Financial Statements Of A Company - Class 12 Commerce Accountancy - Extra Questions

Financial statements are the formal document of an entity that communicates the financial information of business to its owners and stakeholder.
It includes the Balance sheet, cash flow statement, and profit and loss statement.
The American Institute of Certified Public Accountants states the nature of financial statements as, the statements prepared for the purpose of presenting a periodical review of report on progress by the management and deal with the status of investment in the business and the results achieved during the period under review. They reflect a combination of recorded facts, accounting principles and personal judgements.

 This statement is false. Drawings is an amount withdrawn by owner from the company. Capital means the money that is to be returned by the company to the owner and drawings is the money that is to returned by the owner to the company. Hence, by deducting drawings from capital the company reduces it's liability. 

The statement of Assets and liabilities is a balance sheet. Balance Sheet shows the financial position of an organisation. It shows the balances of assets and liabilities at a particular time, which is at the end of the year.

Money received against share warrants is the amount received by the company which is converted into shares at a specified date at a specified rate. The instrument is issued against the amount so received as share warrants. It is separately disclosed under the shareholder's fund.

The term 'trade receivables' is the amount receivable for the sale of goods or services performed in the ordinary course of business operation. It is the sum of debtors and bills receivable.

The dividend proposed by the board of directors but yet to be approved by members i.e. shareholders is called a proposed dividend. Board of Directors propose the dividend after the annual accounts for the year have been prepared. Shareholders may reduce the amount of the proposed dividends but cannot increase it.

The following is the criteria to classify current assets:

Values that a company must observe while preparing its financial statements.
(a) The financial statements must be drawn following the accounting concepts, principles, procedures 
(b) The financial statements must be drawn following the ethical and legal framework 

Item	Major Head	Sub-Head
Capital Reserve	Shareholders' Funds	Reserves & Surplus
Calls-in-Advance	Current Liabilities	Other Current Liabilities
Loose Tools	Current Assets	Inventories
Bank Overdraft	Current Liabilities	Short Term Borrowings

A critical and thorough examination of the financial statements of a company in order to understand the data contained in it, is known as 'Analysis of Financial Statements'. 

True. Prepaid expenses are the expenses that have been paid in advance before they are even due for payment. An obligation that is met in advance is an asset for the company, Hence, any advance payment will appear on the assets side of the balance sheet. 

Balance Sheet shows the financial position of an organisation. It shows the balances of assets and liabilities at a particular time, which is at the end of the year. It is one of the main financial statements of the company. 

False. Net profit is transferred to the balance sheet. Gross profit is calculated by taking into account all the direct expenses and incomes. Gross profit is calculated in the Trading account and then is transferred to Profit and loss account to calculate net profit. Profit and loss account takes into account all the other incomes and expenses to calculate net profit which is then transferred to the balance sheet.

True. Net loss is deducted from Capital. Profit and loss account is like any other nominal account which is closed at the end of the year and balance so obtained is transferred to the capital account. Net loss is a debit balance being a loss and hence is deducted from the capital. If it would have been net profit the same will be added to the capital account.

Fixed deposit is the movement of cash from bank account to fixed deposit account. When the business has surplus cash it can invest in fixed deposit to earn interest. Fixed deposit can be said as a current or non current asset based on the duration. Hence, fixed deposits comes under Current asset group. Assuming they are for 12 or less than 12 months.

False. Human resource is not shown as assets in the Balance sheet because it is not possible to express them in monetary terms. Anything which can not be expressed in monetary terms is not recorded in the books of accounts. 

• Dividend declared by company between two annual general meetings is called as Interim Dividend.
• An interim dividend is a distribution to shareholders before a company has determined its full years profits. 

Generally final accounts refer to Profit and Loss Account and Balance Sheet. But they do not give details of different transactions during the year as the Balance Sheet is the positional statement at a particular date and Profit and Loss Account is prepared to find out Net Profit/Loss of the year. Fund Flow Statement gives the details of various sources and applications of working capital during the year and so has become an important part of final accounts now-a-days.

 Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at the end of financial year.

Balance Sheet of Zoom Ltd as at 31.3.2018

Capital and Liabilities	Rs.	Assets	Rs.
Share Capital	$$5,00,000$$	Fixed assets	$$6,00,000$$
Reserves & Surplus	$$2,50,000$$	Stock	$$2,00,000$$
Long term borrowings	$$1,50,000$$	Debtors	$$2,50,000$$
Current liabilities	$$2,00,000$$	Bank	$$50,000$$
	$$11,00,000$$		$$11,00,000$$

Working Notes

Assume Current Liabilities	$$1.0$$
Current Assets are	$$2.5$$
Therefore, Difference or working capital	$$1.5$$
Given, Working Capital	Rs. $$3,00,000$$
Current Assets $$=Rs.3,00,000\times 2.5/1.5=$$	Rs. $$5,00,000$$
Current Liabilities =	Rs. $$2,00,000$$
Given, Liquidity Ratio =	$$1.5$$
Liquid Assets $$Rs.2,00,000\times 1.5=$$	Rs. $$3,00,000$$
Therefore Stock = (Current Assets - Liquid Assets)= $$Rs. 5,00,000 - Rs. 3,00,000$$
Stock $$=Rs. 2,00,000$$
Cost of Sales (as stock turnover is $$6$$ ) $$=Rs. 2,00,000\times 6=$$	Rs. $$12,00,000$$
Sales (G.P ratio $$20$$ %) $$=Rs. 12,00,000+[(20/80)\times 12,00,000]$$
Sales $$={15,00,000}^{\ast}$$
Fixed Assets $$=Rs. 12,00,000/2=Rs. 6,00,000$$
Debtors $$=Rs. 15,00,000/6=Rs. {2,50,000}^{\ast \ast}$$
Net worth $$=Rs. 6,00,000\times 1/0.8 =Rs. 7,50,000$$
Reserve and Surplus, 1/3rd of net worth $$=Rs. 2,50,000$$
Share Capital $$=Rs. 7,50,000-Rs. 2,50,000=Rs. 5,00,000$$

$$^{\ast}$$ Alternatively, candidates may use fixed assets turnover ratio for computation of sales
$$^{\ast \ast}$$ The balance of Debtors can be calculated as a balancing figure in the balance sheet.

Provision	Contingent liability
(1) Provisions is a present  liability of uncertain amount,  which can be measured  reliably by using a substantial  degree of estimation.	A Contingent liability is possible      obligation that may or may not  crystallize depending on the  occurrence or non-occurence of  one or more uncertain.
(2) A provision meets the recognition criteria.	A contingent liability fails to  meet the same
(3) Provision is recognized when (a) an enterprise has  a present obligation arising from past events; an outlow of resources embodying  economic benefits is probable and (b) a reliable estimate  can be made of the amount of the obligation.	Contingent liability includes present obligations that do not meet the recognition criteria because either it is not probable that settlement of those obligations will require outflow of economic benefits, or the amount cannot be reliably estimated
(4) If the management estimates that it is probable that the                  settlement of an obligation will result in outflow of economic  benefits, it recognises a  provision in the balance sheet.	If the management estimates that  it is less likely that any economic benefit will outflow from the firm to settle the obligation, it discloses the obligation as a  contingent liability

"Royalty" may be defined as Periodic payment made by one person(lessee) to another person(lessor) for using the right by the lessee vested in the lessor.
Examples:
$$1$$ . For the extraction of oil, coal and minerals.
$$2$$ . To an author for sale of his books.
$$3$$ . To a patentee for the use of patent.
$$4$$ . For use of technical know how developed by a party.

Financial statements are reports prepared by a company’s management to present the financial performance and position at a point in time. A general-purpose set of financial statements usually includes a balance sheet, income statements, statement of owner’s equity, and statement of cash flows. These statements are prepared to give users outside of the company, like investors and creditors, more information about the company’s financial positions. Publicly traded companies are also required to present these statements along with others to regulator agencies in a timely manner.

Interim dividend is the dividend which is declared between two annual general meetings of a company. Final dividend is the dividend which is declared at the annual general meeting of the company. 

Other Current Liabilities- Income received in advance; Unpaid dividends.
Other Current Assets- Prepaid expenses; Taxes paid in advance.

M/s Raghuram and Associates
Trading Account for the year ended 31st March 2018

Particulars	Details	Amount	Particulars	Details	Amount
		Rs.			Rs.
To opening Stock		$$3,20,000$$	By Sales	$$15,00,000$$
To Purchases	$$12,00,000$$		Less: Sales Return	( $$24,000$$ )	$$14,76,000$$
Less: Purchase Returns	( $$18,000)$$	$$11,82,000$$	By Closing Stock		$$4,10,000$$
To Freight		$$62,000$$
To Gross Profit c/d		$$3,22,000$$
		$$18,86,000$$			$$18,86,000$$

M/s Raghuram and Associates
Profit and Loss Account for the year ended 31st March 2018

Particulars	Details	Amount	Particulars	Details	Amount
		Rs.			Rs.
To Salaries		$$72,000$$	By Gross profit b/d		$$3,22,000$$
To Rent for Godwon	$$55,000$$
Add: Outstanding	$$5000$$	$$60,000$$	By Discount received		$$12,000$$
To Provision for Doubtful Debts (W.N 4)		$$16,200$$
To Rent and Taxes		$$24,000$$
To Discount Allowed		$$7500$$
To Carriage outwards		$$8,500$$
To Printing and stationary		$$6,000$$
To Electricity charges		$$14,000$$
To insurance premium (W.N,1)		$$4,800$$
To Depreciation (W.N 2)		$$80,000$$
To General expenses		$$11,000$$
To Bank Charges		$$3,800$$
To Interest on loan	$$4,400$$
Add: Outstanding (W.N 3)	$$100$$	$$4,500$$
To Motor car expenses (Repairs)		$$13,000$$
To Net Profit transferred to CApital A/c		$$8,700$$
		$$3,34,000$$			$$3,34,000$$

BBalance Sheet of M/s Raghuram and Associates as at 31st March 2018

Liabilities	Details	Amount Rs.	Assets	Details	Amount Rs.
Capital	$$14,11,400$$		Land & building	$$5,00,000$$
Add: New Profit	$$8,700$$		Less: Depreciation	$$25,000$$	$$4,75,000$$
Less: Drawings	( $$20,000$$ )		Motor vehicles	$$1,00,000$$
Less: Proprietor's Insurance premium	( $$42,000$$ )	$$13,58,100$$	Less Depreciation	( $$20,000$$ )	$$80,000$$
Loan from Rajan	$$60,000$$		Office equipment	$$2,00,000$$
Add: Outstanding Interest	$$100$$	$$60,100$$	Less: Depreciation	($$30,000)	$$1,70,000$$
Sundry Creditors		$$62,000$$	Furniture & Fixtures	$$50,000$$
Outstanding rent		$$5,000$$	Less: Depreciation	( $$5,000$$ )	$$45,000$$
			Stock in Trade		$$4,10,000$$
			Sundry Debtors	$$2,80,000$$
			Less: Provision for doubtful debts	( $$14,000$$ )	$$2,66,000$$
			Cash at hand		$$22,000$$
			Cash in bank		$$16,000$$
			Prepaid insurance (W.N1)		$$1,200$$
		$$14,85,200$$			$$14,85,200$$

Working Notes
(1) 

Insurance Premium	Rs.
Insurance premium as given in the trial balance	$$48,000$$
Less: Personal premium	( $$42,000$$ )
Less: Prepaid for 3 months   $$(\cfrac{6,000}{15}\times 3)$$	$$1,200$$
Transfer to Profit and Loss A/c	( $$1,200$$ )

(2) Depreciation

Building @ $$5$$ % on $$5,00,000$$	$$25,000$$
Motor Vehichles @ $$20$$ % on $$1,00,000$$	$$20,000$$
Furniture & Fittings @ $$10$$ % on $$50,000$$	$$5,000$$
Office Equipment @ $$15$$ % on $$20,000$$	$$30,000$$
Total	$$80,000$$

(3) Interest on loan

Interest on Loan $$Rs. 60,000\times 10$$ % $$\times 9/12$$	$$=4,500$$
Less: interest as per Trial Balance	( $$4,400)$$
Amount (Outstanding)	$$100$$

(4) Provision for bad debts A/c

Particulars	Amount Rs.	Particulars	Amount Rs.
To bad debts a/c	$$12,200$$	By balance b/d	$$10,000$$
To balance c/d ( $$5$$ % of $$2,80,00$$ )	$$14,000$$	By P & L A/c	$$16,200$$
	$$26,200$$		$$26,200$$