of Heads and Contents of Balance ‘Sheet Dierence ‘between Provision and Reserve Statement of Profit and Loss Format of Statement of Profit and Loss Explanation of Heads and Contents of Statement of Profit and Loss Objectives of Financial Statements Essentials of Financial Statements Parties Interested in Financial Statements or Users of Financial Statements Limitations of Financial Statements ents are prepared following the accounting, principles, practices and the accounting standards. Section 129 of the Companies Act, 2013 prescribes that Balances Sheet and Profit and Loss Account (Statement of Profit and Loss) are prepared in forme prescribed in Schedule III of the Companies Act, 2013. A set of financial statements a5 per Financial Sta’ Section 2(40) of the Companies Act, 2013 includes: 1. Balance Sheet: It is a statement of As: Liabilities and Equity (ie, Shareholders’ Funds) of the company en date. It shows the financial position of a business by detailing its assets, equity and liabilities. It is also known as. Position Statement. 2. Profit and Loss Account: It shows the financial performance, i.e., result of business operation during an accounting period. It is described as Statement of Profit and Loss im Pants of Schedule III of the Compan Act, 2013 and is also known as Income Statement: 3. Notes to Accounts: Balance Sheet and Statement of Profit and Loss are supported byt notes giving details of it and Statement of Profit and Loss 4, Cash Flow Statement: It is a statement prepared in accordance with AS-3, Cash Pls lows of Cash and Cash Equivalents. the Balance Shee Statement, to show inflows andal Statements of a Company Accounting Concepts: Financ ments are prepared by following the acc concepts, For example, under the Going Concern Concept, it is assured thal business shall continue for a foreseeable future, ic., indefinitely. Fixed are shown in the Balance Sheet at their historical value rather than their market value. The use of accounting concepts also makes the financial statements reliable, understandable and comparable. fie) Accounting Standards: Accounting standards prescribed in the Companies Act, 2013 are mandatory in nature and are the guidelines for preparing the financial statements. They are followed by the companies, If they are not followed, the financial statements do not give a true and fair view. {o) Selection of Accounting Policies: Selection of Accounting, Policies have important bearing on financial statements. For example, the choice of selecting a method of depreciation (Straight Line Method or Written Down Value Method) lies with the management which has a bearing on financial performance and position. Another example is selection of a method of inventory valuation (Weighted Average or LIFO). (vf) Estimates: Estimates are necessary for preparing the financial statements and have a bearing on the financial statements. For example, useful life of a fixed asset 1s estimated to provide depreciation, estimating expenses to make provision, etc. (vii) 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. annual report of a company, as per law, should disclose the prescribed information to le the users to make informed judgments and decisions. The information is disclosed the Financial Statements, Board Report and by a separate statement being, part of the ual report. set of Annual Report of a company has: |. A Report by the Board of Directors containing: Report in terms of Section 134 of the Companies Act, 2013; Directors’ Responsibility Statement; Report on Corporate Governance; and Management Discussion and Analysis. Auditors’ Report to the Shareholders. Financial Statements: (#) Balance Sheet as at the end of the financial year; (ii) Statement of Profit and Loss for the year ended; (iii) Note to Accounts; and (iz) Cash Flow Statement. Notes to Accounts has different parts as follows: (i) Accounting Policies followed by the company; (ii) Details of line items in Balance Sheet and Statement(a) Long-term Borrowings (6) Deferred Tax Liabilities (Net) (©) Other Long-term Liabilities (d) Longterm Provisions 4, Current Liabilities (@) Short-term Borrowings (6) Trade Payables (€) Other Current Liabilities {d) Short-term Provisions Total I. ASSETS | 1, Non-Current Assets | (@) Fixed Assets: | (Tangible Assets (Intangible Assets (i) Capital Work-in-Progress (iv) Intangible Assets under Development (6) Non-current Investments (c) Deferred Tax Assets (Net) (d) Long-term Loans and Advances {e) Other Non-current Assets 2. Current Assets (@) Current Investments (6) Inventories | (c) Trade Receivables | a (d) Cash and Cash Equivalents | | (e) Short-term Loans and Advances (f) Other Current AssetsShares of € 10 each ut Not Fully Paid-up ‘quity Shares of & 10 each ls-in-Arrears (10,000 x 3) 9,000; 9% Preference Shares* of 8 100 each, 90 called-up ‘Less: Calls-in-Arrears (500 x 10) Total (To be shown against Share Capi "The u of ‘9%’ before Preference Sha paid In the above discu Called-up Share Capital 0 iy to be paid by the shareholders 5 Subsctibed Capital is 2,00,000 Equity s called 25 per share to be paid by the share capital. For example, a compar ¥ 10 each against which th In this case, € 10,00,000 (i.e company 2,00,000‘Share Capital” or “Share Capital Paid-up” means jas paid-up as is equivalent to the amount rece f snares issued and also includes any amount credited as paid-UP a company, but does not include any other amount received in respe by whatever name called. ~ Calls-in-Arrears Galls-in-Arrears means the amount not received by the company SGaHist galled-up by it towards share capital. Shares against which the calls “Subscribed but not fully paid-up” at the amount rece ; example, DBH International Ltd. issue lls had been made and received except are shown under company against those shares. Fo Equity Shares of 10 each. All cal % 2 per share on 10,000 Equity Shares. It is shown in the Note to Accounts on Share Capital under Subscribed Capital a Subscribed and fully paid-up: z 1,40,000 Equity Shares of € 10 each Subscribed but not fully paid-up: 10,000 Equity Shares of 10 each 1,00,000, Less: Calls-in-Arrears (10,000 x % 2) 20,000 Total Calls-in-Advance in the Balance Sheet as ‘Other Current Liabilities’ under the main head ‘CiAnalysis of Financial Statements—cys, » | a 112 oY _ @) Reserves and Surplus According to William Pickels, “Reserve means which ure not earmarked in any way to meet any particular liabilit the Balance Sheet.” Thus, resetves mean amount set aside out of profits and surpluses tg ive losses or to strengthen financial position. future uncertainties, prospecti lance in Statement of Profit and Loss means accumulated profits ,, \d as dividend, i.e, balance of profit remaining after = mount set aside out of profits and other our, Se Ly, known 10 exist on dai. the oy Meet Surplus, ie, Bal: appropriated or distribute appropriations towards reserves and dividend. amount on the face of the Balance Sheet again,, uns, Detail of Reserves and Surplus is shown in y, Reserves and Surplus is shown as single ening balance, additions/dedvctions yng Reserves and Surplus under Shareholders’ Fu Note to Accounts on Reserves and Surplus giving opé closing balance for each item under Reserves and Surplus. Schedule III of the Companies Act, 2013 prescribes the heads of Reserves and Surplus to be () Capital Reserve; (ii) Capital Redemption Reserve; (iii) Securities Premium Reserve; (iv) Debentures Redemption Reserve/Styncling Funct, (0) Revaluation Reserve; (vi) Shares Options Outstanding Account; (wit) Other Reserves (to specify the nature and purpose of each reserve); and (viii) Surplus, i.e., Balance in Statement of Profit and Loss. ‘A company is required to show the reserves that are in the nature of reserves at serial (i) to (ui) above under the prescribed head. For example, if a company has Securities Premium Reserve, it is shown in the Note to Accounts on Reserves and Surplus as Securities Premium Reserve, at serial numbers (i) to (vi) say, Workmen Compensation Reserve, Investments Reserve, Subsidy Reserve, etc. Each such reserve is shown separately in the Accounts on Reserves and Surplus. Surplus, ie., Balance in Statement of Profit and Loss is shown as a separate item: Reserves and Surplus. It is accumulated balance of profits of the past years and also year remaining after appropriations towards reserves and dividend. It may balance or debit balance. Current year’s profit or loss is added to the balance of brought forward from which appropriations towards other reserves and Difference: between Statement of. Profit:and Loss and Surplus, e., Balance in. Statement-of-Profit and Loss ement of Profit and Loss during the ac ear. |ves or Securities Premium | quires that a sum equal to nominal (face) value 0 Saal to Capital Redemption Reserve. The reserve m: ‘issue fully-paid bonus shares. Section 65 of the Companies Act, 2013, requires that redeemed out of profits which would be otherwise available for ‘sum equal to Nominal (Face) Value of the shares redeemed must be t Redemption Reserve’. Securities Premium Reserve Securities Premium Reserve is a reserve to which amount received in excess © (face) value of securities (shares, debentures, etc.) is credited. It can be used) for the purposes stated in Section 52(2) of the Companies Act, 2013. Debentures Redemption Reserve (DRR) Debentures Redemption Reserve is a reserve credited by the amount pre Section 71(4) of the Companies Act, 2013 and Rule 18(7)(b) of the Companies (Shi &fd Debentures) Rules, 2014 by a company before redemption of debentures In respect of partly convertible debentures, DRR is created only for non-conver of debentures. Revaluation Reserve, Revaluation Reserve is a reserve wv of an asset. It is debited when the valu sold or discarded, The amount standing to the credit of Revaluation Reserve: ayment of dividend or issuing bonus shares. Shares Options Outstanding Account Shares Options Outstanding Account is a reserve to which difference | value and issue price of shares issued to employees is credited ‘the market price of the share is t 75 and is to be iss % 26 (ie., = 75 — = 50) should be credited to th ich isse a oe ee ee jal Statements of a Company imple 1. Sony Ltd has an opening debit balance of & 100,000 in Surplus, ie,, Bal Statement of Profit and Lows, During the year ended 3ist March, 2019, it earned a © 3,00,000, Prepare Note to Accounts on Reserves and Surplus showing the amount © te carried t Balance Sheet ce of € 200,000 in Surplus, ie, Balance in Statement of Profit and Loss ‘shown under Reserves and Surplus in the Balance Sheet. ample 2. HP Computers Ltd. has an opening credit balance of Surplus, ie., Balance in statement of Profit and Loss and Securities Premium Reserve of % 1,00,000 and ® 2,00,000 spectively, During the year, it incurred a loss of & 1,50,000. low will it be shown in Note to Accounts on Reserves and Surplus? (a+) (Tobe shown in the Balance Sheet against Reserves and Surplus) Example 3. Casio Machines Ltd. has an opening balance of & 5,00,000 in Securities Premium Reserve and also debit balance of % 10,00,000 in Surplus, i.e., Balance in Statement of Profit and Loss under Reserves and Surplus. During the year ended 31st March, 2019, it incurred ‘a loss of & 15,00,000. How will it be shown in Note to Accounts on Reserves and Surplus? Solution:on Is Share Application Money a Current Liability? aa re Application Money received by the company and which is refundable to the appli #, against which shares will not be allotted, is shown as ‘Other Current Liabilities’ under urrent Liabilities’ in the Equity and Liabilities part of the Balance Sheet. are Application Money becomes refundable in the following circumstances: (i) When the Issue is Oversubscribed: The amount received in excess of issued capital being refundable to the applicants is classified or shown under major head ‘Current Liabilities’ and sub-head “Other Current Liabilities’ in the Equity and Liabilities part of the Balance Sheet. (i) When the issue is oversubscribed and the amount is payable in instalments, the amount retained by the company to be adjusted against calls is shown as ‘Other Current Liabilities’ under Current Liabilities. ‘ (ii) When the company receives amount against calls yet to be made, i fio) In case the Company has not received Minimum Subscription: In such a situation, it is classified or shown under major head ‘Current Liabilities’, and sub-head ‘Other Current Liabilities’ in the Equity and Liabilities part of the Balance Sheet because the share application money received is refundable to the applicants. bis A company received applications for 1,25,000 Equity Shares against an issue of 1,00,000 Equity Shares of % 10 each. Allotment is yet to be made against the applications received as on the date of the Balance Sheet. How will it be shown in the Balance Sheet? , Calls-in-Advance. jabilities Hh jabilities are ‘claSsified or shown as Non-current Liabilities and Current Liabilities the Balance Sheet. The two terms have been defined in Schedule II of the ompanies Act, 2013. ie term ‘Current Liabilities’ is defined in Schedule Ill of the Companies Act, 2013 follows: nt Liability is that liability which is: (i) expected to be settled in company’s normal operating cycle; or (ii) due to be settled within 12 months after the reporting date, ie., Balance Sheet date; or iii) held primarily for the purpose of being traded; or (iv) there is no unconditional right to defer settlement for at least 12 months after the reporting date. er a liability meets any of the above four conditions, it is classified or sk liability.ah Collatorat Security tures issued as Collateral ity can be diselowed in any of the fatlowing mun When Entry is not Passed for Debentures teswed as Collateral Security In the Note to Accounts on Borrowings (Long-teem or Short-term), in the particulate column below the borrowings, it is disclosed that the lean is collaterally secured by issue of debentures as follows: Loan from Bank (say) © 1000,000 ‘Secured by issue of 12,000; 9% Debentures ‘of € 100 each as Collateral Security) Kit) When an Entry is Passed for Debentures Issued us Collateral Security The entry passed for issue of debentures a8 Collateral Security (i t t Debentures Suspense A/c Dn 12,00,000 To 9% Debentures A/c 12,00,000 (12,000; 99 Debentures ® 100 each issued as Collateral Security against loan of € 10,00,000) Debentures issued as Collateral Security are shown in the Note to Accounts on Long-ternVShort-term Borrowings as follows: . t Loan from Bank (say) 10,00,000 12,000;99% Debentures of € 100 each 12,00,000 tess: Debentures Suspense A/c 12,00,000 160,000 Maturities of Long-term Debts ‘A part of long-term borrowing may become due for repayment within 12 months from the idate of Balance Sheet or within the period of Operating Cycle. In such a case, part of the rowing that becomes due for repayment is shown under major head ‘Current Liabilities’ and sub-head ‘Other Current Liabilities’ as ‘Current Maturities of Long-term Debts’, For example, term Joan taken by the company from a bank, Instalments falling due for payments within 12 months from the Balance Sheet date (assuming Operating Cycle period ‘to be less than 12 months) will be shown as ‘Current Maturities of Long-term Debts’. Deferred Tax Liabilities (Ne#: Every year Accounting Income is compared with i=Mistration 26 (Chu ue Ith a i POTN ftir uses sets 6008 BS SONI ag “ie (Office Equipment OS a a f (te) ‘Trad (0) Bile Recetas (3) Stok 1) Bie Rs C8) Stockeinsthyg a a i) Bult (wid) Vehicles, ) Cash at Bank ov ai tes Work-in-Peogress (Machinery), y eps (aut. Interest Accrued! on Investments, ang GX) Deposits with Blectricity Supply Company i Soluti and, Building, Furniture, Vehig (®) Fixed Assets (Tangible): Office Equipment, | (i) Fi Assels (Intangible); Goodwill, Trademarks. (iii) Capitat Work-in-Progress: Work-in-Progress (Machinery) : (#0) Long-term Loans and Advances: Advance to Subsidiaries, Deposits with Supply Company. (2) Inventories: Loose ‘Tools, Stock-in-Trade, Stores and Spare Parts, J (vi) Thade Receivables: Bills Receivable, Debtors (vii) Cash and Cash Equivalents: Cash at Bank, Cash in Hand (iii) Other Current Assets: Interest Accrued on Investments Illustration 27, Give the heads under which following items are shown in a company’s Bal per Schedule Ill, Part 1 of the Companies Act, 2013? @ Mortgage Loan, ii) Patents, ( é (ii) Investments, (iv) General Reserve, (e) Bills Receivable, and (vi) 10% Debentures,1.39 of aCompany Under what heads andl Gubheads the’ fallowing imac will-appieat in the Balance Subetibe #* per Schedule Il of the Companies Act, 2013? a comp {9 Premium on Redemption of Debentures; (a) Loose Tools, (i) Balances with Banks. (Dethi 2013, Modified) Solution me | Main ead (0 | Premium on Redemption of Non-cument Liabilities “i | (ose Tooks | Current Assets ' Milustration 30. Under what heads and sub-heads the following items will appear in the Balance Sheet of “company as per Schedule IIL Part I of the Companies Act, 2013?My Vat onclal Statements of a Company Headings nt Laabsies (vy) Non Current I (ii) Fixed Assets Intangible Assets; /Short-term Borrowings) (Iv) Long-term Provisions; (vf) Other Current Assets. @ Inv (ip), Cur wiment; on 35, Iw State under which major headings the following items will be presented in the Balance 8 per Schedule IT of Companies Act, 2013; of a comp (0 Trademarks (i) Capital Redemption Reserve (iii) Income Received in Advance (iv) Stores and Spares (0) Office Equipments (of) Current Investments (AL 2014 C, Modified) on Major Headings: () Non-Current Assets; (ii) Current Liabilities (») Non-Current Assets; Mlostration 36. Under what main heads and sub-heads of Assets part are the following items classified or shown in the Balance Sheet of a company as per Schedule III? (i) Bills Receivable, (i) Sundry Debtors, (iii) Long-term Investments, (iv) Shares in Listed Companies (») Prepaid Insurance, (vi) Deposit with Customs Authorities, and (vii) Building, (ii) Shareholders’ Funds; (iv) Current Assets; (vi) Current Assets. items will be presented in the [ of the Companies Act, 2013?f Financial Sak % analysisof Profit and Loss is a statement that shows the financial performance of ompany, /¢. profit earned or loss incurred during the accounting period. t of Statement of Profit and Loss Format of the Statement of Profit and Loss is prescribed in Part I of Schedule Til of the ‘Companies Act, 2013, as follows: STATEMENT OF PROFIT AND LOSS for the years endedFinancial Statements of a Company 4EADS AND CONTENTS O} oa 1. REVENUE 4. Revenue trom Operations —Sal t \¢ from Operations means revenue earned by the company from its operating ities carried on by the company to earn profit. Commonly, it is Net Sales Return) for a manufacturing company or trading company, fee sd ay Bev i8 CotinaneTiand intent and cividend.easned by a finance Soma resides earning revenue from operations, may earn income from that are Tot its business activities. These incomes are—————— om ; erinanctal Statements cy > 14a naly Solution: =. “id Paros = . Sales 70" Operations a con ess: Sales Retuin, oe Se eel Sol ieccare | « : imerest as | ‘On Fixed i. . W655, Total Revenue (t+) Se “ge in tal Revenue for a finan, Calculate Revenue from Operations, Other Income and To! 7 Ompany from the following, information: Miscellaneous Income % 5,000; Interest on Loan: (Profit) on Sale of Building & 15,00,000. Solution: « € 3,00,000; Dividend © 1,00,000; c,, facturer of lamps, has surplus d deposit with a bank. The deposit : shown in the Statement of Prof aCompany "Compute Cost of Materials Consumed from the following: Opening Inventory of Materials € 2,50,000; Materials Purchased % 20,00,000; and Closing Inventory of Materials % 3,00,000. Solution: | Cost of Materials Consumed = Opening Inventory of Materials + Purchases of Materials = Closing Inventory of Materials = % 2,50,000 + % 20,00,000 — % 3,00,000 = & 19,50,000. Tilustration 47. ‘Compute Cost of Materials Consumed from the following: ® + Materials 550,000 Finished Goods 2,50,000 22,50,000 Materials 450,000 1 Finished Goods of Materials Consumed = Opening Inventory of Materials + Purchases of Materials — Closing Inventory of Materials 33 = & 5,50,000 + & 22,50,000 ~ & 4,50,000 = % 23,50,000.ior Financial Statements * oud red its St MeO Reoe intent of Axia Monutectusing bas Per PoP 6,50,000, on’ Profit and Loss showing Cost of Moterials Consumed 2 eT ted ret uestioned about its correctness, Ne SXPle! a thet Jt urchastalet 4 it \ en tes Inventory of Materials and Stock © ad Stockelintvang he dene in-Trade — Closing inventory of IV © determined the Cost of Materials Consumed ¢ jin-Trade terials orrectly? 2. - Purchases of Stock-in-Trade : si eine Of Stock-in-Trade means goods purchased for eselling. 4 See tan, a further processing ogee parcisscds hey donot TMS ee ebut be. Patt of the Cost of Materials Consumed. For examples if * con Eo (2 ale, it will be shown as ‘Purchases of Stock-in-Trade’. But, if paper is purchase, ; G3y) manufacturing copies, it will be shown under ‘Cost OF Materials Consumeg), oF 7 Changes in inventories of Finished Goods, Workin: Progress and Stock-in-Trage ‘Changes in Inventories of Finished Goods, Work-in-Prosress and Stock-in-Trade me, _ the difference between the Opening, and Closing Inventor (Stock) of Finished G,. n-Progress and Stock-in-Trade, i.e., Opening Inventory (Stock) less Closing Inver The difference between the Opening Inventory (Stock) and Closing Inventory ij, Positive, fe, Opening inventory (Stock) is more than the Closing Im x 1ay be negative, ie,, Opening Inventory (Stock) is less than the Closing In\ c n the Note to Accounts on Changes in Inventories of Finis) each item of Inventory is shown separately and the s added to show one amount against the entry in the Si (with imaginary data) illustrates how it is Inventories of Finished Goods, WIP ants of a Company 4 is6 Are opening and closing Inventories considered in the amount shown against Purchases of Stock-in-Trade? Give reasons. Pllustration 50. Prepare Note to Accounts for Change in Inventories of Bakers Ltd. for the y | Bist March, 2019 from the following information and determine the amount ees shown in the Statement of Profit and Loss against Changes in Inventories of Goods, WIP and Stock-in-Trade:52 Ani nefit EXPENSES May be F, npl ste (with imaginary Fina a xan Expenses detailed in the Note to es Follow : ee ee He oe direct expenses and indir borane pe . ow it is shown in ; = Xs Note to Accounts Particulars ree Mustration 51 Out of the following, identify the i Benefit Expenses: , (iv) Bonus; (0) Gratuity Paid) ang (@ Wages; (fi) Salaries; (iii) Entertainment Expenses; (i (ei) Conveyance Expenses. Solution: Expenses are: Items to be shown in Note to Accounts on Employees Benet Ep (® Wages; (ii) Salaries; (ic) Bonus and (v) Gratuity Paid. Illustration 52. From the following information for the year ended 31st March, 2019, prepare Accounts on Employees Benefit Expenses: that are shown in the Note to Accounts on Employe., ms that are 0,000; (v) Gratuity Paid ® 1,20,000; (vi) Conveyance Expenses & Expenses % 40,000.1.53 tements of a Company ts mean costs incurred by the company on the borrowings, ic., loans taken by fore, includes interest-paid on borrowings (such as term loans, bank overdralt anc. cashcreditlimit) from banks and from others (such as public deposits, debentures, bonds, etc.) Finance Costs also include exp incurred for the borrowings such as loan processing { premium payable on redemption of debentures, fee, discount on issue of debentures and these expenses are incurted by the company for borrowings. However, Bauk Charges ane. aol-shown under Finance Costs but are shown under ‘Other Expenses’, they being an expen: {for services availed from the bank. Ilustration 53. Out of the following, identify the items that are shown in the Notes to Accounts on Finance Cost: 2 Interest paid on Term Loan; (ii) Interest paid on Bank Overdraft; (iff) Discount on Issue f Debentures Written off; (io) Interest Received on Fixed Deposits and (v) Bank Charges. Solution: Items that will be shown in the Notes to Accounts on Finance Costs are: ‘3 ( Interest Paid on Term Loan; (ii) Interest Paid on Bank Overdraft and (iii) Discount on Issue of Debentures Written off. IMustration 54, 23 From the following information of Abacus Ltd. for the year ended 31st March, 2019, prepare Note to Accounts on Finance Costs: % terest paid on Term Loan € 2,50,000; (ii) Interest paid on Bank Overdraft iscount on Issue of Debentures Written off € 10,000; (iv) Interest Received $ % 25,000; (x) Bank Charges % 9,500 and (vi) Interest paid on Deposits. : a -Items that will be shown in the Note to Accounts on Other Expenses are (f) Courier Expenses; (iii) Internet Expenses; (jv) Re y; (v) Carriage Outwards; (pit) Rent for warehouse; (viii) Rent for office and (ix) Audit fee Let us now discuss, Statement of Profit and Loss being prepared as a statement: Hllustration 56, | Following is the Trial Balance of Perfect s at 31st March, 2019: ‘Land and Building Depreciation on Machinery “purchases of Raw Materials (Adjusted) ares s of 100/each (Fly paid) Es at TOO each (Fully pac)4. Long-term Borrowings 1,00,000 5, Short-term Borrowings Bonk Overdeaft 200,000 6 Other Current Liabilities Interest on Debenture 10000 Dividend Payable: On Equity 14900 On Preference Shares 6,000 7. Tangible Assets Machinery Land and Building Notes: 1. Proposed Divider © 6.000 (6% on F Transfer to Debentures Redemption Re \d proposed Dividend on Equity Shares and Preference Shares for th ms of appropriation from Surplus, fe, Balance in Statement of Profit and Loss. JOTES TO ACCOUNTS Notes to Accounts is the statement attached to the financial statements and is a part of the financial statements. It has details of items of Balance Sheet and Statement of Profit and Loss besides Significant Accounting Policies and additional information required to be disclosed as per Schedule III of the Companies Act, 2013 and Explanatory Notes. Cash Flow Statement is a statement showing the flow of cash and cash equivalents —inflows and outflows, during an accounting period. This statement is important for better understanding of financial statements. It is an essential tool for short-term financial analysis. It has been discussed in a separate chapter. Objectives of Financial Statements are: |. To provide financial data on economic resources and obligations of an enterprise. To show implications of operating profit on the financial position of an enterprise. To provide information about cash flow to investors and creditors for assessing, comparing and evaluating, potential cash flow in terms of amount. |. To pr = sufficient and reliable information to various parties interested the business. gement towards utilisation of resources of b activities of business affecting the society, s followed in the accounting processFinancial Statements of a CompanyName the major heads under which the Equity and Liabilities part of a co | organised and presented, 4. What is a contingent liability? Where is it shown in the Balance Sheet? Give an liabilities. [/& Name the major heads which appear in the Equity and Lables pat of the B | 7. Name the head under which long-term investments appear in the Balance S| |) Name the head under which Goodwill appears in the Balance Sheet of the Name the head under which Debentures appear in the Balance Sheet of , Name the head under which Unclaimed Dividend js shown in the Balar f. Give four examples of Tanail items that are considered to compute Change in Im calculated and shown in thPart tof 2013, ipeserves: ‘State any Ave items which are shown under the head MA" 95, # company as per Schedule Il, Part | of the Companies ive two examples each of Non-current Assets and % Ust any three items each of the Balance Sheet of @ Current Liabilities as per Schedule Ill, Part | of the Com Ust any three items each of the Balance Sheet of 2 com! and ‘Current Liabilities ities,’ and Naren fa fes that are shown under the head ‘other Curent LASTS tag are shown under the head ‘Other Current Assets’ in the Balance MM of the Companies Act, 2013. 12. Explain Short-term Investments and why they are shown a company Uf panies Act, 2073. jer the head es pany und n 5 current asset. 13. List five items that are included in inventories. 14, List three items that are shown under Other Current Assets. 15. List the major heads of Statement of Profit and Loss shown as Income anc SPS) 16, State any two items that are classified or shown as Revenue from Operations in the ca financial companies. 4 J 12. State any two items that are classified or shown as Revenue from Operations in the caseiGf and Expenses. companies, 18. List three items that are shown as Other Income in the case of non-financial companies, 19. Name three items that are shown under Employees Benefit Expenses. |. Name three items that are shown under Finance Costs. EXERCISE 7. What are the major heads in the Equity and Liabilities part of the Balance Sheet as per [Ans.: (i) Shareholders’ Funds; (ii) Share Application Money Pendir (ili) Non-current Liabilities; (iv) Cun 2. Under which major head will the following be shown: (i) Share Capital; and (ii) Money Received Against Share Warrants? {Ans.; (i) Shareholders’ Funds; (ii)eamed ap Reserve (ORR) an also proposed to pay "How wil be the appropriations shown in the fnanciel statements? (Hint: BALANCE SHEET (An Extract) sat... [EQUITY AND LIABILITIES ‘Shareholders’ Funds Reserves and Surplus Note: Proposed Dividend & 25,000 is shown as contingent liability in Notes to Accounts] 7. State giving reason whether Trade Receivables are classified as Current Assets of Non-current Assets in the Balance Sheet of a Company as per Schedule Ill of the Companies Act, 2013 in the following cases: \Aisualentad oe eee Case Operating Cycle Period (Months) | Expected Realisation Period (Months) 1 W 10 2 10 2 3 10 3 4 4 3 5 15 16 [Ans.: 1. Current Assets; 2. Current Assets; 3. Non-current Assets; 4. Current Assets; 5. Non-current Assets 8. State giving reason whether Trade Payables are classified as Current Liabilities or Non-current Liabilities in the Balance Sheet of a Company as per Schedule III of the Companies Act, 2073 in the: following cases: tae ng Cycle Period (Months) | Expected Payment Period (Months) 1 10 1 2 10 12 3 10 3 4 14 3 5 [Ans.: 1. Current Liabilities; 2. Current Liabilities; 3. 4. Current Liabilities; 5.Fe - x yy res Account, Interest Accrued but Not Oue on Debentures? {Ans.: () Long-term Borrowings under under Non-current Liabilities (it) Be {iv) Reserves and Surplus ul ; under the sub head Share Capital under the main head {Shown by way of addition to Subscribed Capital (0) Tad Current Liabilities; (vil) Other Current Liabilities under A State any two items that are included in te following major heads under which lables (ii) Short-term B are shown: (i) Reserves and Surplus; (i) Long-term Borrowings; Current Liabilities. tAns.: (i) Reserves and Surplus: Capital Reserve; Capital Red Term Loans from bank; Lo (li) Long-term Borrowings: Debentures; from Others; Public Deposits; (ii) Short-term Borrowings) Cash Credit from Bank; (iv) Other Current Liabilities: Unpaid Divi Maturities of Long-term Debts; Interest Accrued and Due Classify the following items under major head and sub-head (if any) in the Balance She as per Schedule Ill of the Companies Act, 2013:(i) Capital Work-in-Progress; (ii) Provision (ili) Income received in Advance; and (iv) Capital Advances. [Ans.: 12. Head | (i) Non-current Assets| (i) Non-current Liabilities | ii) Current Liabilities Sub-head (i) Fixed Assets— __| (ii) Long-term Provisions | (ii) Other Current Capital Work-in- Liabilities Progress | 13. Under which major head and sub-head of the Assets part of the | oon ° Balance Sheet will (i Intangible Assets: (i) Intangible Assets under Development; (i) In we: tiv) Deferred Tax Assets (NeUs (Stores and Spates and (V) Laxse Tocteh nea [Ans.: (i) Fixed Assets: Intangible Assets (ii) Fixed Assets: rains Lambe Ae (iv) Deferred Tax Assets (Net) uniwhich of the major heads will the following ree nm y, a8 per Schedule Ii of the Companies Act, Unamartised Loss on Issue of Debentures (To be ae Balance Sheet); 10% Debentures; (ili) Stock-in-Trade; Bills Receivable; (vi) Goodwill; ‘Truck; (ix) Provision for Tax; and. lead Sub-head current Assets | Other Non-current Assets. | (vi) eran Fi Non-current Liabilities Long-term Borrowings —_| (vil) Curent Assets ‘Current Assets pean s Current Assets Current Assets 47. Under which heads will the following items be shown in the Balance Sheet ofacani ane op | {i) Bank Balance; (ii) Investments (Long-term); (iii) Outstanding Se (lv) Authorised Capital () Bills Payable; {vi) Unclaimed Dividends; (vil) Shares Option Outstanding Account; (vil) General Reserve; and (ix) Subsidy Reserve? Ans. Sub-head hand Cash Equivalents | (vi) Curent Liabilities r (i) Non-current Assets Non-current Investments _| (vil). Shareholders’ Funds eee {ii Current Liabilities Other Current Liabilities (vill). Shareholders’ Funds | Res (i) Shareholders’'Funds Share Capital | (o_Shareholders Funds ()_Gurrent Liabilities _ ‘Trade Payables /18. Under which heads the following items are shown in the Balance Sheet of a compa y: (i) Calls-in-Arrears; (i) Commission Received in (iii) Debentures; ‘(¥) Land and Building;(iD) Copyrights and Patents. a Identify the major heads under which the following items wil be shown ‘company as per Schedule Ill of Companies Act, 2013: (0 Provision for Tax. (iil) Computer and related equipment. ay (a) Loan payable on a ; (iv) Goods acquired for trading, {ans (i) Current Liabilities: (W) Curr (ii) Non-current Assets; (Ww) ms will be shown int 22. Under which major headings and sub-headings the following ite of a company as per Schedule Ill of Companies Act, 2013? {i)_ Provision for Employee Benefits. (i) Calls-in-Advance. (oe Major Head = Non-current Liabilities | Long-term Pi () | Provision for Employee Benefits Other Curr (ii) | Calls-in-Advance Current Liabilities | 23. How are the following items shown while preparing Balance Sheet of a company: (i) Surplus, ie, Balance in Statement of Profit and Loss (Dr); (ii) Interest accrued and due on Debentures; (iii) Computer Software under development; (iv) Interest accrued on Investment? (An: __ttem __|_ Major es @ | Shareholders’ Funds Reserves and Surplus (As negative A Ww | current Liabilities Other Current Liabilities (i) | Non-current Assets Fixed Assets: Intangible Assets Under (iv) | Current Assets Other Current Assets. 5 24. Hero Ltd, has raised following long-term loans on 1st April, 201: 10,000; 10% Debentures of € 100 each redeemable in four equal yearly instalments beginning 1st July, 20195, Prepare Balance Sheet of Recovery Ltd, as per Schedule Ill of 10% Debentures of ® 100 each Stock-in-Trade (Inventories) Goodwill Provision for Tax Totalling of Balance Sheet is not required, _[Ans.: Long-term Borrowings (10 Short-term Provisions (Provision for Tax): € 6,000; Fixed / (Goodwin: 8 20,000; Current Assets (I 26. Prepare Balance Sheet of VT Ltd. as at 31st March, 2019, from the following information as P Schedule Il, Part | of the Companies Act,2013: z | z General Reserve 3,000 Fixed Assets: Tangible Assets (Cost) 9,000 8% Debentures 3,000 | Other Current Liabilities 2,500 Surplus, .c., Balance in Statement of Share Capital 5,000 Profit and Loss (Credit) 1200 | Other Current Assets 6,400 Depreciation of Fixed Assets 700 | [Ans.: Shareholders’ Funds: Share Capital: ® 5,000; Reserves and Surplus: < 4,200; Non-Current Liabilities: Long-term Borrowings (8% Debentures): ® 3,000; Current Liabilities: Other Current Liabilities: € 2,500; Non-Current Assets: Fixed Assets: Tangible Assets: % 8,300; Current Assets: Other Current Assets: 6,400.) 27. From the following information extracted from the books of Howrach Ltd., prepare Balance Sheet of the company as at 31st March, 2019 as per Schedule Il of the Companies Act, 201: @ in ‘000) (in (000) Long-term Borrowings 1,000 Fixed Assets (Tangible) 1,600 Trade Payables 60 Inventories 40 Share Capital 800 Trade Receivables 160 Reserves and Surplus 180 Cash and Cash Equivalents {Ans.: Total of Balance Sheet-—& 28. Prepare Balance Sheet of HP Ltd. as at 31st March, 2019 from the following information: z Equity Share Capital 20,00,000 | Surplus,ie, Balance in Statement’ 12% Preference Share Capital 10,00,000 | Profit and Loss (Cr) Fixed Assets (At cost) 46,60,000 | Stock Accumulated Depreciation 16,60,000 | Sundry Debtors pvestment 400,000 8,00,000head neial COMP 19 revenue items of non-finan oe me BE og rea Asa Fae acted C7 NT Gv) Gain (Profit) on Sale of Investments an@ fy sale of Miscelnecu te ced Asset; (i) Fee Recelve con Sale of FX i oe ( Other Income: (i) Gain (Profil) hi {i Interest on Loans Giver eer Cost of Materials Con: followit ed rem the of Materials € 25,00,000% anc TAN 32. Calculate Cost of Materials Consum ‘Opening Inventory of Materials & 5,00,000; of Materials € 4,00,000. 33. Calculate Cost of Materials Consumed from the following: oads & 1,00,000; Closing Inventory Purchase of Jnased during the year & 15,004 At ¥ 2,50,000; Finished Ge [Ans ‘Opening Inventory of: Materials 000; Raw Material pure 2,25,000; Finished Goods & 75, e following ed Goods & 75,000; Stock-in-Trade & 34, Calculate Cost of Materials Consumed from th Stockin-Trade & 1,50,000; Pur jals & 3,50,000; ed Goods € 85,000; Opening Inventory of: Mater Trade ¥ 9,00,000. Inventory of: Materials € 3,25,000; Finishe the year: Raw Material € 17,50,000; Stock ntory of Finished Goods: Opening, (An inter of F ni 1c tion, calculate Change in Inve hed Goods ¥ 2,00,000 and & 1,75,000 respectively. and Closing Inventory of Finis! 136. From the following information, calculate Change in Inventory of Finished Goo’ nd Closing Inventory of Finished Goods € 250,000 end & 2,00,000 respectively 137. From the following information, calculate Change in inventory of Work-in-Progres Closing Work-in-Progress € 1,00,000 and & 1,15,000 respectively. t 38. From the following information, calculate Change in inventory of Work-in-Progress Closing Work-in-Progress 1,50,000 and & 1,45,000 respectively. g inf change . Changes in 35. From the following informaBenefit Expenses From the following information, compute the amount to be shown | Benefit Expenses; Wages © 5,40,000; Salaries € 7,20,000; Bonus © 1,0 % 60,000; and Business Promotion Expenses % 50,000, From the following information, prepare Note to Accounts on Employees Be Wages € 2,70,000; Salaries % 3,60,000; Staff Welfare Expenses % 60,000; Printing « 20,000 and Business Promotion Expenses ¥ 50,000, Finance Costs 44. Out of the following, 'dentify the items that are shown in the Note to Accounts on Finance Costs: () Interest paid on Borrowing from Prince Finance Ltd (ii) Interest paid on Term Lean to Bank} {ii Interest paid on Public Deposits iv) Loss on Issue of Debentures Written off; and (y) Bank Charges. [Ans.: (i) Interest paid on Borrowings from Prince Finance Ltd.; (\i) Interest paid on Term Loan to Bank; (il) Interest paid on Public Deposits; (jv) Loss on Issue of Debentures Written off.) Note: Bank Charges are not Finance Costs, it being charges for services availed. 45. From the following information, prepare Note to Accounts on Finance Costs: Interest paid to Bank ¥ 75,000; Interest on Debentures & 58,000; Loss on issue of Debentures written off © 27/500) and Commitment Charges % 15,000. [Ans 1,75,500.) Depreciation and 46. From the following information of Best Marketing Ltd. for the year ended 21st March, 2019 prepare Note to Accounts on Depreciation and Amortisation Expenses: mortisation enses Depreciation on: Building % 15,500; Plant and Machinery % 25,000; Computers * 60,000) Goodwill written off % 7,500; Patents written off € 12,500, [Ans.: Depreciation— 1,00,500; Amortisation—X 20,000; Total—& 1, Other Expenses 47. Identify which of the following items will be shown in the Note to Accounts on Ott (0 Salaries; (ii) Postage Expenses; (iii) Telephone and Internet Expenses; (iv) Rent for warehous Inwards; (vi) Depreciation on computers; (vil) Computer Software amortised (vil) Cor (ix) Audit fee; and (x) Bonus. Ans.: (ii) Postage Expenses; (ill) Telephone alowing be shown: ‘securities 1 imeret om Loans ies (9 sn (Profi on iis ‘Computers: ( S my) Depreci Interest paid on Deposits: v) Depreciation Tepalrs Expenses? (Wi) Commission paid for Deposit Mobilisation: 2” : ions: (i) and (ii); Fit tans.: Revenue from operation ‘oat ss: (v) and (vids Depreciation and Amortisat be shoe tion Expense 50. Under which tine item of the financial statements following item = on issu 0) Sale; Logs on Sale of Vehcer (t) Debentures («) UNOMOTNSE TT fea Fe Gator of win 12 roots ofthe date of Balance Sheets) Enca! _ a Time of Retirement; () Tax Reserve; (i) Carage on Purchases ofS ae (i, and Internet Expenses? Tue: Revenue fom Operations: Cy Cte? EXD=I= Tong-term Borrowings: (i); Other Non-current Assets: Provisions: (v); Reserves and 551, State under which major headings and subheadings the following items wil be pre Balance Sheet of a company as per Schedule Il! ‘of the Companies Act, 2013: (i) Capital Reserve; (ii) Calls-in-Advance; (iii) Loose Tools; and (iv) Bank Overdraft. [ans.: Main |() Shareholders Funds (i ~ Tf) Current Assets (iv) Current Head (iv) Short-term ‘Sub-head (() Reserves and Surplus (i) Other Current Labilties (ii) Inventoriesons of Financial Statement Analysis eka b are OLN toIIs) fatemients is a systematic process of analysing the financial information 17 s fo understand and take economic decisions. Analysis of Fins the financial statemen Analysis of Financial Statements is a study of relationships among, vari ie., Balance Sheet, Statement of Profit and Loss and Cashy ta given in the financial statements is divided or broken into onships are established between the interdependent set out in the financial statemen Flow Statement. The complex d simple and valuable elements and rel or related elements of the same statement ferent financial statements. This process of division, establishing relationships and interpretation thereof to understand the working: and financial position of a business is known as Analysis of Financial Statements. “Financial Statement Anal r »f relationships among the various financial factors in a business, i le set of statements, and a study of trends of these factors, —Myer The analysis and interpreta ttempt to determine the significance and meaning of fi i t y be made of the prospects for future earnings, ab 0 t and long-term) and profitability and sound divider Kennedy and Muller The term ‘Financial Analy s’ and ‘Interpretation’. ‘Analysis’ is concerned with simplificatio: 1 en in the financial statement by proper classification. ‘Interpretatio P , the meaning and significance 5 lementary to each other, ie, analysis is of the financial data not of much use without ir Financial Statement Analysis is undertaken by creditors, investors and other users Of financial statements to asse dit worthiness, financial soundness and earning potential of the business.similar nature and fing ina similar business with the industry Tones Coney used tools for Finar Comparative Statements acon Comparative Statements or Comparative Financial Statements MOT" yy og individual items or components of financial statements, !# UT NC a arative Profit and Loss of two or more years of the enterprise itself. In > ange Ea amounts of two or more years are placed side by side aot ee o Preke absolute and percentage terms to facilitate comparison. Both cueonnenl and Balance Sheet are prepared in the form of Comparative Sia ltt & Financial Statements. This analysis is also known as Horizontal Analysis. Common-size Statements Common-size Statements or Common-size Financial Statements mean ee ee individual items of financial statements of two or more years are placed side Werted into percentages taking a common base. Common Haag t of Common-size Balanes and thereafter « is Total Assets or Total of Equity and Liabilities, in the case Total of Equity and Liabiliti Statement of Prokt ail Common-size Balance Sheet, the Total Assets or Total of Equity and. liabilities ig as 100 and all amounts are expressed as percentage of total. Similarly, in Com ¢., Net Sales is taken as 10 and Revere from Operations, in the case of Common-size Statement of Profit and Loss, Revenue from Operations, is take all amounts are expressed as a percentage of Revenue from Operations, te, Net This analysis is also known as Vertical Analysis. Ratio Analysis Ratio is an arithmetical expression of relationship between two related or interdi components of financial statements of an accounting period. Ratio Analysis is an impa tool or technique for analysing financial statements, i., Balance Sheet and Stat Profit and Loss. It helps in assessing the profitability, solvency, liquidity and effig of an enterprise Cash Flow Statement Cash Flow Statement i: statement showing flow of Cash and Cash Equivalents di accounting period, classified under Operating Activities, Investing Activities and Fim Activities. It shows the sources from which cash is received (generated) and the p which it is utilised (used). It also shows the changes in cash position from one period to In addition to the above, Funds Flow Statement and Trend Percentages are also they have not been d Financial Statement Analysis. Since they are not in SyllabusHorizontal (or Dynamic) Analysis This analysis is made to review and analyse financial statements for a Ibis a Time Series Analysis. It shows comparison of financial data for ‘a chosen base year. It is useful for long-term trend analysis and plannil Statements or Comparative Financial Statements are examples of horizontal! Vertical (or Static) Analysis : This analysis is made to review and analyse the financial statements of one: year only. 9 Cross-sectional Analysis. Ratio analysis of the financial statement relating &9 a part accounting year is an example of this type of analysis. Such an analysi is useful in compart the performance of several companies of the same type or divisions of departments ‘one enterprise. Horizontal or Dynamic Analysis is a time series analysis. Vertical oF y js carried out at one particular point of time, generally when the accounts are 6 22 What is Horizontal Analysis? 623 What is meant by Vertical Analysis? Distinction b Basis Horizontal Analysis ents of twoormore Itrequiresa financial statement 1, Period It requires financial statem accounting periods. 2 Components |t deals with same items of different periods. or items 3, Information It provides information in absolute and \t provides information in perce percentage terms. 4, Usefulness [tis generally used for Time Series Analysis 5, Comparison tis a part of comparison.enterP’ ‘A comparison of two oF MOR Tce Te compares financial VaHiaBe oof state et tion. i competitive position WIT i compared, it is known as Cross-sectional What is meant by Intra-firm Compat! 27 F What is meant by Inter-firm Comparison? ison? ale Rela oi 1a aaa rious items in the financial statements: erpretation are: It gives the structural relationships of val . : Se ee ess of analyse ant inh functions which are used in the process of Rearrangement of Financial Statements For analyeis, it is neceseery te reclassify the complex data contained. tn telly ae ioe al jximum desired information from eveny osive classes so that r n and rearrangement Of diff statements into pui for analysis can be extracted classification or obtained data depends upon the purpose of analysis. Comparison After the classification of data of financial stateme 10 different categories, it is nega obtain comparative data of the same enterprise of t periods if itis a time series anal case of cross-sectional analysis, it is necessary to obtain comparative data of the same accu period of similar or comparable enterprises. For this, a comparative study is necessary Analysis Comparative financial data are the like profitability, solvency and liquidity analysed with reference to financial chara Interpretation f financial statement analysis is interpretation of financial inform The concluding pa generated in the process of financial statement analysis. The interpretation sh@ precise and directed towards indicating the movement of various financial charaet ra 2.8 Distinguish between analysis and interpretation of financialsie e , ncial statement analysis helps to identify the areas | {ficient and the areas where they have been inefficient. For Sitios, it i$ possible to analyse relative proportion of prod Hfarketing expenses. Any favourable or unfavourable variation can | thereof can be ascertained to pinpoint managerial efficiency oF ‘assessing the Short-term and Long-term Solvency of the Ei Long-term and short-term solvency of an enterprise can be assessed on the statement analysis. Creditors or suppliers are interested to know the shor or liquidity of the enterprise, jc, its ability to meet short-term liabilities. De And lenders are interested to know the long-term and short-term solvency of the he ability of the company to repay the principal amount and interest to as Inter-firm Comparison : Inter-firm comparison becomes easy with the help of financial analysis. It helps an/€nteMpnise: and acquisitions in assessing its own performance as well as that of others, if mergers ¢ to be considered. are t Forecasting and Preparing Budgets Past financial statement analysis helps in assessing developments in future, especially, im the next year. For example, given a certain investment, it may be possible to forecast thie next year's profit on the basis of earning capacity shown in the past. An analysis) thus helps in forecasting and p: he budgets Explainable and Understandable Financial analysis helr ¢ rs of the financial statements to understand the Complicated: matter in a simplified manner. Financi 1 can be made more comprehensive by charts, graphs and diagrams, wt 2 ly explained and understood. 29 Is financial analysis helpful in assessing the financial position of @ ol USES OF FINANCIAL ANALYSIS of decisions in various areas such: idend decision and general business: On the basis of fina a a € a as securities anal analysis. These are d t Securities Analys It is a process b estor kr her the firm is fulfilling iis expectati “e w ent of dividend, capital appreciation and security Gt money. Such analysi: Joni ‘ urities analyst who is interested in cash+} enerating, ability, dividend pa’ policy and the behaviour of 5 : hare prices. iesGeneral Business Analysis 7 Financial analysis can be used to identify th to assess the profit potential of the firm. it uN ue ue The parties interested in the analysis Management Financial analysis helps the management to 25% efficiency of the business. Besides, it helps them self-evaluation. Employees and Trade Unions certain overall as well as rey decision-making, control bonus, better working (4 in profitability, operating also interested in fini gotiating and entering, Employees are interested in better emoluments, security of their jobs. So, they are always interested 1” P and financial strength of the business. Trade Unions art because the degree of profitability helps them in ne agreements with the employers. Investors Therefore, they are interested in pi to know whether the business is owth potential of Shareholders or Ov Owners invest their savings in the enterprise and safety of their investments. They would like has growth potential and its progress is on expected lines. Gr helps in appreciation of their investment. nt profitability (i, earning) and financial position They are interes as future pri Potential Ir sted to know the pr i pects to determine whether they should invest in a particular comp} Supplier Cre They are interested to know the short-term solvency position of a firm, i.e. Ene meet its short-term liabilities. Short-term solvency of a firm can be determined help of financial statement analysis. On the basis of analysis, they decide whe should allow or extend credit to the enterprise or not. E Bankers and Lenders are interested in servicing of the loans granted to an enti regular payment of interest and repayment of principal amount on due dat words, they are interested in long-term and short-term solvency of a firm, pay interest on loans and debts and its repayment.i of financial statement analysis are: Historical Analysi Financial statement analysis is a historical analysis. It analyses what has date. It does not reflect the future. Persons like shareholders, investors, ete, interested in knowing the likely position in future. Ignores Price Level Changes Price level changes and purchasing power of money are inversely related. A the price level makes analysis of financial statements of different accounting years in because accounting records ignore change in value of money. Qualitative Aspect Ignored Since the financial statements are confined to monetary matters alone, the qualitative” e quality of management, quality of staff, public relations are ignored While” aspects carrying out the analysis of financial statements. Suffers from the Limitations of Financial Statements sd on the information given in the Analysis of financial statements is b financial statements. Hence, this analysis suffers from all such limitations fom WI the financial statements suffer. Therefore, unless the basic data given in the fin derived on the basis of the analysis of this de statements is reliable, th nelusion cannot be reliable. | | Not Free from Bias choice in the method of inventory valuation, choice in the method of dep | line or written down value), etc. Since the subjectivity is inherent in pe the financial statements are, therefore, not free from bias.» Tear problems but The management has to look for the remedy to rectify 16 PS answers To & QUESTIONS mi a business transactions as era is a postmortem of the S, Financial Statement Analysis is @ po: Se ee ‘perational ability, profitability and financial soun' 7 nancial statements for a number of 24 22 Horizontal analysis is made to review and analyse fi i sis. ‘on financial data taken for those years. It s a Time Series Analy: r it of one parti 2-3 Vertical analysis is made to review and analyse the financial statemen Pal Such analysis is also called Static Analysis. 24 There Is no conflict between the horizontal and vertical analyses because both serve iff The former analysis is used for intra-irm comparison whereas the latter analysis Is Used comparison. In real practice, both the analyses are complementary in nature: 2.5 Vertical analysis is the study of quantitative relationship existing among the items of Financial Statements at a particular date. This justifies the convention that Vertical Analysh Analysis. 2.6 & comparison of financial variables ofa firm over a period of time is known as Intra-firm, It analyses the performance of a business over a number of years and shows trend of or more firms are analysed and compared for alg 2-7 When the financial statements of tw called Inter-firm Comparison. 2.8 analysis is the process of identifying the financial strengths and weaknesses of the firm By establishing relationships between the items of financial statements. Interpretation involves explaining the meaning and significance of the relationships $0) by the analysis Analysis and interpretation are closely related. Interpretation is not possible without without analysis, interpretation has no value. ‘ 2.9 Financial analysis is helpful in assessing the financial position and profitability of a"5, Why is an inter-firm comparison useful? {6 What is Horizontal Analysis of Financial Statements? 7, What Is meant by Vertical Analysis of Financial Statements? 48, State the significance of Analysis of Financial Statements to ‘Top Management. (2018 9, Why are investors interested in analysing Financial Statements? (Deihi 2008 €, Al 2017) 40. Why are the financial institutions interested in analysing Financial Statements? (al 20080, 41. Why is public interested in analysing Financial Statements? (Ai 2008 © 12. State any one objective of Financial Statement Analysis. (Delhi 2010, 2013,2014 Aland Foreign 2074) 43, State any two objectives of ‘Analysis of Financial Statements, (Delhi 2016 44. One of the objectives of ‘Financial Statement Analysis’ is to Identify the reason for change in the financial position of the enterprise. State two more objectives of this analysis. (Delhi 2016) 45. One of the objectives of ‘Financial Statement Analysis’ is to judge the ability of the firm to repay its debts and assessing the short-term as well as the long-term liquidity position of the film, State two more objectives of this analy: ai2016) 46, What is meant by ‘Solvency of Business’? (Dethi 2016) 47. How the solvency of a business is assessed by Financial Statement Analysis? (Delhi 2010) 98. How the Eaming Capacity of a busin 12d by Financial Statement Analysis? (Delhi 2010) 19. State any two limitations of Financial ment A sis. {Al 2010, Delhi 2013, Al 2015 C) 20. How is Window Dressing a limita’ if ncial (Al 2010) 21. How does ‘subjectivity limitation of Financial Statement Analysis? (ai2010) te 22, Name two parties interested in Financial at Analysis. (Foreign 2010) 23. State why shareholders are interested in Financial Statement Analysis. 0) 24, State why creditors for goods are interested in Financial Statement Analysis. 25. State the interest of Trade Unions in the Analysis of Financial Statements, | 26. State the interest of management in the Analysis of Financial Statements.‘analysis of Financi ‘State any two limitations and any two objectives i ene Uist any three objectives of Analysing the Financia Ne objectives of ‘Ani Fit nts State th fi ‘Analysis of Financial Stateme! @ any two objectives of ‘Analysis of Financial Statements ‘Analysis of Financial . ie ful for (a) Creditors, ( its? How is it use! 5. What is meant by Analysis of Financial Statements’ Mom cana (c) Investors, (d) Employees, (e) Government, ant 7. What is meant by Analysis of Financial Statements? What is its Importance ta employees? Briefly explain limitations of Financial Statement Analysis. (Foreign 2005, B Or State any four limitations of ‘Analysis of Financial Statements: Or 8. State any two limitations of ‘Analysis of Financial Statements. (Al 2017 G 9. Differentiate between Intra-firm and inter-firm Analysis. 10. Discuss the advantages of Financial Statement Analysis. What is meant by Analysis of Financial Statements? How is it important from the VieWp " (Delhi 1998, 2005 G and management? 12. Explain the importance of Financial Analysis. 13. What is meant by Analysis of Financial Statements? What is the interest of the maf shareholders in such an analysis? 14, What is meant by Analysis of Financial Statements? How is it useful to investors a Explain in brief. 15. How is the Analysis of Financial Statements useful to potential investors and tax in brief. 16. How is Analysis of Financial Statements important to Government Authorities? 17. Why is Analysis of Financial Statements important to Creditors?