FRA -NOTES FOR END TERM EXAMINATION

What are Financial Statements?

Financial statements are the statements that present an actual view of the financial
performance of an organisation at the end of a financial year. It represents a formal record of
financial transactions taking place in an organisation. These statements help the users of the
information in determining the financial position, liquidity and performance of the
organisation.

Financial statements are used by different stakeholders of an organisation which includes

shareholders, staff, customers, investors, suppliers, stock exchanges, government authority
and other related stakeholders.

Types of Financial Statements

There are four (4) types of financial statements that are required to be prepared by an entity.
These statements are:

1. Income statement,

2. Balance Sheet or Statement of financial position,

3. Statement of cash flow,

4. Noted (disclosure) to financial statements.

Let us discuss these statements in detail now

1. Income statement

Income statement of an organisation or business entity is the financial statement which

contains financial information about the three important components, which are revenues,
profit or loss and expenses incurred during the accounting period.

The three components of income statement are explained as follows:

1. Revenues: It refers to the sales of goods and services that the business generates
during the current accounting period. Revenues can be obtained from both cash and
credit sales.

2. Profit or Loss: Profit or loss is the net income which is obtained by deducting the
expenses from the revenues. Profit will happen if revenues are more than expenses
and loss will occur if expenses are more than revenue.
 3. Expenses: Expenses are the cost of operations that an organisation incurs for running
day to day operations. They can be administrative expenses like salaries, depreciation
etc.

2. Balance sheet

A balance sheet is known as a statement of financial position as it shows the position of

assets, liabilities and equity at the end of an accounting period. The net worth of a business
can be determined by deducting the liabilities from the assets.

If the users of financial information are looking for information regarding the financial
position of the company, a balance sheet is the most appropriate statement which will present
the necessary information.

Components of a balance sheet are assets, liabilities and equity. These are described below:

a. Assets: Assets are resources that are owned by the company both legally and economically.
There are two main classes of assets. They are current and non-current assets.

Current assets of a company are those assets that are going to be utilised in the current
accounting period. The examples of current assets are cash, marketable securities, cash
equivalent etc.

Non-current assets comprise of those assets that cannot be utilised completely in the current
accounting period and are therefore used across several accounting periods. It consists of
tangible and intangible assets including machinery, building, land, computer equipment,
vehicles etc.

Assets are equal to the sum of liabilities and equity of the organisation.

b. Liabilities: Liabilities are obligations of a company which they owe to other businesses or
individuals. It includes interests payable, loans, taxes etc. Liabilities are of two categories
current liabilities and non-current liabilities.

Current liabilities are due within a year that means the organisation has to pay the dues within
that accounting year only. Non-current liabilities, on the other hand, are obligations that have
a longer period of repayment, which is more than twelve months. For example, a long term
lease which is due in more than twelve months.

c. Equity: Equity is defined as the difference between assets and liabilities. The examples of
equity are retained earnings, share capital. Equity can be calculated by subtracting assets
from liabilities.

3. Statement of Cash Flow

Cash flow statement reveals the movement of cash in an organisation. It comprises cash
inflows and outflows. Cash flow can be classified into three activities which are operating
activities, investing activities and financing activities.
4. Notes to Accounts

Notes to accounts or notes to financial statements are supporting piece of information that is
provided along with final accounts of a company. Notes are required to be provided as per the
law which can include details regarding reserves, provisions, inventory, depreciation, share
capital etc.

The notes to accounts help users of accounting information in understanding the current
financial position of the business and also help in estimating its future performance.

It helps the auditors at the time of auditing of financial statements to determine if the
accounting policies are properly implemented and are reflected in the statements of the
company.

Financial Reporting: Meaning, Objectives and Importance or

Need
In any industry, whether manufacturing or service, we have multiple departments, which
function day in day out to achieve organizational goals. The functioning of these departments
may or may not be interdependent, but at the end of day they are linked together by one
common thread – Accounting & Finance department. Financial Reporting involves the
disclosure of financial information to the various stakeholders about the financial
performance and financial position of the organization over a specified period of time. These
stakeholders include – investors, creditors, public, debt providers, governments &
government agencies. In case of listed companies the frequency of financial reporting is
quarterly & annual.

Financial Reporting is usually considered as end product of Accounting. The typical

components of financial reporting are:

1. The financial statements – Balance Sheet, Profit & loss account, Cash flow statement
& Statement of changes in stock holder’s equity

2. The notes to financial statements

3. Quarterly & Annual reports (in case of listed companies)

4. Prospectus (In case of companies going for IPOs)

5. Management Discussion & Analysis (In case of public companies)

Objectives of Financial Reporting

The following points sum up the objectives & purposes of financial reporting –

1. Providing information to management of an organization which is used for the

purpose of planning, analysis, benchmarking and decision making.
 2. Providing information to investors, promoters, debt provider and creditors which is
used to enable them to male rational and prudent decisions regarding investment,
credit etc.

3. Providing information to shareholders & public at large in case of listed companies

about various aspects of an organization.

4. Providing information about the economic resources of an organization, claims to

those resources (liabilities & owner’s equity) and how these resources and claims
have undergone change over a period of time.

5. Providing information as to how an organization is procuring & using various

resources.

6. Providing information to various stakeholders regarding performance management of

an organization as to how diligently & ethically they are discharging their fiduciary
duties & responsibilities.

7. Providing information to the statutory auditors which in turn facilitates audit.

8. Enhancing social welfare by looking into the interest of employees, trade union &
Government.

Importance of Financial Reporting

The importance of financial reporting cannot be over emphasized. It is required by each and
every stakeholder for multiple reasons & purposes. The following points highlights why
financial reporting framework is important –

1. In helps and organization to comply with various statues and regulatory requirements.
The organizations are required to file financial statements to ROC, Government
Agencies. In case of listed companies, quarterly as well as annual results are required
to be filed to stock exchanges and published.

2. It facilitates statutory audit. The Statutory auditors are required to audit the financial
statements of an organization to express their opinion.

3. Financial Reports forms backbone for financial planning, analysis, bench marking and
decision making. These are used for above purposes by various stakeholders.

4. Financial reporting helps organizations to raise capital both domestic as well as

overseas.

5. On the basis of financials, the public in large can analyze the performance of the
organization as well as of its management.
 6. For the purpose of bidding, labor contract, government supplies etc., organizations are
required to furnish their financial reports & statements.

What is GAAP
Generally Accepted Accounting Principles (GAAP) are basic accounting principles and
guidelines which provide the framework for more detailed and comprehensive accounting
rules, standards and other industry-specific accounting practices. For example, the Financial
Accounting Standards Board (FASB) uses these principles as a base to frame their own
accounting standards. Thus GAAP encompasses:

1. Basic accounting principles/guidelines

2. Accounting Standards usually issued by the premier accounting body of the country
3. Industry-specific accounting practices to cover unusual scenarios

In India, financial statements are prepared on the basis of accounting standards issued by the
Institute of Chartered Accountants of India (ICAI) and the law laid down in the respective
applicable acts (for example, Schedule III to Companies Act, 2013 should be compulsorily
followed by all companies)..

Accounting Principles: Accounting Concepts and conventions.

GAAP AND IFRS
Accounting concepts are also basic assumptions or truths which are accepted by people
without further proof. They are conceptual guidelines for application in the financial
accounting process.

Principles/Concept

According to AICPA (USA) principles means " a general law or rule adopted or professed as
a guide to action, a settled ground or basis of conduct or practice". Thus principles are
general guidelines for action or conduct.

Conventions

The term 'convention' includes those customs and traditions which guide the accountant while
preparing the accounting statements. Conventions have their origin in the various accounting
practices followed by the accountant. It is very difficult to trace the origin of the conventions
and establish their authenticity as accounting principles. But by usage they have attained the
status of accounting principles..

Separate Entity Concept

In separate entity concept the business is treated as a separate entity from the owner event
though statutes recognize no such distinct entity. In accounting the concept of separate entity
is applicable in the case of all organizations. This concept is very much relevant in the case of
sole proprietorship entities and partnerships. In the case of a company it is recognized as a
separate entity by statutes as well as from the accounting point of view.The separate entity
concept helps to keep the affairs of the business separate from the private affairs of the
proprietor.

Going Concern Concept

This concept assumes that the business will continue for a fairly long period of time in future.
There is no need of forced sale of the assets of the entity. Otherwise every time the annual
financial statements are prepared the probable losses on account of the possible sale of assets
should be accounted. This would distort the operating result as revealed by the profit and loss
account and the financial position depicted in the balance sheet. On the basis of this principle
depreciation is charged on fixed assets on the basis of expected life rather than its market
value and intangible assets are amortized over a period of time .

Money Measurement Concept

Money is the unit in which economic events affecting a business entity are measured. The
money measurement concept implies that accounting could measure and report only those
transactions and events which could be measured in terms of money. It cannot account for
qualitative aspects like employee relations, competitive market, advantages of the entity over
others etc. This concept imposes a restriction on the ability of the financial statements to
present a correct picture of the entity as those events which are unable to be quantified in
money terms are left out. Further the money as a unit of measurement is not stable. The
variations in the value of money fail to present a correct picture of the operating results and
financial position of the entity.

Cost Concept

The basis on which assets are recorded in the books of accounts is the cost- that is the price
paid to acquire them. Cost will form the basis of which further accounting will be done as
regards the asset. No adjustment is made in the cost to reflect the market value of the asset.
The cost concept does not imply that asset will always appear at cost in the balance sheet. It
only means that cost will be the basis for further accounting treatment. The cost of the asset
may be reduced gradually by the process of charging depreciation.

Dual Aspect Concept

The basic equation of accounting is

Assets = Equities

Or

Assets = Outsiders' Equity + Owners' Equity

Or
Assets = Liabilities + Capital

Every transaction affecting an entity has dual aspect on the accounting records. Both aspects
are recorded in the books of accounts. Hence accounting is called ' double entry system'. The
two aspects are expressed as 'debit' and 'credit '.In other words ' for every debit there is an
equivalent credit'.

Accounting Period Concept

As per the going concern concept, the life of a business is indefinite. The actual working
result of the entity and its real financial position could be ascertained only after a very long
period of time. This will Be of not much help to various interested parties who have to take
decisions considering the operating results and financial position of the entity. In order to
overcome these practical difficulties the life of an entity is divided into segments known as
accounting period. Usually accounting period is a period of one year. The accounting period
concept facilitates the preparation of income statement and statement of financial position at
the end of each accounting year and ascertains the operating results (profit/loss) and the
financial position of the entity.

Periodic Matching of Cost and Revenue Concepts

The concept is based on the accounting period concept. The objective of maintaining
accounts is to prepare the income statement to ascertain the profit/loss of the entity. In order
to fulfill this objective the 'revenues' of the period for which income statement is prepared
should be matched with costs. 'Matching' means the appropriate association of related
'revenues' and 'costs'. Profit/loss could be ascertained only when the revenue earned during
the period is compared with the expenditure incurred during the same period.

Realization Concept

According to the realization concept 'revenue' should be recognized only when the entity is
legally entitled to receive payment. The AICPA has defined revenue as “Revenues results
from the sale of goods and the rendering of services and is measured by the charge made to
customers, clients or tenants of goods and services furnished to them. It also includes gains
from the sale or exchange of assets other than stock in trade, interest and dividend earned on
investments and other increase in owner's equity except those arising from capital
contribution and capital adjustment .Revenue is sometimes described as operating revenue."

The accounting conventions followed in the preparation of accounting statements are

Conservatism

The rule of the accountant is 'anticipate no profit but provide for all possible losses' at the
time of recording the business transactions and preparation of annual financial statements.
The accountant wants to be on the safer side by not taking some profits which may be
received but which is not yet received and providing for losses which he thinks may happen
but which has not yet happened. This is because he thinks the chances of non-receipt of
anticipated profit and the incurring of losses anticipated are higher. If he is very optimistic
regarding receipt of profits and non –incurring of losses, the financial statements may present
a very rosy picture of the state of affairs of the entity which may not subsequently
materialize. So he acts conservatively by not taking anticipated profits and but taking
anticipated losses in the preparation of the financial statements.

Materiality

The convention of materiality advocates that the accountant should give importance to
transactions and events which are material in the preparation of accounts and presentation of
financial statements. He should ignore those items in the recording of transactions and
preparation of financial statements, items which are immaterial or not having much bearing in
giving a true and fair view of the state of affairs of the entity. It is very difficult to fix a
threshold limit in deciding materiality or non-materiality of events. It is left to the discretion
and best judgment of the accountant to decide upon the materiality and non-materiality of
events.

Consistency

According to the convention of consistency the accounting practices employed should be

consistent, that is, applied without change in the coming periods also. In other words the
practices should not be changed without sufficient reason. For example if stock is valued on
the basis of 'cost or market price whichever is lower' the same method should be employed
year after year. If depreciation is charged on straight line method, the same method of
computing depreciation should be used thereafter.

Full disclosure

The very purpose of accounting is to facilitate the preparation of the income statement and
the statement of financial position so that the operating results of the entity and the financial
position could be ascertained. This is done at periodic intervals usually on an annual basis.
The business enterprise should provide through the financial statements all the relevant
information required, so as to enable the external parties to make sound economic and
investment decisions. Any information which is relevant and likely to influence the decision
making process of the user should not be left out. This is more important in the case of joint
stock companies since the members and outsiders have no access to the accounting records of
the company and have to depend on the published annual financial statements to dig out
information relating to the company.

GAAP (US Generally Accepted Accounting Principles) is the accounting standard used
in the US, while IFRS (International Financial Reporting Standards) is the accounting
standard used in over 110 countries around the world. GAAP is considered a more “rules
based” system of accounting, while IFRS is more “principles based.” The U.S. Securities and
Exchange Commission is looking to switch to IFRS by 2015.
What follows is an overview of the differences between the accounting frameworks used by
GAAP and IFRS. This is at a broad, framework level; differences in accounting treatments
for individual cases may also be added as this gets updated.

Comparison chart

GAAP IFRS

Generally Accepted Accounting International Financial Reporting

Stands for
Principles Standards

Generally accepted accounting International Financial Reporting

principles (GAAP) refer to the standard
framework of guidelines for financial
Introduction accounting used in any given
jurisdiction; generally known as
accounting standards or standard
accounting practice.
Standards are designed as a
common global language for
business affairs so that company
accounts are understandable and
comparable across international
boundaries.

United States Over 110 countries, including those

Used in
in the European Union

Revenue or expenses, assets or Revenue or expenses, assets or

Performance
liabilities, gains, losses, comprehensive liabilities
elements
income

Required Balance sheet, income statement, Balance sheet, income statement,

documents in statement of comprehensive income, changes in equity, cash flow
financial changes in equity, cash flow statement, statement, footnotes
statements footnotes

Inventory Last-in, first-out, first-in, first-out or First-in, first-out or weighted-

Estimates weighted-average cost average cost

Inventory Prohibited Permitted under certain criteria

Reversal

Purpose of the US GAAP (or FASB) framework has no Under IFRS, company management
framework provision that expressly requires is expressly required to consider the
management to consider the framework framework if there is no standard or
in the absence of a standard or
 GAAP IFRS

interpretation for an issue. interpretation for an issue.

In general, broad focus to provide In general, broad focus to provide

Objectives of relevant info to a wide range of relevant info to a wide range of
financial stakeholders. GAAP provides separate stakeholders. IFRS provides the
statements objectives for business and non-business same set of objectives for business
entities. and non-business entities.

The "going concern" assumption is not IFRS gives prominence to

Underlying
well-developed in the US GAAP underlying assumptions such as
assumptions
framework. accrual and going concern.

Relevance, reliability, comparability and Relevance, reliability, comparability

understandability. GAAP establishes a
hierarchy of these characteristics.
Qualitative
Relevance and reliability are primary
characteristics
qualities. Comparability is secondary.
Understandability is treated as a user-
specific quality.
and understandability. The IASB
framework (IFRS) states that its
decision cannot be based upon
specific circumstances of individual
users.

The US GAAP framework defines an The IFRS framework defines an

Definition of an asset as a future economic benefit. asset as a resource from which
asset future economic benefit will flow to
the company.

IFRS
The IFRS establishes accounting standards and practices that every company adhering to it
must observe. It is a rule book that must be followed while recording business transactions in
the books of accounts. Also, as it yields transparency and consistency in financial reporting,
governments use it to regulate direct and indirect foreign investments.

It is accepted worldwide as it facilitates the free flow of capital. In other words, any U.S.
investor will be more confident to invest in, suppose, an Indian company after scrutinizing its
financial records prepared in conformity with this accounting standard. This is because
following the internationally-approved standards eliminate accounting risks associated with
such investments.
However, note that the U.S. government enforces GAAP on their companies. Therefore, there
is often a widespread debate on IFRS vs US GAAP when it comes to compliance. IFRS is
lengthy and flexible compared to GAAP. As it is principle-based, its rules are open to
multiple interpretations. However, both IFRS and GAAP serve a common objective of
uniformity and openness in maintaining financial statements.

Importance of IFRS

It is treated as an international accounting standard and holds great importance for many
countries and the world economy. Here is its significance:

#1 – Transparency

It encourages transparency and accountability of financial statements prepared by companies,

small firms, and government agencies. As a result, it minimizes the margin of error and
manipulation of any holdings and irregularities of funds, transactions, and balances. Besides,
it also motivates consistency and clarity of work.

#2 – Uniformity and Comprehensive

The International Financial Reporting Standards are developed to set uniformity in the
presentation and understand ability of statements. When everyone follows and recognizes the
standards, it becomes easy for companies and agencies to follow a common law that helps
world economies compare their growth comprehensively. Also, it is easy to read for
everyone.

#3 – Security and Flow

It helps track the flow of transactions, records funds information, and works towards attaining
a security level for direct and indirect foreign investments across nations. This accounting
standard is essential when we are dealing with significant assets or getting into heavy
transactions.

#4 – Accountability

It strengthens accountability by bridging the gap of incompetent financial reporting. If not

complied with it, the companies may face penalties.

Differentiate revenue expenditure with deferred revenue

expenditure
In business, Deferred Revenue Expenditure is an expense which is incurred while accounting
period. And the result and benefits of this expenditure are obtained over the multiple years in
the future. For example, revenue used for advertisement is deferred revenue expenditure
because it will keep showing its benefits over the period of two to three years. Thus, the
profit and loss account statement is prepared as a periodic statement. Let us learn more about
it in greater detail.

Revenue expenditures are those expenses that are borne by the company during the course of
normal business operations. These benefits that will result from these expenses will be
obtained in the same accounting period.

Examples of revenue expenditure include: utility expenses, insurance expenses, salary

expenses, rent expenses etc.

Asset Defined
In financial accounting, an asset is an economic resource. Anything tangible or intangible that
is capable of being owned or controlled to produce value and that is held to have positive
economic value is considered an asset. Simply stated, assets represent value of ownership that
can be converted into cash (although cash itself is also considered an asset).

The balance sheet of a firm records the monetary value of the assets owned by the firm. It is
money and other valuables belonging to an individual or business. Two major asset classes
are tangible assets and intangible assets.

Tangible assets contain various subclasses, including current assets and fixed assets. Current
assets include inventory, while fixed assets include such items as buildings and equipment.

Intangible assets are nonphysical resources and rights that have a value to the firm because
they give the firm some kind of advantage in the market place. Examples of intangible assets
are goodwill, copyrights, trademarks, patents and computer programs, and financial assets,
including such items as accounts receivable, bonds and stocks.

Earnings per share and Diluted earnings per share

Earnings Per Share (EPS)

EPS measures the amount of a company’s profit on a per-share basis. Unlike diluted
EPS, basic EPS does not account for the dilutive effects that convertible securities have on
EPS.

Dilutive effects occur when the number of shares increases—for example, through a new
share issue. If a company issues more shares to investors, then this increases the number of
shares outstanding and decreases the company’s EPS. Ultimately, this can decrease the stock
price.

To calculate a company’s basic EPS, take a company’s net income and subtract any preferred
dividends, then divide the result by the weighted average number of common shares
outstanding. The weighted average is a measurement that investors use to monitor the cost
basis on shares accumulated over a period of years.
Diluted EPS

Conversely, diluted EPS is a metric used in fundamental analysis to gauge a company’s

quality of EPS assuming all convertible securities have been exercised. Convertible
securities include all outstanding convertible preferred shares, convertible debt, equity
options (mainly employer-based options), and warrants.

To calculate diluted EPS, take a company’s net income and subtract any preferred dividends,
then divide the result by the sum of the weighted average number of shares outstanding and
dilutive shares (convertible preferred shares, options, warrants, and other dilutive securities).

Types of assets
There are six main types of assets, which you can categorize based on several characteristics.
You may be able to categorize some assets into multiple categories. These six types of assets
are:

1. Current assets

Current assets are ones an owner can convert into cash or cash equivalents within a year
through sale or account payments. Companies can use current assets to pay for daily
operations and other short-term expenses. Current assets include:

 Cash: Cash assets include the cash you have on-site and the total amount of money in
all of your bank accounts, certificates of deposits and prepaid expenses.

 Mutual funds: This account consists of money from various investors and is part of a
portfolio of mixed assets.

 Money market account: This is a low-risk savings account that pays interest. As a
significant part of the world’s financial system, it’s an investment of short-term debt
where shares sell for about $1 each.

 Marketable securities: These may include equity that you can liquidate, treasury
bills and stocks.

 Accounts receivable: Accounts receivable are payments clients owe you for products
you sold or services you rendered. These are short-term assets because you can collect
the money within a year.

 Goods and products: These can be items you or a business own or your current
inventory of products you haven’t sold. These also are short-term assets.

 Supplies: Supplies can include office equipment, such as paper products, and
manufacturing supplies, such as wood, textiles and plastic.
  Promissory Notes: This is an official document that’s signed and includes a written
promise to pay back a sum of money to a specific person on a specific date or
demand.

2. Fixed assets

Fixed assets, or capitalized assets, are the tangible assets of a company. These help
companies produce goods or provide services that result in future income. You can’t convert
these assets quickly to cash or use them to cover daily expenses. Accountants consider fixed
assets as long-term tangible assets you keep for long periods and that often depreciate. You
typically sell fixed assets only if there’s an emergency and they’re more profitable than your
current assets.

Fixed assets can be freehold fixed assets or leasehold fixed assets. The owner legally holds
freehold fixed assets, meaning no other entity has an ownership claim to them. Leasehold
fixed assets are assets a borrower leases for a specific time, and an owner may or may not
renew them. Fixed assets include:

 Buildings and land: This is any property or land a business purchases and owns.
These real estate investments include any permanent structures on the land.

 Machinery: Machines help produce goods that bring in revenue, making them assets.

 Vehicles: Any vehicles, including work trucks and cars, a company provides to its
also are fixed assets.

 IT equipment: This includes computers, servers, routers and other related equipment
a company owns.

3. Tangible assets

Tangible assets are ones you can touch, feel or see. Meaning they’re any physical or
measurable items a company uses for its operations. These assets often provide a way for a
business to operate. Some common examples of these include:

 Machinery

 Buildings

 Equipment

 Cash

 Supplies

 Land

 Inventory
4. Intangible assets

Intangible assets are nonphysical assets of a company that add to its value. Because of their
nature, these assets can be more difficult to assign a monetary value to, but they also can be
more valuable than tangible assets. These assets can include:

 Intellectual property

 Patents

 Copyrights

 Goodwill

 Brand equity

 Intellectual property

5. Operating assets

These assets are any ones that are vital for a company’s daily operations. Operating assets
allow companies to perform their more basic business activities, which helps them generate
revenue. Examples of these assets are:

 Cash

 Buildings

 Copyrights

 Goodwill

 Machinery

 Buildings

 Patents

6. Non-operating assets

Non-operating assets are ones that businesses can use to generate revenue, even though they
aren’t required for their daily operations. Some common examples of these assets include:

 Vacant land

 Interest income from fixed deposits

 Marketable securities

 Short-term investments
 Basic items of Profit and loss accounts
Profit and Loss

Profit and loss is prepared in form ledger. So, it contains two sides i.e. debit and credit side.
The items included in profit and loss account are as follows: -

Items relating to Debit Side

 Office and administrative expenses

All the office and administrative expenses like office salaries, printing and stationery
expenses, legal expenses, telephone and electricity charges, office rent, audit fees,
insurance premium etc. are debited in profit and loss account. These expenses
incurred in managing the whole activities of the business.

 Selling and distributing expenses

All the selling and distributing expenses like warehouse expenses, carriage on sales,
packing expenses, commission on sales, advertising, traveling expenses etc. are
debited in profit and loss account. These expenses incurred in maintaining and
promoting sales.

 Financial expenses Bank Charges

The financial expenses that include interest on the loan, loan, interest on bank
overdraft, bank charges etc. are debited in profit and loss account. These expenses are
incurred for the steady supply of financial necessary for the business.

 Depreciation and repair & maintenance

Depreciation is the loss for a business because it is the permanent decrease in the
value of fixed assets due to their continuous use. The repair & maintenance expenses
are incurred to maintain the working condition of the fixed assets.

 Other expenses and losses:

Other expenses and losses are included on the debit side of the profit and loss account.
Bad debts, provision for bad debts, loss on sale of fixed assets, loss of goods in transit
etc. are some of the other expenses.

Items relating to Credit Side

 Indirect incomes:
Profit and loss account contains all the indirect incomes in its credit side. Incomes
from commission and discount are the examples of indirect incomes.

 Profits Other incomes and profits:

Profit and loss account contains all other incomes like interest on investment, interest
on deposit, dividend received, bad debts recovered etc. it also includes profit on sale
of fixed assets, profit on sale of investment etc.
 What Does It Mean to Calculate Your Net Worth?
You can calculate their net worth by adding up all your assets while subtracting their
outstanding liabilities from the total. Regardless of where you are in life, you may be curious
to learn how much you’re worth — at least on paper.

There are several good reasons to calculate your net worth. A financial institution may ask for
your net worth when evaluating your application for a home, business or auto
loan. Calculating your net worth gives the bank or credit union an idea of how much you’re
worth if you default on the loan.

Simple Net worth Calculation

A simple net worth calculation means adding up your total assets and subtracting your debts,
often referred to as liabilities.

Assets include everything you own, including how much money you have in your checking
or savings account, real estate equity, savings and investment plans and items with a clear
market value.

Liabilities include all outstanding debts, including the remaining balance on your home, car,
business or personal loan, credit card debt, student loans, back taxes and anything else you
still owe.

To calculate your net worth, use the following equation:

ASSETS – LIABILITIES (DEBTS) = TOTAL NET WORTH

Why reformulation of balance sheet is required?

The reformulated statement combines the two statements and separates the two types of
operations. Like the reformulated balance sheet, it separates the earnings from investing
from earnings from insurance underwriting. With this reformulation, one gets a better
insight into the business.

In the reformulated balance sheet, the float is represented by negative net. operating
assets. So the reformulated balance sheet depicts the two aspects of the business – the.
negative net operating assets in underwriting and the positive investment in securities.

Reformulating a balance sheet involves making adjustments or restatements to the reported

financial figures to provide a clearer and more accurate view of a company's financial
position and performance. Here are some examples of balance sheet reformulations:

Operating Lease Capitalization: Under accounting standard changes like IFRS 16 or ASC
842, operating leases must be capitalized on the balance sheet. Reformulation involves
recognizing a right-of-use asset and a corresponding lease liability.
Goodwill Impairment: If a company's goodwill becomes impaired, it needs to be adjusted
on the balance sheet. Impairment losses reduce the carrying amount of goodwill and may
impact equity.

Foreign Currency Translation: When a company operates in multiple currencies, the

balance sheet may need reformulation to translate foreign currency financial statements into
the reporting currency. This can impact the value of assets and liabilities.

Inventory Write-Down: If the company's inventory becomes obsolete or loses value, it may
need to be written down. This will reduce the reported value of inventory on the balance
sheet.

Deferred Tax Assets/Liabilities: Changes in tax laws or reassessment of deferred tax assets
and liabilities may require reformulation. The balance sheet should reflect the adjusted tax
positions.

Pension Plan Adjustments: Companies with defined benefit pension plans may need to
reformulate the balance sheet to reflect the impact of actuarial gains or losses on the pension
asset or liability.

Asset Impairment: If the recoverable amount of assets (e.g., property, plant, or equipment)
is less than their carrying amount, the assets need to be written down, impacting the balance
sheet.

Restructuring Provisions: When a company is undergoing restructuring, it may need to

create provisions for future expenses. These provisions are recorded as liabilities on the
balance sheet.

Convertible Debt: Reformulation may be needed when accounting for convertible debt. It
may involve separating the debt into liability and equity components based on the fair value
of the conversion feature.

Contingent Liabilities: In some cases, companies may need to disclose and, if probable,
recognize contingent liabilities on the balance sheet. This affects the liabilities section.

Adjustments for Related-Party Transactions: If a company has engaged in transactions

with related parties that are not conducted at arm's length, reformulation may be necessary to
reflect fair market values or disclose the related-party nature of the transactions.

Fair Value Adjustments: Certain financial instruments, like investments in marketable

securities, may need to be adjusted to fair value. Changes in fair value impact both assets and
equity on the balance sheet.

Revaluation of Fixed Assets: Some companies choose to revalue their fixed assets to reflect
their current market values. This can result in changes to the carrying amounts of assets.

These are just some examples of balance sheet reformulation scenarios. Each of these
adjustments is made to ensure that the balance sheet accurately reflects the financial position
and performance of the company, adhering to relevant accounting standards and regulations.
It's important to consult with accounting professionals or follow the appropriate accounting
standards when making these adjustments.

Calculating Cash Flow from Operating Activities

Different reporting standards are followed by companies as well as the different reporting
entities which may lead to different calculations under the indirect method. Depending upon
the available figures, the CFO value can be calculated by one of the following formulas, as
both yields the same result:

Cash Flow from Operating Activities = Funds from Operations + Changes in Working
Capital where,

Funds from Operations = (Net Income + Depreciation, Depletion, & Amortization +

Deferred Taxes & Investment Tax Credit + Other Funds)

Or

Cash Flow from Operating Activities = Net Income + Depreciation, Depletion, &
Amortization + Adjustments To Net Income + Changes In Accounts Receivables +
Changes In Liabilities + Changes In Inventories + Changes In Other Operating
Activities

This format is used for reporting Cash Flow details by finance portals like Yahoo! Finance.

All the above mentioned figures included above are available as standard line items in the
cash flow statements of various companies.

The net income figure comes from the income statement. Since it is prepared on an accrual
basis, the noncash expenses recorded on the income statement, such as depreciation and
amortization, are added back to the net income. In addition, any changes in balance sheet
accounts are also added to or subtracted from the net income to account for the overall cash
flow.

Methods of financial statement analysis

There are several techniques used by analysts to develop a fair understanding of a company’s
financial performance over a period. The three most commonly practised methods of
financial analysis are – horizontal analysis, vertical analysis, and ratio and trend analysis.

Horizontal Analysis

Performance of two or more periods is compared to understand company’s progress over a

period. Each component of a ledger is compared with the previous period to gather a general
understanding of trends.
For example, if the cost of final goods rises by 20 per cent in a year, but it is not reflected in
the revenue earned, then there may be some components which are costing the company
more.

Vertical Analysis

Vertical analysis helps to establish a correlation between different line items in a ledger. It
gives analysts an understanding of overall performance in terms of revenue and expenses.
The results are reviewed as a ratio.

Ratio analysis

Ratio methods of financial analysis is used to compare one financial component against
another and reveal a general upward or downward trend. Once the ratio is calculated, it can
be compared against the previous period to analyse if the company’s performance is in accord
with set expectations. It helps management highlight any deviation from set expectations and
take corrective measures.

Trend analysis

It helps to analyse trends over three or more periods. It takes into account incremental change
patterns, considering the earliest year as the base period. A change in a financial statement
will either reveal a positive or negative trend.

What is Ratio Analysis?

Ratio analysis is a quantitative analysis of data enclosed in an enterprise’s financial
statements. It is used to assess multiple perspectives of an enterprise’s working and financial
performance such as its liquidity, turnover, solvency and profitability.

To put it in other words, Ratio analysis is the method of analysing and comparing financial
data by computing meaningful financial statement value percentages rather than comparing
line items from each financial statement.

Ratio analysis has its own merits and demerits too. Below mentioned points highlights those
points.

Advantages of Ratio Analysis are as follows:

 Helps in forecasting and planning by performing trend analysis.

 Helps in estimating budget for the firm by analysing previous trends.

 It helps in determining how efficiently a firm or an organisation is operating.

 It provides significant information to users of accounting information regarding the

performance of the business.

 It helps in comparison of two or more firms.

  It helps in determining both liquidity and long term solvency of the firm.

Disadvantages of Ratio Analysis are as follows:

 Financial statements seem to be complicated.

 Several organisations work in various enterprises each possessing different

environmental positions such as market structure, regulation, etc., Such factors are
important that a comparison of 2 organisations from varied industries might be
ambiguous.

 Financial accounting data is influenced by views and hypotheses. Accounting criteria

provide different accounting methods, which reduces comparability and thus ratio
analysis is less helpful in such circumstances.

 Ratio analysis illustrates the associations between prior data while users are more
concerned about current and future data

Categories of Ratio Analysis

There are a lot of financial ratios which are used for ratio analysis, for the scope of Class 12
Accountancy students. The following groups of ratios are considered in this article, which are
as follows:
1. Liquidity Ratios: Liquidity ratios are helpful in determining the ability of the company to
meet its debt obligations by using the current assets. At times of financial crisis, the company
can utilise the assets and sell them for obtaining cash, which can be used for paying off the
debts.
Some of the most commonly used liquidity ratios are quick ratio, current ratio, cash ratio, etc.
The liquidity ratios are used mostly by creditors, suppliers and any kind of financial
institutions such as banks, money lending firms, etc for determining the capacity of the
company to pay off its obligations as and when they become due in the current accounting
period.
2. Solvency Ratios: Solvency ratios are used for determining the viability of a company in
the long term or in other words, it is used to determine the long term viability of an
organisation.
Solvency ratios calculate the debt levels of a company in relation to its assets, annual
earnings and equity. Some of the important solvency ratios that are used in accounting are
debt ratio, debt to capital ratio, interest coverage ratio, etc.
Solvency ratios are used by government agencies, institutional investors, banks, etc to
determine the solvency of a company.
3. Activity Ratio: Activity ratios are used to measure the efficiency of the business activities.
It determines how the business is using its available resources to generate maximum possible
revenue.
These ratios are also known as efficiency ratios. These ratios hold special significance for
business in a way that whenever there is an improvement in these ratios, the company is able
to generate revenue and profits much efficiently.
Some of the examples of activity or efficiency ratios are asset turnover ratio, inventory
turnover ratio, etc.
4. Profitability ratios: The purpose of profitability ratios is to determine the ability of a
company to earn profits when compared to their expenses. A better profitability ratio shown
by a business as compared to its previous accounting period shows that business is
performing well.
The profitability ratio can also be used to compare the financial performance of a similar
firm, i.e it can be used for analysing competitor performance.
Some of the most used profitability ratios are return on capital employed, gross profit ratio,
net profit ratio, etc

Different Types of Ratio Analysis

There are several types of accounting ratios that help in analysing a company. They can be
broadly categorised into five different types.

Liquidity Ratios

Liquidity ratios measure the company’s ability to repay its short and long-term obligations.
There are three types of liquidity ratios namely current ratio, quick ratio, and cash ratio.

1. Current ratio

The current ratio is a measure of the company’s ability to pay its short-term liabilities with
current assets. Also, it indicates the company’s liquidity. The higher the ratio, the higher its
liquidity. However, the ideal current ratio is 2:1. Anything higher than this indicates the
company is not putting its excess cash to good use. However, there is one drawback of the
current ratio that it cannot be used in isolation to compare different companies.

Current ratio = Current assets/Current liabilities

2. Quick ratio

Quick ratio or acid test ratio is a measure of the company’s ability to pay its short-term
liabilities with quick assets. The quick assets are current assets without inventory and prepaid
assets. The higher the ratio, the higher its liquidity. The ideal quick ratio is 1:1. Though this
ratio can be used to compare different companies, it doesn’t consider future cash flows and
the long-term liabilities due within 12 months.

Quick ratio = (Current assets – inventory – prepaid assets)/Current liabilities

3. Cash ratio

The cash ratio measures the company’s capacity to repay short-term liabilities with its cash
and cash equivalents. A high cash ratio indicates the company is cash rich. However,
companies are not advised to maintain a high level of cash. Hence cash ratio is hardly used in
financial analysis.

Cash ratio = Cash and cash equivalents/Current liabilities

Profitability Ratios

Profitability ratios measure the company’s profits in relation to revenue and assets. It also
tells the company’s financial health. The higher the profitability ratios, the better the
company’s profit-generating capacity. Profitability ratios are also known as performance
ratios. Analysts use five different types of profitability ratios to determine the company’s
ability to generate profits.

1. Gross profit margin

The gross profit ratio measures the company’s profits from selling its goods and services. It
takes into account the net sales and all expenses that the company incurred to produce goods
and services. A high gross profit margin indicates the company’s efficiency in selling goods
and services. One drawback of gross profit margin is that it doesn’t consider corporate or
indirect expenses, such as marketing and distribution expenses that the company incurs to sell
goods and services.

Gross profit margin = ((Net Sales – Cost of goods sold)/Net sales) * 100

2. Net profit margin

Net profit margin indicates how much profit is generated for every rupee of revenue earned.
The higher the net profit, the greater the company’s ability to generate profits. It is the most
important indicator as it tells how profitable the company is. It considers all direct and
indirect income and expenses before determining the company’s profitability. Hence even
one off-time, such as profit or loss from the sale of an asset, can affect the company’s
profitability.

Net profit margin = ((Revenue – Operating and non-operating expenses)/Revenue)*100

3. Return on capital employed (RoCE)

Return on capital employed measures the company’s ability to generate profits from its
capital. A high RoCE indicates that the company is using its capital efficiently. This ratio is
used for companies that are capex-heavy. It is a very good tool for comparing companies with
different capital structures. However, the ratio is calculated based on the book value of assets
and liabilities and doesn’t consider the market value.

RoCE = EBIT/Capital Employed

Where EBIT is earnings before interest and tax

Capital employed = Total assets – Current liabilities

4. Return on equity (RoE)

Return on equity measures the profits from the equity invested. In other words, it tells how
much profit the company made using shareholder funds. The higher the RoE, the greater the
return for the shareholders. As an investor, you can look at the RoE of different companies
and compare them to make an investing decision. However, RoE can be easily manipulated
by increasing the asset life or decreasing the depreciation rate.

RoE = Net Profit/Average shareholder’s equity

Where the average shareholder’s equity is the average of two years.

5. Return on assets (RoA)

Return on assets (RoA) measures the profits against the assets. It indicates how well the
company is using its assets to generate profits. In other words, it measures the company’s
ability to generate profits using the assets. RoA is not a very useful measure for service-
oriented companies as their asset base is usually low, and they do not incur a lot of capex as
well.

RoA = EBIT/Average total assets

Where EBIT is earnings before interest and tax

Average total assets are the average assets of two years

Solvency Ratios

Solvency ratios, also known as leverage ratios, measure the company’s solvency. In other
words, these ratios determine whether the company is able to pay back its debt and interest
obligations. There are two types of leverage ratios that analysts and investors use for analysis.
They are the debt-to-equity ratio and interest coverage ratio.

1. Debt-to-equity ratio

The debt-to-equity ratio measures the company’s ability to pay back its debt obligations using
its equity. It also tells how much leverage the company is using in its capital. High leverage
indicates that the company uses more debt, indicating a higher risk. It means the company
uses more outside funds to operate its business. The debt-to-equity ratio is a very useful tool
that helps gauge the risk in the business. The only drawback of this ratio is that it cannot be
used to compare companies from different industries. This is because some industries have a
high capex and hence may require more leverage than others.

Debt-to-equity = Total debt/Shareholder’s equity

2. Interest coverage ratio

The interest coverage ratio measures whether the company is generating enough profit to
cover its interest expense. Also, creditors have the first right to the profits of the company.
Hence it is important to gauge whether the company’s profits will be sufficient to pay interest
on the loan. Moreover, a high ratio is considered better as the company has enough money to
pay off the interest.
Interest coverage ratio = EBIT/Interest expense

Where EBIT is earnings before interest and tax

Turnover Ratios

Turnover ratios indicate how well the company uses its assets and liabilities to generate
revenue. They are also known as efficiency ratios, as they determine how efficient the
company’s management is. There are three turnover or activity ratios that investors use for
analysis: fixed asset turnover ratio, inventory turnover ratio and receivables turnover ratio.

1. Fixed asset turnover ratio

The fixed asset turnover ratio measures how efficiently a company generates revenue from its
fixed assets. Also, a high ratio implies that the company efficiently uses its fixed assets to
generate revenue. On the other hand, a low ratio implies that the business is underperforming.

Fixed asset turnover ratio = Net sales/Average fixed assets.

2. Inventory turnover ratio

The inventory turnover ratio measures the speed at which the company converts its inventory
into sales. Also, it indicates the number of times the inventory is converted and sold to
customers in a year. A high ratio signals strong sales, and a low ratio indicates weak sales.
But a high ratio can also mean the company is stocking its inventory inadequately.

Inventory turnover ratio = Cost of goods sold/Average inventory

3. Receivables turnover ratio

The receivables turnover ratio measures the speed at which the company can collect its
receivables. It indicates the number of times the receivables are converted into cash during a
year. A high ratio indicates the company has quality customers and good collection
efficiency. On the other hand, a lot ratio indicates the company’s debtors are not financially
viable and might lead to bad debts.

Receivables turnover ratio = Net credit sales/Average receivables

Valuation Ratios

Also known as the earnings ratio, they determine whether the company is a good investment
or not using the share price. Hence these ratios are also known as market ratios. Also,
analysts usually use these ratios to predict the company’s future performance. There are four
different types of earnings ratios that you can use for analysis.

1. Earnings per share (EPS)

Earnings per share is the net profit earned per outstanding equity share. Also, it is a widely
used metric that indicates how much profit the company makes for each share. A high EPS
indicates that the company is making more profits. Hence shareholders will be willing to pay
more for the company’s shares. However, EPS doesn’t factor in the cash flow. The
shareholders don’t know how much cash will they receive in the form of dividends just by
seeing the EPS.

EPS = Net profit/Total number of outstanding shares

2. Price to earnings ratio (P/E)

The price-to-earnings ratio indicates the price an investor is willing to pay for every rupee of
earnings. It also tells whether the share is overvalued or undervalued compared to its peers. A
high P/E ratio usually indicates that the company is overvalued. However, if the investors
expect a company’s earnings to increase in the near term, the P/E ratio tends to increase. A
low ratio might indicate that either the company is undervalued or the investors are not
positive about the company’s future. Hence P/E ratio shouldn’t be considered in isolation
while valuing a company.

P/E ratio = Share Price/Earnings per share

3. Price to book value (P/B)

Price to book value compares the firm’s market value to its book value. A P/B ratio under one
is considered good as this shows the company’s intrinsic value is higher and that it has scope
for growth in the near future. A high P/B ratio indicates that the company’s shares are
overvalued compared to its peers. However, the P/B ratio doesn’t consider the value of
intangibles such as goodwill and brand value.

P/B ratio = Share price/Book value per share

Where Book value per share = (Assets – Liabilities)/Outstanding shares

4. Dividend yield

Dividend yield measures the return an investor would earn solely based on
the dividend payments. Also, the dividend yield takes into account the current share price and
dividend payment. A high dividend yield would mean the return is high, but it can also mean
the share price is falling. In contrast, a low dividend yield indicates low return, which can
also mean the share price is rising.

Dividend yield = Annual dividend per share/Share price

What is a Comparative Income Statement?

A Comparative Income Statement shows the operating results for several accounting periods.
It helps the reader of such a statement to compare the results over the different periods for
better understanding and detailed analysis of variation of line-wise items of Income
Statement.
 How common size statements are different from comparative
statements?

Comparative Financial Statement Common Size Financial Statement

Definition

Comparative financial statement is a kind of Common size financial statement is a way of

document that presents the financial
performance of the organisations side by side
with the previous year performances, in order to
compare the growth of business over a period of
time
presenting financial information of a business by
expressing the components of financial
statements as percentages.
 Type of analysis

Comparative statements are also known as Common size statements are also known as
horizontal analysis as financial statements are vertical analysis as data is analysed vertically
compared side by side

Purpose

Comparative statements are used for comparing Common size statements are prepared for the
financial performance for internal purposes and reference of stakeholders.
for inter-firm comparison

Types of comparison made

Comparative statements make use of both Common size statements use only percentage
absolute figures and percentages form

Describe the benefits of trend analysis

Advantages of Trend Analysis:

(a) Possibility of making Inter-firm Comparison:

Trend analysis helps the analyst to make a proper comparison between the two or more firms
over a period of time. It can also be compared with industry average. That is, it helps to
understand the strength or weakness of a particular firm in comparison with other related firm
in the industry.

(b) Usefulness:

Trend analysis (in terms of percentage) is found to be more effective in comparison with the
absolutes figures/data on the basis of which the management can take the decisions.

(c) Useful for Comparative Analysis:

Trend analyses is very useful for comparative analysis of date in order to measure the
financial performances of firm over a period of time and which helps the management to take
decisions for the future i.e. it helps to predict the future.

(d) Measuring Liquidity and Solvency:

Trend analysis helps the analyst/and the management to understand the short-term liquidity
position as well as the long-term solvency position of a firm over the years with the help of
related financial Trend ratios.

(e) Measuring Profitability Position:

Trend analysis also helps to measure the profitability positions of an enterprise or a firm over
the years with the help of some related financial trend ratios (e.g. Operating Ratio, Net Profit
Ratio, Gross Profit Ratio etc.)

Elaborate the merits of Reformulation

Financial statements include key documents like the income statement, the statement of
shareholders' equity and the balance sheet that provide information on business finances.
Companies use these to make many operational decisions, while investors use them to
examine businesses and industries from the outside. Reformulation refers to making the
financial statements for a particular period, then changing them, reorganizing the items they
contain in order to more accurately depict various aspects of the business.

Reader Aid

One of the primary reasons that businesses choose to reformulate financial statements is for
readers, both inside and outside companies. Normal statements are created using generally
accepted accounting principles, but these do not always show the most accurate
representation for analysis. The business may be able to make the statements much easier to
read and highlight the most important information by reformulating them for specific readers,
creating their custom versions.

Liability Separation

When it comes to the balance sheet, many businesses will reformulate to further divide
liabilities and assets. Liabilities especially can benefit from being divided in detailed
categories like financial liabilities and operating liabilities. This shows what expenses are
associated with operation and which are more oriented toward investment, future plans and
expansion. Some businesses may also want to separate assets to show which have come to the
business in recent years.

Identify Surpluses and Deficits

In the income statement, reformulating can help highlight recent changes that led to extra
income or a lower income than previously reported. This is often connected with shareholder
changes. For instance, if shareholder equity changes or if a dividend distribution has been
made, the business may reformulate the income statement to incorporate the change and
produce a new net income, giving readers a more accurate picture of the period.

Equity Changes

Equity can also change for the business. When dealing with the state of shareholders' equity,
it may be easier to show beginning and ending equity balances with a reformulation, taking
into account any major share changes and showing clearly the earnings available to
stockholders together with net distributions.

1. reports & statements.

 Annual Report
What is an Annual Report?

The single source of getting information about any company whether it is the past or present
performance or for that matter, the future outlook, detailed financial performance through the
financial statements, corporate governance or CSR activities, all is compiled in the Annual
Report of the company. Key constituents of Annual Report:

The major components of the annual report mirror the psyche of the company, giving a fair
idea on the sustainability of business and how sound the business is.

Letter from the Chairman: This part of the annual report mainly tells you how the company
has performed during the year. It’s a place to find apologies and reasons if the performance
doesn’t meet the expectations. The goals and strategies for the future are also laid down by
the leading hands in this section of the annual report.

Ten-year financial summary: Assuming that a company is at least ten years old, many
annual reports contain a snapshot of the financial results over that period of time. This helps
in seeing the growth / de-growth trend of revenues and profits and other leading indicators of
a company’s financial success.

List of directors and other officers: All the data regarding the leading managers like the
president, chief executive officer (CEO), vice presidents, chief financial officer (CFO) is
provided here. Also, information pertaining to the other seniors who may not be a part of the
organization, but are present on the board of the company, to help and guide the organization
is available in this section of the annual report.

Directors’ report: The director’s report comprises of all the key events that happened during
the reporting period. It contains all the information like summary of financials, operational
performance analysis, and details of new ventures, partnerships and businesses, performance
of subsidiaries, details of change in share capital and details of dividends. In short, it provides
a recap of the fiscal year under consideration.

Corporate information: Subsidiaries, brands, addresses: This section has all the information
regarding company locations (domestic and foreign), contact information, as well as brand
names and product lines.

General shareholders’ information and corporate governance: The report on corporate

governance covers all the aspects that are essential to the shareholder of a company and are
not a part of the daily operations of the company. It provides all the details regarding the
directors and management of the company, for e.g. their background and remuneration. It
also provides data regarding board meetings as to how many directors attended how many
meetings. It also provides general shareholder information such as correspondence details,
details of annual general meetings, dividend payment details, stock performance (stock
history, stock price trends, listing stock exchanges), details of registrar and transfer agents
and the shareholding pattern.

Financial statements and schedules: This section includes the financial performance data of
the company. It provides details regarding the operational performance and financial strength
of a company during the reporting period through the income statement, balance sheet and
cash flow statement. The footnotes are equally important as they provide information about
the organization’s structure and financial status that has not been covered anywhere else in
the report.

a) Profit and Loss statement: It is the financial statement that summarizes the revenues,
costs and expenses incurred during a specific period of time. It clearly indicates how much
was earned and what went into getting those earnings.

b) Balance Sheet: This provides the summary of the assets and liabilities of a company. It
gives a fair idea of what the company owns and what it owes.

c) Cash Flow: Cash Flow Statement is the accounting statement that provides the details of
how much cash is generated and used by the company over a specific period of time.

Write about the significance of CSR report

A corporate social responsibility (CSR) report is an internal- and external-facing document
companies use to communicate CSR efforts and their impact on the environment and
community. An organization’s CRS efforts can fall into four categories: environmental,
ethical, philanthropic, and economic.

In some countries, it’s mandatory for corporations to publish CSR reports annually. Although
not yet required of companies based in the United States, some predict it will be in the not-so-
distant future.

On one hand, CSR reports aim to enable companies to measure the impact of their activities
on the environment, on society and on the economy (the famous triple-bottom-line). In this
way, companies can get accurate and insightful data which will help them improve their
processes and have a more positive impact in society and in the world.

On the other hand, a CSR or sustainability report also allows companies to externally
communicate with their stakeholders what are their goals regarding sustainable development
and CSR. This allows stakeholders such as employees, investors, media, NGOs, among other
interested parties, to get to know better what are the short, medium and long-term goals of
companies and make more informed decisions. These decisions can spread from investing in
a business, buying its products, writing positive (or negative) reviews, protesting in the streets
against the intentions or actions of an organization.