Chapter 3 Financial Statements of a Company Solutions
Question - 11 : - Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?
Answer - 11 : -
The various parties that are directly or indirectly interested in the financial statements of a company can be categorized into the following two categories:
1. Internal parties
2. External parties
Internal Parties
The following are the various internal accounting users who are directly related to the company.
1. Owner− The owner/s is/are interested in the profit earned or loss incurred during an accounting period. They are interested in assessing the profitability and viability of the capital invested by them in the business.
2. Management− The financial statements help the management in drafting various policies measures, facilitating planning and decision making process. The financial statements also enable management to exercise various cost controlling measures and to remove inefficiencies.
3. Employees and workers− They are interested in the timely payment of wages and salaries, bonus and appropriate increment in their wages and salaries. With the help of the financial statements they can know the amount of profit earned by the company and can demand reasonable hike in their wages and salaries.
External Parties
There are various external users of accounting who need accounting information for decision making, investment planning and to assess the financial position of the business. The various external users are given below.
1. Banks and other financial institutions− Banks provide finance in the form of loans and advances to various businesses. Thus, they need information regarding liquidity, creditworthiness, solvency and profitability to advance loans.
2. Creditors− These are those individuals and organisations to whom a business owes money on account of credit purchases of goods and receiving services; hence, the creditors require information about credit worthiness of the business.
3. Investors and potential investors− They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business.
4. Tax authorities− They need information about sales, revenues, profit and taxable income in order to determine the levy various types of tax on the business.
5. Government− It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the government in the formulation of various policies measures and to address various economic problems like employment, poverty etc.
6. Researchers− Various research institutes like NGOs and other independent research institutions like CRISIL, stock exchanges, etc. undertake various research projects and the accounting information facilitates their research work.
7. Consumers− Every business tries to build up reputation in the eyes of consumers, which can be created by the supply of better quality products and post-sale services at reasonable and affordable prices. Business that has transparent financial records, assists the customers to know the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its products and ,thus, helps in repo building of the business.
8. Public− Public is keenly interested to know the proportion of the profit that the business spends on various public welfare schemes; for example, charitable hospitals, funding schools, etc. This information is also revealed by the profit and loss account and balance sheet of the business.
Question - 12 : - `Financial statements reflect a combination of recorded facts, accounting conventions and personal judgments’ discuss.
Answer - 12 : -
The financial statements are the end-products of the accounting process. The financial statements not only reveal the true financial position of the company but also help various accounting users in decision making and policy designing process. The nature of the financial statements depends upon the following aspects like recorded facts, conventions, concepts, and personal judgment
1. Recorded facts- The items recorded in the financial statements reflect their original cost i.e. the cost at which they were acquired. Consequently, financial statements do not reveal the current market price of the items. Further, financial statements fail to capture the inflation effects.
2. Conventions- The preparation of financial statements is based on some accounting conventions like, Prudence Convention, Materiality Convention, Matching Concept, etc. The adherence to such accounting conventions makes financial statements easy to understand, comparable and reflects the true and fair financial position of the company.
3. Accounting Assumptions − These basic accounting assumptions like Going Concern Concept, Money Measurement Concept, Realisation Concept, etc are called as postulates. While preparing financial statements, certain postulates are adhered to. The nature of these postulates is reflected in the nature of the financial statements.
4. Personal Judgments- Personal value judgments play an important role in deciding the nature of the financial statements. Different judgments are attached to different practices of recording transactions in the financial statements. For example, recording stock either at market value or at the cost requires value judgment. Similarly, provision on various assets, method of charging depreciation, period related to writing off intangible assets depends on personal judgment. Thus, personal judgments determine the nature of the financial statements to a great extent.
Question - 13 : - Explain the process of preparing income statement and balance sheet.
Answer - 13 : -
The process of preparing Income Statement (now Statement of Profit and Loss) as per Revised Schedule VI is explained below in a chronological order.
1. Prepare a Trial Balance on the basis of the balances of various accounts in the ledger.
2. Record Revenue from Operations i.e. Sales less Sales Return.
3. Add Other Incomes to Revenue from Operations (such as profit on sale of assets, cash discount received etc.) to ascertain Total Revenue.
4. Deduct all the expenses incurred by the company from Total Revenue (such as cost of material consumed, finance cost, depreciation and amortisation etc.) to ascertain Profit before Tax.
5. Deduct Tax paid by the company from Profit before Tax to ascertain the Profit or loss for the period.
The process of preparing Balance Sheet as per the Revised Schedule VI is explained below in a chronological order.
As per the this schedule, the Balance Sheet is prepared in vertical format and divided into two parts i.e. (i) Equity and Liabilities and (ii) Assets
1. Under the head Equity and Liabilities: Shareholders' Funds, Share Application Money Pending Allotment, Non-Current Liabilities and Current Liabilities are recorded.
2. After recording Equity and Liabilities, Assets are recorded. Under this head all the Non-Current Assets (such as Tangible and Intangible Assets, Capital Work-in-Progress etc.) and Current Assets (such as Inventories, Trade Receivables, Current Investment etc.) are recorded.
3. At the end, total of two heads is ascertained, which must be equal.
Question - 14 : - 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 | Good will | 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 | | |
Answer - 14 : -
| Extract of Balance Sheet as at March 31, 2013 |
| Particulars | Note No. | Amount (Rs) |
| I. Equity and Liabilities | | |
| 1. Shareholders’ Funds | | |
| a. Share Capital | | |
| b. Reserves and Surplus | | |
| 2. Non-Current Liabilities | | |
- Long-term Borrowings
| 1 | 2,00,000 |
| 3. Current Liabilities | | |
- Other Current Liabilities
| | |
| b. Short-term Provisions | 2 | 16,000 |
| | | |
| II. Assets | | |
| 1. Non-Current Assets | | |
- Fixed Assets
| | |
| i. Tangible Assets | 3 | 4,75,000 |
| ii. Intangible Assets | 4 | 30,000 |
| b. Non-Current Investments | | |
| 2. Current Assets | | |
- Inventories
| 5 | 1,52,000 |
| b. Trade Receivables | 6 | 1,20,000 |
| c.Cash and Cash Equivalents | 7 | 1,35,000 |
| d. Other Current Assets | 8 | 2,60,000 |
| | | |
| Notes to Accounts |
| 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. Inventory | |
| Loose Tools | 12,000 | |
| Stock | 1,40,000 | 1,52,000 |
| | 1,52,000 |
| | |
| 6. Trade Receivables | |
| Bill Receivable | 1,20,000 |
| | |
| 7. Cash and Cash equivalents | |
| Cash at Bank | 1,35,000 |
| | |
| 8. Other Current Assets | |
| Preliminary Expenses | 2,40,000 | |
| Discount on Issue of Shares | 20,000 | 2,60,000 |
| | 2,60,000 |
| | |
Question - 15 : - On 1st Aril, 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 over the life time of the Debentures. Show the items in the balance sheet of the company immediately after the issue of these debentures.
Answer - 15 : -
| Balance Sheet as at April 01, 2017 |
| Particulars | Note No. | Amount (Rs) |
| I. Equity and Liabilities | | |
| 1. Shareholders’ Funds | | |
| a. Share Capital | | |
| b. Reserves and Surplus | | |
| 2. Non-Current Liabilities | | |
| a. Long-term Borrowings | 1 | 10,00,000 |
| 3. Current Liabilities | | |
| a. Other Current Liabilities | | |
| b. Short-term Provisions | | |
| Total | | 10,00,000 |
| | | |
| II. Assets | | |
| 1. Non-Current Assets | | |
| a. Other Non-Current Assets | 2 | 1,60,000 |
| 2. Current Assets | | |
| a. Other Current Assets | 3 | 40,000 |
| b. Cash and Cash Equivalents | 4 | 8,00,000 |
| Total | | 10,00,000 |
| | | |
| Notes to Accounts |
| Particulars | Amount (Rs) |
| 1. Long Term Borrowings | |
| 12% Debentures | 10,00,000 |
| | |
| 2.Other Non-current assets | |
| Unamortized discount on issue of Debentures | 1,60,000 |
| | |
| 3. Other Current Assets | |
| Unamortized discount on issue of Debentures | 40,000 |
| | |
| 4. Cash and Cash Equivalents | |
| Bank | 8,00,000 |
| | |
Question - 16 : - From the following information prepare the balance sheet of Gitanjali Ltd., as per the (Revised) Schedule VI:
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.
Answer - 16 : -
| Balance Sheet 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. Other Current Liabilities | 4 | 3,00,000 |
| b. Short-term Borrowings | 5 | 4,00,000 |
| c. Short-term Provisions | 6 | 5,00,000 |
| Total | | 62,00,000 |
| | | |
| II. Assets | | |
| 1. Non-Current Assets | | |
| a. Fixed Assets | | |
| i. Tangible Assets | 7 | 30,00,000 |
| ii. Intangible Assets | | |
| b. Non-Current Investments | | |
| 2. Current Assets | | |
| a. Inventories | | 14,00,000 |
| b. Current Investments | | 8,00,000 |
| c. Cash and Cash Equivalents | | 10,00,000 |
| Total | | 62,00,000 |
| | | |
| Notes to Accounts |
| Particulars | Amount (Rs) |
| 1. Share Capital | |
| Equity Share Capital | 20,00,000 | |
| Preference Share Capital | 12,00,000 | 32,00,000 |
| | 32,00,000 |
| | |
| 2.Reserve and Surplus | |
| Debenture Redemption Reserve | 6,00,000 |
| | |
| 3. Long-term Borrowings | |
| Public Deposits | 12,00,000 |
| | |
| 4. Other Current Liabilities | |
| Outstanding Expenses | 3,00,000 |
| | |
| 5. Short-term Borrowings | |
| Loan from Zaveri Ltd. | 4,00,000 |
| | |
| 6. Short-Term Provisions | |
| Proposed Dividend | 5,00,000 |
| | |
| 7. Tangible Assets | |
| Land and Building | 20,00,000 | |
| Plant and Machinery | 10,00,000 | 30,00,000 |
| | 30,00,000 |
| | |
Question - 17 : - From the following information prepare the balance sheet of Jam Ltd. as per the (revised) Schedule VI:
Inventories Rs. 7,00,000; Equity Share Capital Rs. 16,00,000; Plant and Machinery Rs. 8,00,000; 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; Noncurrent Investments Rs. 10,00,000; Cash at Bank Rs. 5,00,000;Creditors Rs. 2,00,000; 12% Debentures Rs. 12,00,000.
Answer - 17 : -
| Balance Sheet as at March 31, 2013 |
| 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. Short-term Borrowings | | |
| b. Trade Payables | 4 | 3,50,000 |
| c. 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 |
| Particulars | Amount (Rs) |
| 1. Share Capital | |
| Equity Share Capital | 16,00,000 | |
| Preference Share Capital | 6,00,000 | 22,00,000 |
| | 22,00,000 |
| | |
| 2.Reserve and Surplus | |
| General Reserve | 6,00,000 |
| | |
| 3. Long Term Borrowings | |
| 12% Debentures | 12,00,000 |
| | |
| 4. Trade Payables | |
| Creditors | 2,00,000 | |
| Bills Payable | 1,50,000 | 3,50,000 |
| | 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 | 24,00,000 |
| | 24,00,000 |
| | |
| 7. Cash and Cash Equivalents | |
| Bank | 5,00,000 |
| | |
| | | | |
Question - 18 : - 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 Rs. 3,00,000; Stores & Spares Rs. 1,00,000; Discount on issue of 10% debentures Rs. 10,000; 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.
Answer - 18 : -
| Balance Sheet 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 | 10,000 |
| 2. Non-Current Liabilities | | |
- Long-term Borrowings
| 3 | 3,00,000 |
| 3. Current Liabilities | | |
- Other Current Liabilities
| 4 | 1,00,000 |
| 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. Other Current Assets | 8 | 10,000 |
| Total | | 14,10,000 |
| | | |
| Notes to Accounts |
| Particulars | Amount (Rs) |
| 1.Share Capital | |
| Equity Share Capital (50,000* shares of Rs 20 each) | 10,00,000 |
| | |
| 2.Reserve and surplus | |
| Capital Redemption Reserve | 1,00,000 | |
| Less: Statement of Profit or Loss (Debit) | 90,000 | 10,000 |
| | 10,000 |
| 3. Long-term Borrowings | |
| 10% Debentures | 3,00,000 |
| | |
| 4. Other Current Liabilities | |
| Unpaid Dividend | 90,000 | |
| Share Option Outstanding | 10,000 | 1,00,000 |
| | 1,00,000 |
| | |
| 5. Tangible Assets | |
| Building | 10,00,000 |
| | |
| 6. Non-Current Investments | |
| Shares of Metro Tyres | 3,00,000 |
| | |
| 7. Inventory | |
| Stores and Spares | 1,00,000 |
| | |
| 8. Other Current Assets | |
| Discount on Issue of 10% Debentures | 10,000 |
| | |
| | | |
Question - 19 : - 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.
Answer - 19 : -
| Extract of Balance Sheet as at March 31, 2017 |
| Particulars | Note No. | Amount (Rs) |
| I. Equity and Liabilities | | |
| 1. Shareholders’ Funds | | |
| a Share Capital | | |
| b. Reserves and Surplus | | |
| 2. Non-Current Liabilities | | |
- Long-term Borrowings
| 1 | 35,00,000 |
| 3. Current Liabilities | | |
- Other Current Liabilities
| 2 | 2,50,000 |
| | | |
| Notes to Accounts |
| Particulars | Amount (Rs) |
| 1. Long Term Borrowings | |
| 12% Debentures | 25,00,000 | |
| Bank Loan | 10,00,000 | 35,00,000 |
| | 35,00,000 |
| | |
| 2. Other Current Liabilities | |
| Interest on Debentures | 2,50,000 |
| | |
Question - 20 : - Prepare a balance sheet of Black Swan Ltd., as at March 31, 2017 form the following information:
General Reserve : 3,000
10% Debentures : 3,000
Statement of Profit & 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
Answer - 20 : -
| Extract of Balance Sheet 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 | 4,200 |
| 2. Non-Current Liabilities | | |
| a. Long-term Borrowings | 3 | 3,000 |
| 3. Current Liabilities | | 2,500 |
| Total | | 14,700 |
| | | |
| II. Assets | | |
| 1. Non-Current Assets | | |
| a. Fixed Assets | | |
| i. Tangible Assets | 4 | 8,300 |
| 2. Current Assets | | |
| a. Cash and Cash Equivalents | 5 | 6,100 |
| b. Other Current Assets | 6 | 300 |
| Total | | 14,700 |
| | | |
| Notes to Accounts |
| Particulars | Amount (Rs) |
| 1. Share Capital | |
| 6% Preference Share Capital | 5,000 |
| | |
| 2.Reserve and Surplus | |
| General Reserve | 3,000 | |
| Statement of Profit or Loss | 1,200 | 4,200 |
| | 4,200 |
| | |
| 3.Long Term Borrowings | |
| 10% Debentures | 3,000 |
| | |
| 4. Tangible Assets | |
| Fixed Assets | 9,000 | |
| Less: Depreciation | 700 | 8,300 |
| | 8,300 |
| | |
| 5.Cash and Cash Equivalents | |
| Cash | 6,100 |
| | |
| 6. Other Current Assets | |
| Preliminary Expenses | 300 |
| | |
| | | |