CHAPTER 11
FINANCIAL STATEMENTS OF COMPANIES
ONE WORD TO ONE SENTENCE QUESTIONS
Q.1. What is
the number of major heads which appear at the ‘’Assets side’’ of the balance
sheet?
Ans. The
number of major heads that appear on the "Assets side" of the balance
sheet can vary depending on the specific classification used by a company.
However, a common classification includes five major heads:
1. Fixed
Assets
2. Current
Assets
3. Investments
4. Loans
and Advances
5. Miscellaneous
Expenditure
These major
heads categorize the different types of assets held by a company. It's
important to note that the specific classification and major heads may vary
depending on the company's industry, size, and reporting standards followed.
Q.2. What are
the major headings under which the assets of a company are listed in the
balance sheet?
Ans. The major headings under which the assets of a company are listed in the
balance sheet include:
Fixed Assets: This includes long-term assets such as land,
buildings, machinery, vehicles, and other tangible assets that are used in the
company's operations.
Current Assets: This includes short-term assets that are
expected to be converted into cash or used up within one year, such as cash and
bank balances, accounts receivable, inventory, and prepaid expenses.
Investments: This includes long-term investments
made by the company, such as investments in shares, bonds, and other securities
of other companies.
Loans and Advances: This includes loans and advances given by the
company to others, such as loans to employees, advances to suppliers, or loans
to subsidiaries.
Miscellaneous Assets: This includes any other assets that do not fit
into the above categories, such as intangible assets (patents, copyrights),
deferred tax assets, or any other long-term assets not classified elsewhere.
It's
important to note that the specific classification and headings may vary
depending on the company's industry, size, and reporting standards followed.
Q.3.What is the
number of major heads which appear on the ‘’Equity and liabilities’’ side of
the balance sheet?
Ans. The
number of major heads that appear on the "Equity and Liabilities"
side of the balance sheet can vary depending on the specific company and its
reporting requirements. However, in general, there are commonly six major heads
under which the equity and liabilities are listed:
Shareholders' Equity: This includes the capital
contributed by shareholders, such as share capital, share premium, and retained
earnings.
Reserves and Surplus: This includes accumulated profits
of the company that are not distributed as dividends, such as general reserves,
specific reserves, and other reserves.
Long-Term Borrowings: This includes long-term loans and borrowings of
the company, such as bank loans, debentures, and long-term notes payable.
Short-Term Borrowings: This includes short-term loans and borrowings
that are due within one year, such as bank overdrafts, short-term loans, and
trade payables.
Current Liabilities: This includes liabilities that are
expected to be settled within one year, such as accounts payable, accrued expenses,
and short-term provisions.
Miscellaneous Liabilities: This includes any other liabilities that do not
fit into the above categories, such as deferred tax liabilities, deferred
revenue, or any other long-term liabilities not classified elsewhere.
Again, it's
important to note that the specific classification and headings may vary
depending on the company's industry, size, and reporting standards followed.
Q.4. What are
the major headings under which the liabilities of a company shown in the balance
sheet?
Ans. n a balance sheet, the major headings under which the liabilities of a
company are shown include:
Shareholders' Equity: This represents the ownership interest in the
company and includes share capital, share premium, and retained earnings.
Long-Term Liabilities: This includes obligations or debts that are due
beyond one year, such as long-term loans, bonds, and mortgages.
Short-Term Liabilities: This includes obligations or debts that are due
within one year, such as trade payables, short-term loans, and accrued
expenses.
Provisions: This represents estimated liabilities for
uncertain future events or obligations, such as provision for taxes, provision
for warranties, or provision for employee benefits.
Deferred Income: This includes income received in advance but
not yet earned, such as prepaid revenue or advance payments from customers.
Other Liabilities: This category includes any other liabilities
that do not fall under the above headings, such as deferred tax liabilities,
contingent liabilities, or other long-term liabilities.
It's
important to note that the specific classification and headings may vary
depending on the company's industry, size, and reporting standards followed.
Q.5. Under what
heading will you show ‘’LAND’’ in the balance sheet of the company?
Ans. In the
balance sheet of a company, "Land" is typically shown under the major
heading of "Fixed Assets" or "Non-Current Assets." Fixed
assets include long-term tangible assets that are held by the company for
productive use and are not intended for sale in the ordinary course of
business. Other examples of fixed assets include buildings, machinery, equipment,
vehicles, and furniture.
Under the
"Fixed Assets" heading, land is usually listed as a separate line
item along with other tangible fixed assets. It is important to note that the
specific presentation and classification of assets may vary based on the
company's accounting policies and reporting standards.
Q.6. Write any
two items presented under the head ‘’Intangible assets’’ in the balance sheet
of a company?
Ans. In the balance sheet of a company, under the head "Intangible
Assets," two common items that can be presented are:
Goodwill: Goodwill represents the intangible value of a
business that arises from factors such as reputation, customer loyalty, brand
recognition, and intellectual property. It is typically recorded when a company
is acquired for a price higher than the fair value of its identifiable tangible
and intangible assets.
Intellectual Property: Intellectual property includes
assets such as patents, trademarks, copyrights, and trade secrets. These
intangible assets provide legal protection for unique inventions, branding
elements, artistic works, and proprietary knowledge. They contribute to a
company's competitive advantage and are often valued and reported on the
balance sheet.
Q.7. Name two items shown under the heading ‘’non-Current investments
Ans. In the balance sheet of a company,
under the heading "Non-Current Investments," two common items that
can be shown are:
Equity Investments: These represent ownership stakes in other
companies, typically in the form of shares or stocks. Non-current equity
investments are long-term holdings in other businesses that the company does
not intend to sell in the near future. They are recorded at their fair value on
the balance sheet.
Debt Investments: These refer to long-term investments
in debt instruments, such as bonds or debentures issued by other entities.
Non-current debt investments represent the company's loan or investment in
another organization's debt securities, which are expected to be held for a
significant period of time. They are reported at their amortized cost or fair
value on the balance sheet.
Q.8. Under what
heading will you show ‘’Sunday debtors’’ in the balance sheet of the company?
Ans. In the
balance sheet of a company, "Sunday debtors" would typically be shown
under the heading "Current Assets" or more specifically, under the
sub-heading "Trade Receivables" or "Accounts Receivable."
This represents the amount of money owed to the company by its customers or
clients for goods sold or services rendered, but not yet collected as of the
balance sheet date. Sunday debtors refer to those debtors who have exceeded
their credit period or payment due date.
Q.9. Name the
head under which long investments appear in the balance sheet?
Ans. Long-term
investments typically appear under the heading "Non-Current Assets"
or "Long-term Assets" in the balance sheet of a company.
Q.10. Name the
head under which ‘’Good will’’ appears in the balance sheet of the company?
Ans. Goodwill
typically appears under the heading "Intangible Assets" in the
balance sheet of a company.
Q.11. Name two
items shown under the heading current assets?
Ans. Two
common items shown under the heading "Current Assets" in a balance
sheet are "Cash and Cash Equivalents" and "Accounts
Receivable" or "Trade Receivables."
Q.12. Under
what heading will you show ‘’ Building’’ in the balance sheet of a company?
Ans. "Building"
is typically shown under the heading "Fixed Assets" or
"Property, Plant, and Equipment" in the balance sheet of a company.
Q.13. Mention
any three accounts that are to be presented under the heading ‘’Reserves &
surplus’’ in the balance sheet of a company?
Ans. In the balance sheet of a company, the following accounts can be
presented under the heading "Reserves & Surplus":
General Reserve: It represents the accumulated profits of the
company that have been set aside for various purposes, such as future expansions,
contingencies, or dividends.
Surplus/Retained Earnings: It includes the profits earned by the company
that have not been distributed as dividends to the shareholders. It represents
the amount retained within the company for reinvestment or other purposes.
Capital Reserve: It comprises the reserves created as a result
of capital transactions, such as the premium received on issuing shares,
profits from the sale of fixed assets, or the revaluation of assets and
liabilities.
Please note
that the specific accounts and their presentation can vary depending on the
company's policies and accounting practices.
Q.14. Why prepaid expenses are considered as current asset?
Ans. Prepaid
expenses are considered as current assets because they represent payments made
in advance for goods or services that will be received in the near future,
typically within one accounting period. These expenses are treated as assets
because the company has already made the payment, and they have economic value
that will benefit the company in the short term.
Since
prepaid expenses will be consumed or utilized within a relatively short period,
they are classified as current assets on the balance sheet. As the benefit of
the prepaid expense is received, it is gradually recognized as an expense in the
income statement over the relevant period.
Q.15. Mention
two items shown under the heading ‘’Current liabilities?
Ans. Two items shown under the heading 'Current Liabilities' in the balance
sheet of a company are:
Accounts Payable: This represents the amounts owed by
the company to its suppliers or creditors for goods or services received but
not yet paid for. It includes trade payables, accrued expenses, and short-term
obligations.
Short-Term Borrowings: This includes any short-term loans or borrowings
that the company has taken from financial institutions or other sources, which
are due for repayment within one year. It may include bank overdrafts, short-term
loans, or lines of credit.
Please note
that the specific items listed under 'Current Liabilities' may vary depending
on the nature and operations of the company.
Q.16. How would
you disclose contingent liabilities in the balance sheet of a company?
Ans. In the balance
sheet of a company, contingent liabilities are disclosed in the form of notes or
footnotes rather than being directly included as a separate line item. The
purpose of this disclosure is to inform the readers of the financial statements
about potential obligations or liabilities that may arise in the future, but
their occurrence is uncertain.
Contingent
liabilities are typically described in the notes to the financial statements,
providing relevant details such as the nature of the liability, the potential
amount involved, and any uncertainties surrounding its occurrence. This allows
the readers of the financial statements to assess the potential impact of these
liabilities on the company's financial position and performance.
By
disclosing contingent liabilities in the notes, it ensures transparency and
provides additional information to stakeholders that may have a significant
influence on the company's financial well-being.
Q.17. Mention
any two items shown under the heading ‘’Short term loans & advances?
Ans. In the balance sheet of a company, under the heading "Short-term
loans and advances," two common items that are shown are:
Short-term Loans: This refers to any loans or borrowings that are
due within the next accounting period or within a year. It includes loans taken
from financial institutions, banks, or other sources for short-term financing
needs. These loans are classified as current liabilities as they are expected to
be repaid in the short term.
Advances to Suppliers: This represents any amounts paid in advance to
suppliers or vendors for goods or services that are yet to be delivered or
rendered. It is a form of prepayment made by the company to secure future
supplies or services. Advances to suppliers are considered as short-term assets
as they are expected to be utilized within a year.
These items
are important components of a company's short-term financial position and are
disclosed separately to provide clarity on the company's short-term borrowing
obligations and prepayments made for future business transactions.
Q.18. Name the
head under which prepaid insurance appears in the balance sheet of a company?
Ans. Prepaid
insurance appears under the heading of "Current Assets" in the
balance sheet of a company.
Q.19. Give two
example each of Non-current assets and non-current liabilities?
Ans. Two examples of non-current assets are:
Property,
Plant, and Equipment (such as land, buildings, and machinery)
Intangible
Assets (such as patents, trademarks, and copyrights)
Two examples
of non-current liabilities are:
Long-term
Loans (such as bank loans or bonds with maturity periods exceeding one year)
Deferred
Revenue (income received in advance for goods or services that will be
delivered in the future)
Q.20. Mention
any two financial statements?
Ans. Two financial statements are:
Income Statement (also known as
Profit and Loss Statement or Statement of Comprehensive Income): It shows the company's revenues, expenses,
gains, and losses over a specific period, resulting in the net income or net
loss.
Balance Sheet (also known as
Statement of Financial Position): It provides a snapshot of a company's financial position at a specific
point in time, showing its assets, liabilities, and shareholders' equity.
VERY SHORT ANSWER TYPE QUESTIONS
Q.1. What is
the financial statements of a company?
Ans. Financial
statements of a company are formal records that present the financial
performance and position of the company. These statements provide valuable
information about the company's revenues, expenses, assets, liabilities, and
shareholders' equity. The primary financial statements include the Income
Statement (Profit and Loss Statement), Balance Sheet, Cash Flow Statement, and
Statement of Changes in Equity. These statements are prepared based on
generally accepted accounting principles (GAAP) and provide crucial insights
into the company's financial health, performance, and ability to meet its
obligations.
Q.2. What are
the main objectives of financial statements?
Ans. The main objectives of financial statements are as follows:
Providing Information: Financial statements aim to provide relevant
and reliable information about the financial performance, position, and changes
in the financial condition of a company. These statements enable users to make
informed decisions regarding investments, lending, and other financial
transactions.
Assessing Profitability: Financial statements help assess
the profitability of a company by presenting the revenues earned, expenses
incurred, and the resulting net income or loss. This information allows
stakeholders to evaluate the company's ability to generate profits and its
overall financial viability.
Evaluating Financial Position: Financial statements provide a snapshot of a
company's financial position by presenting its assets, liabilities, and
shareholders' equity. This information helps stakeholders understand the
company's financial health, liquidity, solvency, and its ability to meet its
financial obligations.
Facilitating Decision-Making: Financial statements assist in decision-making
processes by providing data and insights that are useful for various
stakeholders, including investors, creditors, management, and regulatory
authorities. These statements support decision-making related to investment,
lending, expansion, cost control, and other financial matters.
Ensuring Accountability and
Transparency: Financial
statements promote accountability and transparency by disclosing the financial
activities and performance of a company to its stakeholders. They provide a
basis for evaluating the management's stewardship and help detect any
irregularities or discrepancies in financial reporting.
Overall,
the primary objectives of financial statements are to provide meaningful and
accurate information that aids in understanding the financial position,
performance, and prospects of a company.
Q.3. How would
you disclose contingent liabilities in the balance sheet of the company?
Ans. The main objectives of financial statements are as follows:
Providing Information: Financial statements aim to provide relevant
and reliable information about the financial performance, position, and changes
in the financial condition of a company. These statements enable users to make
informed decisions regarding investments, lending, and other financial
transactions.
Assessing Profitability: Financial statements help assess the
profitability of a company by presenting the revenues earned, expenses
incurred, and the resulting net income or loss. This information allows
stakeholders to evaluate the company's ability to generate profits and its
overall financial viability.
Evaluating Financial Position: Financial statements provide a
snapshot of a company's financial position by presenting its assets,
liabilities, and shareholders' equity. This information helps stakeholders
understand the company's financial health, liquidity, solvency, and its ability
to meet its financial obligations.
Facilitating Decision-Making: Financial statements assist in decision-making
processes by providing data and insights that are useful for various
stakeholders, including investors, creditors, management, and regulatory
authorities. These statements support decision-making related to investment,
lending, expansion, cost control, and other financial matters.
Ensuring Accountability and
Transparency: Financial
statements promote accountability and transparency by disclosing the financial
activities and performance of a company to its stakeholders. They provide a
basis for evaluating the management's stewardship and help detect any
irregularities or discrepancies in financial reporting.
Overall,
the primary objectives of financial statements are to provide meaningful and
accurate information that aids in understanding the financial position,
performance, and prospects of a company.
Q.4. Give the
major headings of the assets part of company’ s balance sheet as per schedule
III, part 1?
Ans. As of
my knowledge cutoff in September 2021, the major headings of the assets part of
a company's balance sheet as per Schedule III, Part 1 of the Companies Act,
2013 are as follows:
Non-Current
Assets:
1. Fixed Assets
2. Tangible
Assets
3. Land,
Buildings, and Leasehold Improvements
4. Plant
and Machinery
5. Furniture
and Fixtures
6. Vehicles
7. Computer
Equipment
8. Intangible
Assets under Development
9. Intangible
Assets
10. Goodwill
11. Brands
and Trademarks
12. Copyrights
and Patents
13. Computer
Software
14. Licenses
and Franchises
15. Capital
Work-in-Progress
16. Intangible
Assets under Development
17. Non-Current
Investments
18. Long-term
Investments
19. Other
Non-Current Investments
20. Long-term
Loans and Advances
21. Loans
and Advances to Subsidiaries
22. Loans
and Advances to Associates
23. Loans
and Advances to Others
24. Other
Non-Current Assets
Current
Assets:
1. Current
Investments
2. Inventories
3. Raw
Materials
4. Work-in-Progress
5. Finished
Goods
6. Stock-in-Trade
7. Trade
Receivables
8. Cash and
Cash Equivalents
9. Short-term
Loans and Advances
10. Loans
and Advances to Subsidiaries
11. Loans
and Advances to Associates
12. Loans
and Advances to Others
13. Other
Current Assets
14. Prepaid
Expenses
15. Current
Maturities of Long-term Debt
16. Other
Receivables
17. Advances
and Deposits
Please note
that the specific format and headings of the balance sheet may vary depending
on the accounting standards and regulations applicable in a particular jurisdiction.
It is always recommended to refer to the relevant reporting standards and legal
requirements for accurate and up-to-date information.
Q.5. Discuss
the nature of the financial statements?
Ans. The nature
of financial statements can be understood by examining their key
characteristics and purposes. Here are some aspects of their nature:
Objective: Financial statements are objective and factual
representations of a company's financial performance, position, and cash flows.
They are prepared based on reliable financial data and established accounting
principles to provide an accurate picture of the company's financial affairs.
Historical in nature: Financial statements primarily present
information about past financial activities and events. They summarize the
financial results and position of the company for a specific period, such as a
fiscal year. While they reflect historical data, financial statements can still
provide insights into trends, patterns, and the overall financial health of the
company.
Comprehensive: Financial statements cover various aspects of a
company's financial activities. The three main financial statements include the
balance sheet, income statement, and cash flow statement. The balance sheet
shows the company's assets, liabilities, and shareholders' equity at a specific
point in time. The income statement presents revenues, expenses, and profits or
losses over a period. The cash flow statement reveals the company's cash
inflows and outflows during a period.
Standardized format: Financial statements follow a standardized
format and structure, which enables easy comparison and analysis across
different companies and industries. This standardization facilitates
transparency, consistency, and comparability in financial reporting.
Users and stakeholders: Financial statements are prepared for the
benefit of various users and stakeholders, including investors, shareholders,
creditors, financial institutions, regulatory bodies, and management. These
statements assist users in making informed decisions, assessing the company's
performance, and evaluating its financial stability.
Compliance and accountability: Financial statements serve as a means of
complying with legal and regulatory requirements, such as accounting standards
and company laws. They also enhance accountability by providing transparency
and disclosing relevant financial information to external parties.
Subject to audit and verification: Financial statements are subject to independent
auditing by external auditors to ensure their accuracy, reliability, and
compliance with applicable accounting standards and regulations. Auditing adds
credibility to the financial statements and provides assurance to stakeholders
regarding the accuracy and fairness of the financial information presented.
It is
important to note that the nature of financial statements can evolve over time,
reflecting changes in accounting standards, regulations, and reporting
practices. Additionally, financial statements should be interpreted in
conjunction with other relevant information and disclosures to gain a
comprehensive understanding of a company's financial performance and position.
Q.6. Give the
major headings of the equity and liabilities part of company’s balance sheet as
per schedule III PART 1.
Ans. As per
Schedule III Part I of the Companies Act, 2013 (India), the major headings of
the equity and liabilities part of a company's balance sheet include:
Shareholder's
Funds:
Share Capital: This includes the authorized, issued, and
subscribed share capital of the company, segregated by types of shares, such as
equity shares and preference shares.
Reserves and Surplus: This category comprises various
reserves created out of the company's profits, such as general reserves,
capital reserves, retained earnings, and any other accumulated profits.
Non-Current
Liabilities:
Long-Term Borrowings: This includes long-term debts or
loans taken by the company, such as bank loans, debentures, bonds, and other
long-term borrowings.
Deferred Tax Liabilities (Net): This represents the amount of income tax that
will be payable in future periods due to temporary differences between
accounting and tax rules.
Other Long-Term Liabilities: This encompasses any other non-current
liabilities that are not classified under the above headings, such as long-term
provisions or long-term contingent liabilities.
Current
Liabilities:
Short-Term Borrowings: This includes short-term debts or loans that
are expected to be repaid within one year, such as bank overdrafts, short-term
loans, or credit facilities.
Trade Payables: This represents the amounts owed by the company
to its suppliers or creditors for goods or services received.
Other Current Liabilities: This includes any other current liabilities
that do not fall under the above categories, such as accrued expenses, advances
received, or short-term provisions.
Other
Liabilities and Provisions:
Other Financial Liabilities: This covers any other financial
liabilities that are not categorized under the above headings, such as loans
from related parties or other financial institutions.
Provisions: This includes provisions made for expected
future liabilities or expenses, such as provisions for warranties,
contingencies, or employee benefits.
These major
headings provide a broad classification of the equity and liabilities section
of the balance sheet, allowing stakeholders to understand the sources of funds
and obligations of the company. However, it's important to note that the
specific sub-headings and presentation format may vary based on the applicable
accounting standards and regulations in a particular jurisdiction.
Q.7. What is
meant by current assets? Explain with examples?
Ans. Current
assets refer to the assets of a company that are expected to be converted into
cash or consumed within a short period, typically within one year or the
operating cycle of the business, whichever is longer. These assets are easily
liquidated or used up in the normal course of business operations. Current
assets are an important component of a company's working capital and are
crucial for its day-to-day operations.
Examples of
current assets include:
Cash and Cash Equivalents: This includes cash on hand, cash in bank
accounts, and highly liquid financial instruments that are readily convertible
into cash, such as short-term government bonds or treasury bills.
Accounts Receivable: These are amounts owed to the company by its
customers or clients for goods sold or services rendered on credit. Accounts
receivable are usually expected to be collected within a short period, and they
represent the company's right to receive payment.
Inventory: This comprises the goods held by the company
for sale, raw materials used in production, and work-in-progress. Inventory
includes finished goods that are ready for sale as well as items in the
production process.
Prepaid Expenses: These are payments made in advance for expenses
that will be incurred in the future. Examples include prepaid insurance
premiums, prepaid rent, or prepaid subscription fees.
Short-Term Investments: These are investments made by the company in
securities or financial instruments that have a maturity period of less than
one year. These investments are relatively liquid and can be readily converted
into cash when needed.
Marketable Securities: These are equity or debt securities that the
company intends to sell within a short period, typically within one year, to
generate cash. Marketable securities can include shares of other companies or
government bonds.
The
presence of current assets on a company's balance sheet indicates its ability
to meet short-term obligations and fund day-to-day operations. These assets are
expected to provide liquidity and support the ongoing functioning of the
business.
Q.8. What is
meant by property, plant and equipment? Explain with examples?
Ans. Property,
plant, and equipment (PP&E), also known as fixed assets, are long-term
tangible assets held by a company for use in its operations. They are not
intended for sale in the normal course of business but are used to generate revenue
over an extended period. PP&E typically includes land, buildings,
machinery, vehicles, furniture, and other assets that are essential for the
company's operations.
Here are
some examples of property, plant, and equipment:
Land: This represents the company's ownership of
land, which is used for various purposes such as building facilities,
warehouses, offices, or manufacturing plants. Land is a long-term asset that is
not subject to depreciation.
Buildings: These are structures owned or leased by the
company, including factories, offices, retail stores, warehouses, or any other
physical structures used for business operations. Buildings are typically
depreciated over their estimated useful lives.
Machinery and Equipment: These are tools, machines, and equipment used
in the production process or to facilitate business operations. Examples
include manufacturing machinery, computer servers, vehicles, office equipment,
and specialized equipment used in industries like construction or healthcare.
Machinery and equipment are generally depreciated over their useful lives.
Furniture and Fixtures: These assets include desks, chairs, tables,
cabinets, and other furnishings used in office spaces or other business
premises. They are considered part of the company's fixed assets and are
subject to depreciation.
Leasehold Improvements: These are improvements or alterations made to
leased properties to meet the specific needs of the business. Examples include
renovations, installation of customized fixtures, or modifications to
accommodate equipment. Leasehold improvements are amortized over the shorter of
their useful life or the lease term.
Computer Systems and Software: These assets encompass computer hardware,
software licenses, and other IT infrastructure necessary for the company's
operations. They are categorized as fixed assets and may be subject to
depreciation or amortization.
Property,
plant, and equipment are important assets for a company as they contribute to
its productive capacity and long-term revenue generation. These assets are
typically recorded on the balance sheet at their original cost and are
gradually depreciated or amortized over their useful lives to reflect their
consumption or obsolescence.
Q.9. What is
meant by current liabilities? Explain with example?
Ans. Current
liabilities are obligations or debts that a company expects to settle within
its normal operating cycle, typically within one year. They represent
short-term financial obligations that require the use of current assets or the
creation of new current liabilities for their settlement. Current liabilities
are an important component of a company's financial position and liquidity.
Here are
some examples of current liabilities:
Accounts Payable: These are amounts owed by a company to its
suppliers or vendors for goods or services received on credit. Accounts payable
are short-term obligations that arise from normal business operations. They are
typically settled within a short period, often through the issuance of cash
payments.
Short-term Loans: These are borrowings or loans that are due for
repayment within one year. Companies may obtain short-term loans from banks or
other financial institutions to meet their working capital needs or fund
specific projects. Short-term loans usually carry a higher interest rate
compared to long-term loans.
Accrued Expenses: These are expenses that have been incurred but
have not yet been paid. They represent amounts owed by the company for services
received or expenses incurred but not yet invoiced. Examples of accrued
expenses include salaries and wages payable, utility bills, rent payable, and
taxes payable.
Unearned Revenue: Also known as deferred revenue or advance
payments, unearned revenue represents amounts received in advance from
customers for goods or services that have not yet been delivered. It is a
liability because the company has an obligation to fulfill its obligations to
the customers. As the company delivers the goods or services, the unearned revenue
is recognized as revenue.
Short-term Provisions: These are liabilities that are expected to be
settled within one year and arise from uncertain obligations or events.
Examples include provision for warranties, provision for legal claims, and
provision for restructuring expenses. Short-term provisions are recognized
based on estimates and are adjusted as more information becomes available.
Bank Overdraft: This represents the negative balance in a
company's bank account, where withdrawals exceed the available balance. Bank
overdrafts are typically considered short-term liabilities as they are expected
to be repaid in the near future.
Current
liabilities are important for assessing a company's short-term financial
obligations and its ability to meet its immediate payment obligations. They are
usually paid off using current assets or through the creation of new current
liabilities. Monitoring and managing current liabilities effectively is crucial
for maintaining financial stability and liquidity.
Q.10. How will
you treat calls in arrears and share forfeited account while writing share
capital in the balance sheet?
Ans. When
preparing the balance sheet, calls in arrears and the share forfeited account
are treated as deductions from the issued share capital. Here's how they are presented
in the balance sheet:
Share
Capital:
Authorized Share Capital: This represents the maximum amount of share
capital that a company is authorized to issue, as stated in its memorandum of
association.
Issued Share Capital: This is the portion of the authorized share
capital that has been issued to shareholders. It includes both subscribed and
allotted shares.
Subscribed Share Capital: This is the portion of the issued share capital
that has been subscribed by shareholders.
Called-up Share Capital: This is the amount of the subscribed share
capital that has been called up for payment by the company.
Calls in Arrears: This is the amount of money that shareholders
have not paid on their subscribed shares within the specified timeframe. Calls
in arrears represent a liability of the shareholders to the company.
Share Forfeited Account: This account represents the value of shares
that have been forfeited by shareholders due to non-payment of calls in
arrears. When shares are forfeited, they are typically reissued or canceled by
the company.
Share Capital (Net): This is the net value of the share capital
after deducting the amount of calls in arrears and the share forfeited account.
It represents the actual amount of capital contributed by shareholders that is
available to the company.
In summary,
calls in arrears and the share forfeited account are deducted from the issued
share capital to arrive at the net value of the share capital in the balance
sheet. This adjustment reflects any outstanding payment obligations by
shareholders and the impact of forfeited shares on the company's share capital
position.
Q.11. What are the items which are shown under the
heading ‘’Non-current Liabilities?
Ans. Under the heading 'Non-current
Liabilities' in the balance sheet, you may typically find the following items:
Long-term Debt: This includes long-term loans, bonds, or other
forms of debt that are payable over an extended period, usually beyond one
year. It represents the portion of the company's debt that is not due for
payment in the short term.
Deferred Tax Liabilities: These are tax obligations that arise from
temporary differences between the accounting treatment and tax treatment of
certain items. Deferred tax liabilities represent taxes that will be payable in
the future when these temporary differences reverse.
Pension Liabilities: If the company has a defined benefit pension
plan for its employees, the liability associated with these pension obligations
is shown under this category. It represents the present value of the future
pension payments that the company is expected to make to its employees.
Lease Liabilities: This includes the long-term obligations arising
from lease agreements, such as operating leases or finance leases. Lease
liabilities represent the future lease payments that the company is obligated
to make over the lease term.
Deferred Revenue: Also known as unearned revenue, this represents
the amount received in advance from customers for goods or services that are
yet to be delivered. Deferred revenue is recognized as a liability until the
company fulfills its obligation by providing the goods or services.
Other Long-term Liabilities: This category may include various long-term
obligations that do not fall under the above headings. It can encompass items
like long-term provisions, long-term warranties, contingent liabilities, or any
other significant long-term obligations.
It's
important to note that the specific items under 'Non-current Liabilities' can
vary depending on the nature of the company's operations and the accounting
standards followed.
Q.12. Mention
any three accounts that are to be presented under the heading ‘’Reserves and
surplus’’ in the balance sheet of a company?
Ans. Under the heading 'Reserves and Surplus' in the balance sheet of a
company, you may typically find the following accounts:
General Reserve: This account represents the portion of retained
earnings that has been set aside by the company for various purposes, such as
future contingencies, expansions, or capital investments. General reserves are
created voluntarily by the company's management and can be used for specific
purposes as determined by the company.
Capital Reserve: Capital reserve is created when there is a
non-operating capital gain or a gain arising from specific transactions, such
as the sale of fixed assets or investments. It is not available for
distribution as dividends and is typically maintained separately to be used for
capital-related purposes.
Surplus in Profit and Loss Account: This account represents the accumulated profits
or retained earnings that have not been allocated to specific reserves or
distributed as dividends. It includes the cumulative profits generated by the
company over the years, net of any losses or dividends declared.
It's important
to note that the specific accounts under 'Reserves and Surplus' can vary
depending on the company's financial policies, legal requirements, and
accounting standards followed.
Q.13. Name the
major heading into which the items of assets side presented in company’s
balance sheet?
Ans. The major headings into which the items of the asset side are presented
in a company's balance sheet are as follows:
Non-current assets: This heading includes long-term assets that are
not expected to be converted into cash or used up within the next operating
cycle of the business. It typically includes items such as property, plant, and
equipment, investments, intangible assets, and long-term receivables.
Current assets: This heading includes assets that are expected
to be converted into cash or used up within the next operating cycle of the
business or within one year from the balance sheet date, whichever is shorter.
It typically includes items such as cash and cash equivalents, short-term
investments, accounts receivable, inventories, and prepaid expenses.
It's
important to note that the specific classification and presentation of assets
may vary based on the accounting standards followed and the nature of the
business.
Q.14. Prepare a
layout of information required to be given under the heading share capital on
the equity and liabilities part of the company ‘s balance sheet?
Ans. Under the heading "Share Capital" on the equity and liabilities
part of a company's balance sheet, the following information is typically
presented:
Authorized Share Capital: This indicates the maximum number of shares
that the company is authorized to issue as per its articles of association.
Issued Share Capital: This represents the portion of authorized share
capital that has been issued to shareholders. It includes the number of shares
issued and the nominal or face value per share.
Share Premium: This account reflects the excess amount
received over the nominal or face value of the shares during the initial
issuance of shares or subsequent share issues at a premium.
Calls in Arrears: This account represents the amount that
shareholders have not paid on their shares as per the call notice. It shows any
unpaid portion of the share capital.
Share Forfeiture: This account is used to record shares that have
been forfeited by shareholders due to non-payment of calls or other reasons. It
reflects the value of shares that have been reacquired by the company.
Capital Reserves: This represents any reserves created
from the proceeds of share capital, such as capital redemption reserve, share
premium account, or any other reserves specifically related to share capital
transactions.
Retained Earnings: This account shows the cumulative profits or
losses earned by the company that have not been distributed as dividends. It
includes the net income generated over the years and any prior-year
adjustments.
Other Reserves: This category includes any other reserves or
appropriations created by the company, such as general reserves, specific
reserves, contingency reserves, or statutory reserves.
It's
important to note that the specific presentation and layout may vary based on
the accounting standards followed and the company's specific circumstances.
SHORT ANSWER TYPE QUESTIONS
Q.1. What is
mean by contingent liabilities? Give four example of contingent liabilities. How contingent liabilities will
appear in the balance sheet of a company?
Ans. Contingent
liabilities refer to potential obligations that may arise in the future,
depending on the outcome of uncertain events. These liabilities are contingent
upon the occurrence or non-occurrence of specific events, and their existence
is confirmed by the occurrence of those events.
Four
examples of contingent liabilities are:
Lawsuits and Legal Claims: A company may face legal proceedings or claims
from third parties, such as customers, employees, or suppliers. The outcome of
these cases is uncertain, and if the company is found liable, it may result in
financial obligations.
Guarantees and Indemnifications: Companies may provide guarantees or
indemnifications for loans, leases, or performance obligations of third
parties. If the beneficiary fails to fulfill its obligations, the company may
be required to honor the guarantee or indemnify the losses.
Product Warranties: When a company sells products, it may offer
warranties to customers, promising to repair or replace defective products
within a specified period. If a significant number of products require repairs
or replacements, it can create a contingent liability for the company.
Tax Disputes: Companies may have ongoing disputes with tax
authorities regarding the interpretation of tax laws, assessments, or the
outcome of tax audits. The resolution of these disputes can result in
additional tax liabilities or potential refunds.
In the
balance sheet, contingent liabilities are typically disclosed in the footnotes
or as separate notes to the financial statements. They are not recorded as
actual liabilities on the face of the balance sheet since they are uncertain in
nature. The disclosure provides information about the nature of the contingent
liabilities, their potential impact on the company's financial position, and
any mitigating factors. This allows users of the financial statements to assess
the company's potential future obligations and risks.
Q.2. What is
meant by financial statements? Discuss main characteristics of financial
statements?
Ans. Financial
statements are formal reports that provide a summary of a company's financial
transactions and activities. They are prepared to present the financial
position, performance, and cash flows of a business to various stakeholders,
including investors, creditors, and regulatory authorities. The main purpose of
financial statements is to provide relevant and reliable information for
decision-making and assessing the financial health of a company.
The main characteristics of financial statements
include:
Relevance: Financial statements should provide information
that is useful for decision-making. They should include data that is timely,
accurate, and can influence the decisions of users, such as investors or
lenders.
Reliability: Financial statements should be prepared based
on reliable and verifiable information. They should be free from bias or
intentional misrepresentation and should accurately reflect the financial
position and performance of the company.
Comparability: Financial statements should allow for
meaningful comparisons over time and across different companies. Consistent
accounting principles and disclosure practices should be followed to ensure
that financial information is comparable and can be analyzed for trends and
benchmarks.
Understandability: Financial statements should be presented in a
clear and concise manner, using standard accounting terminology and formats.
They should be easily understandable by users who have a reasonable knowledge
of business and financial concepts.
Faithful
Representation: Financial
statements should provide a faithful representation of the company's financial
position, performance, and cash flows. They should present information that is
complete, neutral, and free from material errors or omissions.
Materiality: Financial statements should include information
that is material or significant to the understanding of the company's financial
position and performance. Materiality is determined based on the nature and
magnitude of an item's impact on financial decisions.
Consistency: Financial statements should be prepared using consistent
accounting policies and practices. Changes in accounting policies or estimates
should be disclosed and explained to ensure comparability and
understandability.
Going Concern Assumption: Financial statements are prepared under the
assumption that the company will continue its operations in the foreseeable
future. If there are indications of a going concern uncertainty, appropriate
disclosures should be made.
Overall,
financial statements serve as a vital tool for stakeholders to assess the
financial performance and position of a company. They provide insights into
profitability, liquidity, solvency, and cash flow, enabling informed
decision-making and evaluation of a company's financial health.
Q.3. What are
the recent trends in presentation of financial statements?
Ans. The
presentation of financial statements has evolved over time to meet the changing
needs of stakeholders and to enhance the transparency and clarity of financial
information. Some of the recent trends in the presentation of financial
statements include:
Enhanced Digital Reporting: With advancements in technology, there is a
growing trend towards digital reporting of financial statements. Companies are
using interactive and online platforms to present financial information,
allowing users to access and analyze data more effectively. This includes the
use of interactive charts, graphs, and hyperlinks to provide a more engaging
and user-friendly experience.
Integrated Reporting: Integrated Reporting is an
emerging trend that aims to provide a holistic view of a company's value
creation process by integrating financial and non-financial information. This
approach recognizes that financial performance alone does not capture the full
value generated by a company, and emphasizes the inclusion of environmental,
social, and governance (ESG) factors in reporting.
Non-Financial Reporting: There is an increasing focus on non-financial
reporting, which includes the disclosure of environmental, social, and
governance (ESG) factors. Companies are recognizing the importance of
sustainability and responsible business practices, and are providing more
information on their environmental impact, social initiatives, corporate
governance practices, and other non-financial performance indicators.
Key Performance Indicators (KPIs): Companies are placing greater emphasis on
presenting key performance indicators that are most relevant to their industry
and business model. This allows stakeholders to quickly assess the company's
performance in key areas such as revenue growth, profitability, liquidity, and
operational efficiency.
Narrative Reporting: In addition to the traditional financial
statements, there is a growing trend towards narrative reporting. This involves
providing additional contextual information, explanations, and insights to
complement the financial data. Narrative reporting helps to provide a deeper
understanding of the company's strategies, risks, opportunities, and future
prospects.
Emphasis on Transparency and
Disclosure:
There is an increasing
demand for transparency and disclosure in financial reporting. Companies are
providing more detailed and comprehensive information on significant accounting
policies, critical judgments and estimates, related party transactions, risk
management practices, and other relevant disclosures. This trend is driven by
the need for greater accountability, investor confidence, and compliance with
regulatory requirements.
Simplification and Clarity: There is a move towards simplifying the
presentation of financial statements to improve clarity and accessibility.
Companies are using plain language, visual aids, and clear formatting to
enhance readability and understanding of financial information. This is
particularly important for non-expert users who may not have a strong financial
background
These
trends reflect the evolving landscape of financial reporting, driven by the
demand for more relevant, transparent, and user-friendly information. They aim
to provide stakeholders with a comprehensive and meaningful understanding of a
company's financial performance, position, and value creation.
Q.4. Explain
importance of financial statements?
Ans. Financial
statements play a crucial role in providing valuable information about the
financial performance, position, and cash flows of a company. Here are some key
reasons why financial statements are important:
Decision Making: Financial statements provide essential
information for making informed business decisions. Investors, creditors, and
other stakeholders use financial statements to assess the financial health and
stability of a company before making investment or lending decisions. Financial
statements help stakeholders evaluate the profitability, liquidity, solvency,
and overall performance of a company, which aids in making sound investment, credit,
and managerial decisions.
Transparency and Accountability: Financial statements promote transparency and
accountability by disclosing a company's financial information to stakeholders.
By providing a clear and comprehensive overview of a company's financial
activities, financial statements enable stakeholders to assess the integrity
and reliability of financial reporting. This enhances trust and confidence in
the company, fostering better relationships with shareholders, investors, lenders,
and regulatory bodies.
Performance Evaluation: Financial statements serve as a tool for
evaluating the performance of a company over a specific period. Comparing
financial statements from different periods helps identify trends, patterns,
and changes in financial performance. By analyzing financial ratios, key
performance indicators, and other metrics derived from financial statements,
stakeholders can assess a company's profitability, efficiency, liquidity, and
overall operational effectiveness.
Compliance and Legal Requirements: Financial statements are essential for meeting
legal and regulatory requirements. Companies are obligated to prepare and
present financial statements in accordance with accounting standards and
regulations. Financial statements, such as the income statement, balance sheet,
and cash flow statement, provide a comprehensive view of a company's financial
activities and facilitate compliance with tax laws, corporate governance
regulations, and financial reporting standards.
Stakeholder Communication: Financial statements serve as a means of
communication between a company and its stakeholders. They provide vital
information to shareholders, potential investors, lenders, employees,
suppliers, and customers about a company's financial position, business
performance, and future prospects. Financial statements enable stakeholders to
assess the company's ability to generate returns, fulfill its obligations, and
create value in the long term.
Planning and Forecasting: Financial statements play a critical role in
the planning and forecasting process. They provide insights into a company's
historical financial performance, which helps in setting realistic financial
goals and developing effective strategies. Financial statements, along with
financial projections, assist in budgeting, financial forecasting, and
identifying areas for improvement. This enables companies to make informed
decisions regarding capital allocation, resource management, and growth
strategies.
Overall,
financial statements are vital for understanding and assessing the financial
health and performance of a company. They facilitate informed decision making,
enhance transparency and accountability, and support compliance with legal and
regulatory requirements. By providing a comprehensive view of a company's
financial activities, financial statements enable stakeholders to evaluate
performance, communicate effectively, and plan for the future.
