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Financial Statements of a Company

Financial Statements of a Company

Action PlanNotesQuestionsMock-Test
Study Action Plan (Sorted by Difficulty)
Limitations of Financial Statements
Accuracy: 33%
Total Attempted3
Total Correct1
Total Incorrect2
Difficulty Level:
High
Statement of Profit and Loss
Accuracy: 67%
Total Attempted3
Total Correct2
Total Incorrect1
Difficulty Level:
Medium
Accounting Standards and Conventions
Accuracy: 75%
Total Attempted4
Total Correct3
Total Incorrect1
Difficulty Level:
Low
Financial Statements of a Company
Accuracy: 89%
Total Attempted9
Total Correct8
Total Incorrect1
Difficulty Level:
Low
Balance Sheet Format and Content
Accuracy: 100%
Total Attempted5
Total Correct5
Total Incorrect0
Difficulty Level:
Low
Share Capital and Reserves
Accuracy: 100%
Total Attempted6
Total Correct6
Total Incorrect0
Difficulty Level:
Low

Learning Objectives

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Learning Objectives

  • Explain the nature and objectives of financial statements of a company.
  • Describe the form and content of Statement of Profit and Loss of a company as per Schedule III.
  • Describe the form and content of balance sheet of a company as per Schedule III.
  • Explain the significance and limitations of financial statements.
  • Prepare the financial statements.

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Revision Notes & Summary

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Financial Statements of a Company

Nature of Financial Statements

  • Financial statements are based on recorded facts expressed in monetary terms for a defined period.
  • They reflect a combination of recorded facts, accounting principles, and personal judgments.

Key Points:

  1. Recorded Facts: Based on cost data recorded in accounting books.
  2. Accounting Conventions: Follow conventions like valuing inventory at cost or market price, whichever is lower.
  3. Postulates: Prepared on assumptions such as going concern and money measurement.

Objectives of Financial Statements

  • Provide information about economic resources and obligations of a business.
  • Offer insights into the earning capacity of the business.
  • Deliver information about cash flows useful for predicting and evaluating potential cash flows.

Important Components of Financial Statements

1. Balance Sheet

  • Shows all assets owned, obligations to creditors, and claims of owners.
  • Structure:
    • Equity and Liabilities:
      • Shareholders' Funds
      • Non-current Liabilities
      • Current Liabilities
    • Assets:
      • Non-current Assets
      • Current Assets

2. Statement of Profit and Loss

  • Discloses profit/loss for a specified period.
  • Reflects the earning capacity over time.

Notes to Accounts

  • Preliminary Expenses: Written off in the year incurred.
  • Borrowings: Classified into long-term and short-term based on repayment terms.

Limitations of Financial Statements

  1. Bias: Results may not be realistic due to personal judgments.
  2. Aggregate Information: Lacks detailed information for decision-making.
  3. Missing Vital Information: Does not disclose market losses or agreement cessations.
  4. No Qualitative Information: Only monetary data is presented.
  5. Interim Reports: Reflects status at a specific time, not future changes.

Common Items in Balance Sheet

S. No.ItemsMajor HeadSub-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
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Practice Test – MCQs, True/False

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Multiple Choice Questions

A.

As a current asset

B.

As a non-current asset

C.

Written off against reserves

D.

Shown under liabilities
Correct Answer: C

Solution:

Preliminary expenses should be written off against reserves or the statement of profit and loss.

Chapter Concept:

Balance Sheet Format and Content

A.

As part of revenue

B.

As part of expenses

C.

As part of other income

D.

As part of equity
Correct Answer: B

Solution:

Finance costs are categorized as expenses in the Statement of Profit and Loss.

Chapter Concept:

Statement of Profit and Loss

A.

Trade payables

B.

Short-term borrowings

C.

Long-term borrowings

D.

Cash and cash equivalents
Correct Answer: C

Solution:

Long-term borrowings are classified as non-current liabilities as they are repayable over a period longer than 12 months.

Chapter Concept:

Financial Statements of a Company

A.

Sundry Debtors

B.

Trade Receivables

C.

Proposed Dividend

D.

Unclaimed Dividend
Correct Answer: B

Solution:

The term 'Sundry Debtors' has been replaced by 'Trade Receivables' as a mandatory disclosure in the balance sheet as per the Companies Act, 2013.

Chapter Concept:

Financial Statements of a Company

A.

Quantitative financial data

B.

Qualitative information like employee satisfaction

C.

Historical financial performance

D.

Aggregate financial data
Correct Answer: B

Solution:

Financial statements contain only monetary information and do not provide qualitative information such as employee satisfaction or industrial relations.

Chapter Concept:

Limitations of Financial Statements

A.

Share Capital

B.

Reserves and Surplus

C.

Current Liabilities

D.

Non-current Liabilities
Correct Answer: B

Solution:

'Securities Premium Reserve' is classified under 'Reserves and Surplus' in the balance sheet.

Chapter Concept:

Share Capital and Reserves

A.

They reflect the current market value of assets.

B.

They provide qualitative information about the business.

C.

They are prepared based on historical cost.

D.

They include detailed information about every transaction.
Correct Answer: C

Solution:

Financial statements are prepared based on historical cost, not current market values.

Chapter Concept:

Share Capital and Reserves

A.

Based on the liquidity of assets

B.

Based on the operating cycle of the entity

C.

Based on the market value of assets

D.

Based on the historical cost of assets
Correct Answer: B

Solution:

The primary distinction between 'Current' and 'Non-current' classification is based on the operating cycle of the entity and whether the asset or liability is expected to be realized or settled within twelve months.

Chapter Concept:

Balance Sheet Format and Content

A.

They do not reflect current market conditions.

B.

They provide detailed qualitative information.

C.

They are based on historical costs.

D.

They may contain bias due to personal judgments.
Correct Answer: B

Solution:

Financial statements do not provide detailed qualitative information; they primarily contain monetary information.

Chapter Concept:

Financial Statements of a Company

A.

Trade payables

B.

Short-term borrowings

C.

Long-term borrowings

D.

Inventories
Correct Answer: C

Solution:

Long-term borrowings are classified under 'Non-current Liabilities' as they are obligations that are not expected to be settled within the company's operating cycle or within 12 months.

Chapter Concept:

Balance Sheet Format and Content

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Financial Statements of a Company

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True or False

Correct Answer: False

Solution:

The Statement of Profit and Loss includes a section for extraordinary items, as per the format described in the excerpts.

Chapter Concept :

Statement of Profit and Loss

Correct Answer: True

Solution:

The balance sheet must disclose the rights, preferences, and restrictions attached to each class of shares, as this is a requirement for transparency and clarity in financial reporting.

Chapter Concept :

Share Capital and Reserves

Correct Answer: True

Solution:

Financial statements are based on recorded facts using historical cost, which does not account for changes in the purchasing power of money, thus not reflecting the current market situation.

Chapter Concept :

Financial Statements of a Company

Correct Answer: False

Solution:

Schedule III of the Companies Act specifies that 'Proposed Dividend' is not shown as a current liability but is disclosed in the notes to accounts as a contingent liability until it is approved by shareholders.

Chapter Concept :

Balance Sheet Format and Content

Correct Answer: True

Solution:

Financial statements are based on historical cost, meaning they reflect the cost at the time of purchase, not current market value.

Chapter Concept :

Financial Statements of a Company

Correct Answer: True

Solution:

The Statement of Profit and Loss is designed to report the revenue earned and expenses incurred during a specific period, as outlined in the provided excerpts.

Chapter Concept :

Statement of Profit and Loss

Correct Answer: False

Solution:

Financial statements contain only monetary information and do not include qualitative information like industrial relations, industrial climate, labour relations, or quality of work.

Chapter Concept :

Limitations of Financial Statements

Correct Answer: False

Solution:

Share application money pending allotment is classified as non-current if it does not exceed the issued capital and is non-refundable.

Chapter Concept :

Share Capital and Reserves

Correct Answer: True

Solution:

Schedule III mandates that assets and liabilities be classified into current and non-current categories to provide a clear financial position.

Chapter Concept :

Balance Sheet Format and Content

Correct Answer: True

Solution:

According to the Companies Act, 2013, 'Share Application Money Pending Allotment' is classified as a non-current liability when it does not exceed the issued capital and is non-refundable.

Chapter Concept :

Share Capital and Reserves

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