Financial Statements

Financial Statements are the end product of financial accounting of a business

enterprise that shows the financial position of the enterprise, the result of its
activities and an analysis of use of earnings.

Nature

1. Recorded Facts
The term ‘recorded facts’ means recorded transactions in the books of
account on the basis of evidences.
2. Accounting Conventions
Transactions are recorded in the books of account following
accounting concepts and conventions. The use of accounting
conventions makes financial statements reliable, understandable and
comparable.
3. Accounting Concepts/Assumptions
Financial statements are prepared following accounting
concepts/assumptions. The use of accounting concepts (assumptions)
also makes financial statements reliable, understandable and
comparable.
4. Accounting Standards
Companies Act, 2013 mandates accounting standards for financial
statement preparation. Non-compliance implies financial statements
may not reflect a true and fair view.
5. Selection of Accounting Policies
Selection of accounting policies have important impact or bearing on
financial statements. In selection of accounting policies, personal
judgement plays an impotent role,
6. Estimates
Estimates are necessary for preparing the financial statements and
have a bearing on the financial statements.
7. Source of Financial Information
Financial Statements are the source of financial information on the
basis of which conclusions are drawn about the profitability and the
financial position of a company.
Objectives

1. To provide financial data on economic resources and

obligations of an enterprise.
2. To show implications of operating profit on the financial
position of an enterprise.
3. To provide information about cash flow to investors and
creditors for assessing, comparing and evaluating, potential
cash flow in terms of amount.
4. To provide sufficient and reliable information to various
parties interested in financial statements.
5. To present a true and fair view of the business.
6. To assess effectiveness of management towards utilisation of
resources of business.
7. To provide information about activities of business affecting
the society.
8. To disclose accounting policies followed in the accounting
process for the better understanding of financial statement.

Operating Cycle
Operating Cycle is the time between the acquisition of an asset for
processing and its realisation into Cash and Cash Equivalents.

 Where it cannot be identified, it is assumed to be of 12 months.

 If Operating Cycle is of 12 months and Accounting Period is of 12

months, then Current Assets are till 12 months.
 If Operating Cycle is of 8 months and Accounting Period is of 12
months, then Current Assets are till 12 months.
 If Operating Cycle is of 16 months and Accounting Period is of 12
months, then Current Assets are till 16 months.
Essentials

1. Factual Information
Should disclose the factual information about the financial position.
Should give true and fair view of the financial position and
performance.

2. Understandability
Should be prepared following the accepted accounting principles for
better understanding of the users.

3. Comparable
Should disclose the information in a manner that the user can compare
the information of the same entity over years (intra-firm) and also
compare the reporting company’s financial information with that of
others (inter-firm).

4. Verifiable
Information disclosed by the financial statements should be verifiable
from the records of the company.

5. Relevant
Information disclose should be in accordance with the legal
requirements. It is so because they are considered relevant to the users
having been set after through public deposits.

6. Timelessness
Should be prepared and presented within a reasonable period after the
accounting period is over. They may lose their relevance because of
undue delay caused in the release of such information.
Limitations

Historical Records
Based on past or historical data while parties are more interested in knowing the
present position and future prospects of the concern.

Affected by Estimates
They are the outcome of accounting concepts and conventions combined with
estimates. Therefore, not free from bias.

Different Accounting Practices

Can be drawn up on the basis of different accounting practices thus profit earned
or loss incurred can be [Link] Elements are Ignored
Only provide financial information and not show qualitative elements
such as quality of management, public relations, etc. as they can’t be
measured in money terms.

Price Level Changes are Ignored

Different assets are shown at historical cost. They therefore ignore the
price level changes or present value of the assets and hence do not
reflect current market position.

Cannot Meet the Purpose of all Parties

The number of parties interested is large and their interests vary.
Therefore, can’t meet the purpose if all interested parties.
 Balance Sheet of Companies
Note Current Previous
Particulars
No. Year (₹) Year (₹)
I. EQUITY AND LIABILITIES
Shareholder’s Fund
i. Share Capital
ii. Reserves and Surplus
* iii. Money Received against Share Warrants
Share Application Money Pending Allotment
Non Current Liabilities
iv. Long Term Borrowings
v. Deferred Tax Liabilities
vi. Other Non-Current Liabilities
vii. Long Term Provisions
Current Liabilities
viii. Short Term Borrowings
ix. Trade Payables (Creditors + Bills Payable)
x. Other Current Liabilities
xi. Short Term Provisions
TOTAL
II. ASSETS
Non Current Assets
i. Property, Plant, Equipment & Intangible Assets
ii. Non Current Investment
iii. Deferred Tax Asset
iv. Long Term Loans & Advances
v. Other Non Current Assets
Current Assets
vi. Current Investment
vii. Inventories
viii. Trade Receivables (Debtors + Bills Receivable)
ix. Cash & Cash Equivalents
x. Short Term Loans & Advances
xi. Other Current Assets
TOTAL
 Examples
I. EQUITIES AND LIABILITIES
Shareholder’s Funds
1. Share Capital – • Equity Share Capital
• Preference Share Capital
• Authorised Capital
• Issued Capital
• Subscribed Capital
i. Subscribed and fully paid up
ii. Subscribed and not fully paid up
Less : Calls in Arrears
Add : Forfeited Shares

2. Reserves and Surplus - • Capital Reserve

• Capital Redemption Reserve
Balance as per statement of P & L
A/c which may be Net Profit/Loss • Debentures Redemption Reserve
• Share Options Outstanding Account
• Securities Premium Reserves
Workmen Compensation Reserve
Non Current Liabilities
1. Long term Borrowings - • Debentures
• Bonds
• Public Deposits
• Term Loan
• Bank Loan
2. Other Non Current Liabilities - • Premium Payable on
Redemption of Debentures
• Premium Payable on
Redemption of Preference
Shares
• Long Term Trade Payables

3. Long term Provisions - • Provision for Employee/Retirement

Benefits
(Provision for Provident Fund, Gratuity,
etc.)
• Provision for Warranties
Current Liabilities
1. Short term Borrowings - • Loans Repayable on Demand
• Bank Overdraft and Cash Credit
Limit from Banks
• Loans from other parties Repayable
within 12 Months
• Deposits
• Current Maturities of Long Term
Debts
• Other Loans and Advances

2. Trade Payables - • Creditors

• Bills Payable

3. Other Current Liabilities - • Current Maturities of Long-term

Debt
• Current Maturities of Finance
Lease Obligations
Outstanding Expenses
• Interest Accrued but not due on
&
Income Received in Advance Borrowings
• Interest Accrued and due on
Borrowings
• Income Received in Advance
• Unpaid Dividends
• Application Money Received for
Allotment of Securities and due
for Refund and Interest Accrued
thereon
• Unpaid Matured Deposits and
Interest Accrued thereon
• Unpaid Matured Debentures and
Interest Accrued thereon
• Calls-in-Advance
• Other Payables (specify nature)

4. Short term Provisions - • Provision for Tax

• Provision for Expenses
• Provision for Doubtful Debt
II. ASSETS
Non Current Assets
1. Property, Plant, Equipment, and Intangible Assets
Tangible Fixed Asset
• Land and Buildings
• Plant and Machinery
• Furniture and Fixtures
• Vehicles
• Office Equipment
Intangible Fixed Assets
• Goodwill
• Brands/Trademarks
• Computer Software
• Mastheads and Publishing Titles
• Mining Rights
• Copyrights, Patents and Other Intellectual Property Rights, Services
and Operating Rights
• Recipes, Formulae, Models, Designs and Prototypes
• Licenses and Franchise
Capital Work-in-progress
It includes Fixed Assets which are under construction by the company
itself e.g. building.
Intangible Assets under Development
Intangible Assets under development such as Patents, Intellectual
Property Rights, Computer Software under development, etc.

2. Non current Investments - • Investment in Property

• Investment in Equity instruments
• Investment in Preference Shares
• Investment in Government Or Trust
Securities
• Investment in Debentures Or Bonds
• Investment in Mutual Funds
• Investment in Partnership Firms
• Other Non-Current Investments
(specify nature)
 3. Long Term Loans & Advances - • Capital Advances
• Security Deposits
• Loans & Advances to related
parties (Creditors,
Employees)
❖ Capital advances are advances given for procurement of fixed assets which
are non-current assets.

4. Other Non-Current Assets - • Long Term Trade Receivable

• Unamortised Expenses or Losses
For example, Discount on Issue of

Debentures,
Loss on Issue of
Debentures
• Insurance Claim Receivable
Current Assets
1. Current Investments - • Investment in Equity Instruments
• Investment in Preference Shares
• Investment in Government or Trust
Securities
• Investment in Debentures or Bonds
• Investment in Mutual Funds
• Investment in Partnership Firms
• Other Investments (specify nature)

2. Inventories - • Raw Materials

• Work-in-Progress/Semi-Finished Goods
• Finished Goods
• Stock-in-Trade (in respect of goods acquired for
trading)
• Stores and Spares
• Loose Tools

3. Trade Receivables - • Debtors

• Bills Receivables

4. Cash and Cash Equivalents - • Balances with Banks

• Cheques Drafts on Hand
• Cash in Hand

5. Short term Loans & Advances – Loan Given to Employee

6. Other Current Assets - • Prepaid Expenses

• Accrued Income
• Advance Tax
• Dividend Receivable
• Unamortised Expenses or Losses to be
written off within 12 Months
 Income Statement of Companies
Note Current Previous
Particulars
No. Year (₹) Year (₹)

I. Revenue from Operations (Net Sales)

II. Other Income
(I + II)
III. Total Revenue
IV. Expenses
i. Cost of Material Consumed
ii. Purchase of Stock-in-Trade
iii. Change in Inventories of Stock-in-
(Opening - Closing) Trade, Semi-Finished Goods and
Finished Goods
iv. Employee Benefit Expenses
v. Finance Cost
vi. Depreciation and Amortisation
vii. Other Expenses
V. Total Expenses
(III - V)
VI. Profit before Tax
VII. Less : Tax Paid
(VI - VII)
[Link] after Tax

❖ Cost of Material Consumed = (Opening Stock + Purchases – Closing

Stock) Raw Material

❖ Finance Cost = Interest on Borrowings