities | ||
| (a) Long-term borrowings | 3 | 3,00,000 |
| 3. Current Liabilities | ||
| (a) Other current liabilities | 4 | 90,000 |
| Total | 14,10,000 | |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Fixed assets | ||
| (i) Tangible assets | 5 | 10,00,000 |
| (b) Non-current investments | 6 | 3,00,000 |
| 2. Current Assets | ||
| (a) Inventories | 7 | 1,00,000 |
| (b) Cash and cash equivalents (Balancing Figure) | 10,000 | |
| Total | 14,10,000 |
Notes to Accounts
| Note No. | Particulars | Amount (Rs.) | Amount (Rs.) |
|---|---|---|---|
| 1 | Share Capital | ||
| 5,00,000 Equity Shares of Rs. 20 each | 1,00,00,000 | ||
| (Revised: Assuming Share Capital is Rs. 10,00,000) | 10,00,000 | ||
| 2 | Reserves and Surplus | ||
| Capital Redemption Reserve | 1,00,000 | ||
| Share Options Outstanding Account | 10,000 | ||
| Less: Statement of Profit and Loss (Debit Balance) | (90,000) | ||
| Total | 20,000 | ||
| 3 | Long-term Borrowings | ||
| 10% Debentures | 3,00,000 | ||
| 4 | Other Current Liabilities | ||
| Unpaid Dividends | 90,000 | ||
| 5 | Tangible Assets | ||
| Building | 10,00,000 | ||
| 6 | Non-current Investments | ||
| Investments in the shares of Metro Tyers Ltd. | 3,00,000 | ||
| 7 | Inventories | ||
| Stores & Spares | 1,00,000 |
Q6Numerical Questions
Brinda Ltd., has furnished the following information:
(a)
25,000, 10% debentures of Rs. 100 each;
(b)
Bank Loan of Rs. 10,00,000 repayable after 5 years;
(c)
Interest on debentures is yet to be paid.
Show the above items in the balance sheet of the company as at March 31, 2017.
Solution
Balance Sheet of Brinda Ltd. (Extract) as at March 31, 2017
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| Non-Current Liabilities | ||
| Long-term borrowings | 1 | 35,00,000 |
| Current Liabilities | ||
| Other current liabilities | 2 | 2,50,000 |
Notes to Accounts
| Note No. | Particulars | Amount (Rs.) |
|---|---|---|
| 1 | Long-term Borrowings | |
| 25,000; 10% Debentures of Rs. 100 each | 25,00,000 | |
| Bank Loan (repayable after 5 years) | 10,00,000 | |
| Total | 35,00,000 | |
| 2 | Other Current Liabilities | |
| Interest accrued and due on debentures (Note) | 2,50,000 |
Working Note:
Interest on Debentures yet to be paid = 10% of Rs. 25,00,000 = Rs. 2,50,000. This is an 'accrued and due' liability and is classified under 'Other Current Liabilities'.
Q7Numerical Questions
Prepare a balance sheet of Black Swan Ltd., as at March 31, 2017 from the following information:
Rs. General Reserve : 3,000 10% Debentures : 3,000 Balance in Statement of Profit and Loss : 1,200 Depreciation on fixed assets : 700 Gross Block : 9,000 Current Liabilities : 2,500 Preliminary Expenses : 300 6% Preference Share Capital : 5,000 Cash & Cash Equivalents : 6,100
Solution
Balance Sheet of Black Swan Ltd. as at March 31, 2017
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 1 | 5,000 |
| (b) Reserves and Surplus | 2 | 3,900 |
| 2. Non-Current Liabilities | ||
| (a) Long-term borrowings | 3 | 3,000 |
| 3. Current Liabilities | 2,500 | |
| Total | 14,400 | |
| II. ASSETS | ||
| 1. Non-Current Assets | ||
| (a) Fixed assets | ||
| (i) Tangible assets | 4 | 8,300 |
| 2. Current Assets | ||
| (a) Cash and cash equivalents | 6,100 | |
| Total | 14,400 |
Notes to Accounts
| Note No. | Particulars | Amount (Rs.) | Amount (Rs.) |
|---|---|---|---|
| 1 | Share Capital | ||
| 6% Preference Share Capital | 5,000 | ||
| 2 | Reserves and Surplus | ||
| General Reserve | 3,000 | ||
| Balance in Statement of Profit and Loss | 1,200 | ||
| 4,200 | |||
| Less: Preliminary Expenses written off | (300) | ||
| Total | 3,900 | ||
| 3 | Long-term Borrowings | ||
| 10% Debentures | 3,000 | ||
| 4 | Tangible Assets | ||
| Gross Block | 9,000 | ||
| Less: Depreciation | (700) | ||
| Net Block | 8,300 |
Note: Preliminary expenses should be written off completely in the year they are incurred from the Statement of Profit and Loss.
Q1Short Answer Questions
State the meaning of financial statements?
Solution
Financial statements are the basic and formal annual reports that are the end products of the accounting process. They communicate financial information from the corporate management to its owners and other external parties. They reveal the financial results for a specified period (Statement of Profit and Loss) and the financial position on a particular date (Balance Sheet). These statements are prepared following accounting concepts, principles, and legal requirements to provide a basis for drawing conclusions about a company's profitability and financial position.
Q2Short Answer Questions
What are limitations of financial statements?
Solution
The limitations of financial statements are as follows:
- Do not reflect current situation: They are based on historical cost, not current market values, which can be misleading as the purchasing power of money changes.
- Assets may not realise: The values shown for assets are unamortised costs and may not be achievable if the company is forced into liquidation.
- Bias: They are influenced by personal judgements and estimates (e.g., provision for doubtful debts, asset life for depreciation), which can introduce bias.
- Aggregate information: They provide summarised information, which may lack the detail needed for specific decisions.
- Vital information missing: They do not disclose non-financial information that has a vital bearing on the enterprise, such as loss of markets or cessation of agreements.
- No qualitative information: They only contain monetary information and omit qualitative aspects like labour relations, quality of work, and industrial climate.
- They are only interim reports: They show performance for a specific period and position at a specific point in time, not the earning capacity over time or likely future changes.
Q3Short Answer Questions
List any three objectives of financial statements?
Solution
The three main objectives of financial statements are:
- To provide information about economic resources and obligations of a business: They offer adequate and reliable information about a firm's assets and liabilities to investors and other external parties.
- To provide information about the earning capacity of the business: They provide useful financial information that can be used to predict, compare, and evaluate the business firm's ability to generate profits.
- To provide information about cash flows: They provide information useful to investors and creditors for predicting, comparing, and evaluating potential cash flows in terms of amount, timing, and related uncertainties.
Q4Short Answer Questions
State the importance of financial statements to :
(i)
shareholders
(ii)
creditors
(iii)
government
(iv)
investors
Solution
The importance of financial statements to various parties is as follows:
(i) Shareholders: Financial statements report on the performance of the management (stewardship function) and help shareholders assess the status, safety, and return on their investment. This information aids them in making decisions about continuing or discontinuing their investment in the business.
(ii) Creditors: Credit granting institutions like banks and financial institutions use financial statements to assess the financial performance and solvency of a company. This forms the basis for their decision on whether to grant credit and on what terms.
(iii) Government: The government uses financial statements to formulate fiscal policies, particularly taxation policies. The financial performance of corporate undertakings provides the basic input for industrial, taxation, and other economic policies.
(iv) Investors: Prospective investors use financial statements to assess the security, liquidity, and profitability of a potential investment. The statements help them evaluate the long-term and short-term solvency as well as the earning capacity of the concern to make informed investment decisions.
Q5Short Answer Questions
How will you disclose the following items in the Balance Sheet of a company;
(i)
Current assets, inventory
(ii)
Contigent liabilities in notes to accounts
(iii)
Shareholders Funds, Reserve and Surplus
(iv)
Fixed Assets, Intangible Assets
(v)
Proposed Dividend for the current year
(vi)
Non Current Liabilities
(vii)
Arrears of Dividend on Commulative Preference Shares.
Solution
The disclosure of the following items in the Balance Sheet of a company as per Schedule III is as follows:
(i) Current assets, inventory: This will be shown under the Major Head 'ASSETS' and the Sub-head 'Current Assets'. 'Inventories' is a specific line item under Current Assets.
(ii) Contingent liabilities in notes to accounts: Contingent liabilities are not shown on the face of the Balance Sheet. They are disclosed by way of a note in the 'Notes to Accounts'.
(iii) Shareholders Funds, Reserve and Surplus: This will be shown under the Major Head 'EQUITY AND LIABILITIES' and the Sub-head 'Shareholders' Funds'. 'Reserves and Surplus' is a specific line item under Shareholders' Funds.
(iv) Fixed Assets, Intangible Assets: This will be shown under the Major Head 'ASSETS' and the Sub-head 'Non-Current Assets'. 'Fixed assets' is a line item under Non-Current Assets, which is further classified into 'Tangible assets' and 'Intangible assets'.
(v) Proposed Dividend for the current year: As per AS-4, the proposed dividend for the current year is not a liability at the balance sheet date because it has not been approved by shareholders. It is disclosed as a contingent liability in the 'Notes to Accounts'.
(vi) Non Current Liabilities: This is a Major Head shown under 'EQUITY AND LIABILITIES', after Shareholders' Funds.
(vii) Arrears of Dividend on Cumulative Preference Shares: This is not a liability until the dividend is declared. It is disclosed as a contingent liability in the 'Notes to Accounts'.