CBSE Class 12 Accounts, Financial statements of a company

NOTES

CHAPTER 11: Financial Statements of a Company

Financial statements of a company

Financial Statements are the end products of accounting process and are prepared at end of the accounting period to reveal the financial position of the enterprise at a particular date and the result of its business operations preparing an accounting period.

The Schedule III prescribes only the vertical format for presentation of financial statements. Thus, a company will now not have an option to use horizontal format for the presentation of financial statements.

Format of Balance Sheet

  1. EQUITY AND LIABILITIES
    1. Shareholders’ funds
      Share capital
      Reserves and surplus
      Money received against share warrants
    2. share application money pending allotment
    3. Non-current liabilities
      1. Long term borrowings
      2. Deferred tax liabilities
      3. Other current liabilities
      4. Long term provisions
    4. Current liabilities
      1. Short term borrowings
      2. Trade payables
      3. Other current liabilities
      4. Short term provisions
    Total
  2. ASSETS
    1. Non-current Assets
      1. Fixed assets
        1. Tangible assets
        2. Intangible assets
        3. Capital work in progress
        4. Intangible assets under development
      2. Non- current investments
      3. Deferred tax assets (net)
      4. Long term loans and advances
      5. Other non- current assets
    2. Current Assets
      1. Current investments
      2. Inventories
      3. Trade receivables
      4. Cash and cash equivalents
      5. Short term loans & advances
      6. Other current Assets
    Total

Example 1:

Under which major head will the following be shown:
(i) Share Capital; and (ii) Money Received against Share Warrants?

Solution:

Items Major Head
Share Capital Shareholder’s Funds
Money received against share warrants Shareholder’s Funds

Example 2:

List any four items that are shown under Reserves and Surplus.

Solution:

Items shown under Reserves and Surplus are:

  1. Capital Reserve
  2. Capital Redemption Reserve
  3. Securities Premium Reserve
  4. Debenture Redemption Reserve

Example 3:

Under which heads are the following items shown in the balance sheet of a company as per schedule III:-

  1. Forfeited shares account
  2. Proposed dividend
  3. Unclaimed dividend
  4. Arrears of fixed cumulative dividend

Solution:

  1. Forfeited shares account – added to subscribed capital under the sub head share capital of the major head shareholders’ funds in the equity & liabilities
  2. Proposed dividend – shown in contingent liability
  3. Unclaimed dividend – current liability
  4. Arrears of fixed cumulative dividend – shown as contingent liability in the notes to accounts.

Example 4:

Give major heads under which of the following items will be shown in a company’s balance sheet as per schedule III of the company’s act 2013

  1. Interest accrued and due on secured loans
  2. Trade payables
  3. Capital redemption reserve
  4. Surplus i.e. balance in statement of profit & loss
  5. Unclaimed dividend

Solution:

Journal
S.No Items Main head Sub head
1. Interest accrued and due on secured loans Current liabilities Other current liabilities
2. Trade payables Current liabilities Other current liabilities
  Capital redemption reserve Shareholder’s funds Reserves and surplus
  Surplus i.e. balance in statement of profit & loss Shareholder’s funds Reserves and surplus
  Unclaimed dividend Current liabilities Other current liabilities

Example 5:

Name any 5 tangible assets?

Solution:

Compute cost of materials consumed from the following:-

  1. land
  2. Building
  3. Cash
  4. Stock
  5. Marketable securities

Opening inventory of materials Rs. 2,50,000; materials purchased Rs. 20,00,000 and closing inventory of materials Rs. 3,00,000.

Solution:

Cost of materials consumed = opening inventory of materials + purchase of materials – closing inventory

= 2, 50,000 + 2, 00,000 – 3, 00,000 = 19, 50,000

Objectives of financial Statements:

  1. To present a true and fair view of the business
  2. To assess effectiveness of management towards utilization of resources of business
  3. To provide financial data on economic resources and obligation of an enterprise.
  4. To provide information about activities of business affecting the society.

Essential of financial statements:

  1. Factual Information: they should disclose the factual information about the financial position of the company.
  2. Comparable: Financial statements should disclose the information in a manner that the user can compare the information of the same entity over years.
  3. Relevant: information disclosed by the financial statements should be in accordance with the legal requirements.

Limitations of financial Statements:

  1. Qualitative elements are ignored
  2. Historical records
  3. Price level changes are ignored
  4. Aggregate information
  5. Different accounting practices
  6. Historical records