Financial Statements of a Company

Every company registered under the Companies Act, 2013 must prepare its financial statements, the Balance Sheet, the Statement of Profit and Loss, the Cash Flow Statement and the Notes to Accounts, in the format laid down in Schedule III of the Act. In this chapter you will learn the meaning, nature, objectives and limitations of financial statements, and the users who depend on them, such as shareholders, lenders, the government and employees. You will understand the concept of the operating cycle and the twelve-month rule used to classify assets and liabilities as current or non-current. The chapter then explains the vertical format of the Balance Sheet, with Equity and Liabilities shown as shareholders' funds, share application money pending allotment, non-current liabilities and current liabilities, and Assets shown as non-current assets (property, plant and equipment, intangible assets, non-current investments) and current assets (inventories, trade receivables, cash and cash equivalents). You will also prepare the Statement of Profit and Loss, showing revenue from operations, other income and expenses classified by nature, and supporting Notes to Accounts.

Detailed Worksheet: Financial Statements of a Company Section A - Definitions (10 marks) 1. What are financial statements? Name the statements a company must prepare under Section 2(40) of the Companies Act, 2013. (2 marks) 2. Define operating cycle. How does it help classify an asset as current or non-current? (2 marks) 3. Name the major headings on the Equity and Liabilities side of a company's Balance Sheet as per Schedule III. (2 marks) 4. What are Notes to Accounts? Why are they necessary? (2 marks) 5. State any four limitations of financial statements. (2 marks) Section B - Calculations and Applications (15 marks) 6. Classify the following items under the major heads and sub-heads of a company's Balance Sheet: (i) calls in advance (ii) loose tools (iii) bank overdraft (iv) goodwill (v) securities premium (vi) 9% debentures repayable after five years. (3 marks) 7. From the following, calculate the total of shareholders' funds: equity share capital Rs 10,00,000; securities premium Rs 1,00,000; general reserve Rs 2,50,000; debit balance of Statement of Profit and Loss Rs 50,000; share application money pending allotment Rs 40,000. (3 marks) 8. Prepare a Statement of Profit and Loss in prose line form from the following: revenue from operations Rs 20,00,000; other income Rs 50,000; cost of materials consumed Rs 9,00,000; employee benefit expenses Rs 3,00,000; finance costs Rs 60,000; depreciation and amortisation Rs 1,40,000; other expenses Rs 2,50,000; tax rate 30%. (3 marks) 9. Show the following under the correct heads with Note numbers: trade receivables Rs 1,80,000; bills receivable Rs 20,000; cash in hand Rs 15,000; balance at bank Rs 85,000; inventories of finished goods Rs 1,10,000 and of raw materials Rs 90,000. Prepare the related Notes to Accounts. (3 marks) 10. A company has 12% debentures of Rs 5,00,000, of which Rs 1,00,000 are to be redeemed within the next twelve months. Show how the debentures and the interest accrued but not due of Rs 15,000 will appear in the Balance Sheet. (3 marks) Section C - Diagrams (10 marks) 11. Draw a labelled format of the Balance Sheet of a company as per Schedule III, showing all major heads and sub-heads on both the Equity and Liabilities side and the Assets side, along with the Note number and the current and previous year columns. (4 marks) 12. Draw a labelled format of the Statement of Profit and Loss as per Schedule III, showing revenue, expenses by nature, profit before tax, tax expense and profit for the period. (3 marks) 13. Draw a cycle diagram of the operating cycle of a manufacturing company: cash -> raw materials -> work in progress -> finished goods -> trade receivables -> cash. (3 marks) Section D - Analysis and Higher-order Thinking (15 marks) 14. A furniture company takes 4 months to procure timber, 8 months to make furniture and gives 6 months' credit to customers. Explain its operating cycle, and state how its inventories and trade receivables realisable within the operating cycle are classified, even though they exceed twelve months. Why does Schedule III allow this? (5 marks) 15. An investor reads the Balance Sheet of a listed company and finds that its reserves and surplus are negative while its current liabilities exceed its current assets. Analyse what these two facts indicate about the company's position, and explain two limitations of the financial statements that the investor should keep in mind before deciding. (5 marks) 16. Explain where each of the following items appears in the financial statements of a company, with reasons: (i) proposed dividend for the year (ii) unpaid dividend (iii) provision for employee benefits payable after two years (iv) capital work-in-progress (v) discount on issue of debentures. (5 marks) Instructions: Time allowed 2 hours. Attempt all sections. Use the Schedule III format and provide Notes to Accounts wherever needed. Present statements in prose line form.