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ACCOUNTING AND AUDITING

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FINANCIAL STATEMENTS OF:

1. Company accounts

COMPANY ACCOUNTS
INTRODUCTION
The word ‘Company’, in everyday usage, implies an assemblage of persons for social purpose, companionship or
fellowship. As a form of organisation, the word ‘company’ implies a group of people who voluntarily agree to form
a company.
The word ‘company’ is derived from the Latin word ‘com’ i.e. with or together and ‘panis’ i.e. bread. Originally the
word referred to an association of persons or merchant men discussing matters and taking food together. However,
in law ‘company’ is termed as company which is formed and incorporated under the Companies Act, 2013 or an
existing company formed and registered under any of the previous company laws. As per this definition of law,
there must be group of persons who agree to form a company under the law and once so formed; it becomes a
separate legal entity having perpetual succession with a distinct name of its own and a common seal. Its
existence is not affected by the change of members.

FEATURES OF COMPANY
1. Incorporated Association: A company comes into existence through the operation of law. Therefore,
incorporation of company under the Companies Act is must. Without such registration, no company can
come into existence. Being created by law, it is regarded as an artificial legal person.
2. Separate Legal Entity: A company has a separate legal entity and is not affected by changes in its
membership. Therefore, being a separate business entity, a company can contract, sue and be sued in its
incorporated name and capacity.
3. Perpetual Existence: Since company has existence independent of its members, it continues to be in
existence despite the death, insolvency or change of members.
4. Common Seal: Company is not a natural person; therefore, it cannot sign the documents in the manner as a
natural person would do. In order to enable the company to sign its documents, it is provided with a legal tool
called ‘Common Seal’. The common seal is affixed on all documents by the person authorised to do so who in
turn puts his signature for and on behalf of the company. Companies Act, 2013 required common seal to be
affixed on certain documents (such as bill of exchange, share certificates, etc.) Now, the use of common seal
has been made optional. All such documents which required affixing the common seal may now instead be
signed by two directors or one director and a company secretary of the company.
5. Limited Liability: The liability of every shareholder of a company is limited to the amount he has agreed to pay
to the company on the shares allotted to him. If such shares are fully paid-up, he is subject to no further liability.
6. Distinction between Ownership and Management: Since the number of shareholders is very large and may
be distributed at different geographical locations, it becomes diflcult for them to carry on the operational
management of the company on a day-to-day basis. This gives rise to the need of separation of the
management and ownership.
7. Not a citizen: A company is not a citizen in the same sense as a natural person is, though it is created by the
process of law. It has a legal existence but does not enjoy the citizenship rights and duties as are enjoyed
by the natural citizens.
8. Transferability of Shares: The capital is contributed by the shareholders through the subscription of shares.
Such shares are transferable by its members except in case of a private limited company, which may have
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certain restrictions on such transferability.

9. Maintenance of Books: A limited company is required by law to keep a prescribed set of account books and
any failure in this regard attracts penalties.
10. Periodic Audit: A company has to get its accounts periodically audited through the chartered accountants
appointed for the purpose by the shareholders on the recommendation of board of directors.
11. Right of Access to Information: The right of the shareholders of a company to inspect its books of account,
with the exception of books open for inspection under the Statute, is governed by the Articles of Association.
The shareholders have a right to seek information from the directors by participating in the meetings of the
company and through the periodic reports.

PREPARATION OF FINANCIAL STATEMENTS

Under Section 129 of the Companies Act, 2013, the financial statements shall give a true and fair view of the state
of affairs of the company or companies, comply with the notified accounting standards issued by CG and shall be
in the form or forms as may be provided for different class or classes of companies, as prescribed in Schedule III.
The Board of Directors of the company shall lay financial statements at every annual general meeting of a company.
Financial Statements as per Section 2(40) of the Companies Act, 2013, inter-alia include –
i. A balance sheet as at the end of the financial year;
ii. A profit and loss account, or in the case of a company carrying on any activity not for profit, an income and
expenditure account for the financial year;
iii. cash flow statement for the financial year;
iv. A statement of changes in equity, if applicable; and
v. Notes to accounts
Provided that the financial statement, with respect to One Person Company, small company and dormant company,
may not include the cash flow statement.

REQUISITE OF FINANCIAL STATEMENTS

It shall give a true and fair view of the state of affairs of the company as at the end of the financial year.
DIFFERENT PROVISIONS FOR DIFFERENT COMPANIES
1. If Specific Act is Applicable
For instance, any
(a) Insurance company
(b) Banking company or
(c) Any company engaged in generation or supply of electricity* or
(d) Any other class of company for which a Form of balance sheet or Profit and loss account has been prescribed
under the Act governing such class of company.

(2) In case of all other companies:

Balance Sheet as per Form set out in Part I of Schedule III and Statement of Profit and Loss as per Part II of Schedule
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III
Part 1 Balance sheet
Name of the company
Balance sheet as at
Particulars Not Figures as Figures as at end
es at end of of the previous
No the reporting period
. current
reporting
period
EQUITY AND LIABILITIES
1 Shareholders’ funds
.
a. Share capital (A)
xxx xxx xxx
b. Reserves and Surplus (B)
xxx xxx xxx
c. Money received against share
xxx
2 warrants Share application money
xxx
. pending allotment Non-current liabilities
3 a. Long-term borrowings (C)
. b. Deferred tax liabilities (Net)
c. Other long term liabilities xxx xxx xxx
d. Long-term provisions (D) xxx xxx
Current liabilities xxx xxx
a. Short-term borrowings (E) xxx
4 b. Trade Payables
.
c. Other current liabilities (F)
xxx xxx xxx
d. Short-term provisions
xxx xxx
Total xxx xxx
ASSET xxx
S xxx xxx
Non-current assets
1 a. Property, Plant and Equipment
. i. Tangible assets (G)
ii. Intangible assets (H)
iii. Capital Work-in-progress xxx xxx xxx
iv. Intangible assets under development xxx xxx xxx
b. Non-current investments (I) xxx xxx xxx
c. Deferred tax assets (Net) xxx xxx xxx
d. Long-term loans and advances (J) xxx
e. Other non-current assets xxx
Current assets xxx
a. Current investments (K) xxx
2 b. Inventories (L)
.
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c. Trade receivables xxx xxx xxx

d. Cash and cash equivalents (M) xxx xxx xxx
e. Short-term loans and advances xxx xxx
f. Other current assets xxx xxx
Total xxx
xxx
xxx xxx

Part 2 Statement of Profit and Loss

Name of the company
Profit and loss statement for the year ended

Particulars Note Figures Figures

No. for the for the
current previous
reportin reporting
g period period
I. Revenue from operations xxx xxx
II. Other income xxx xxx
III. Total Revenue (I + II) xxx xxx
IV. Expenses: xxx xxx
Cost of materials consumed xxx xxx
Purchases of Stock-in-Trade xxx xxx
Changes in inventories of finished goods xxx xxx
Work-in- Progress and Stock-in-Trade
Employee benefits expense xxx xxx
Finance costs xxx xxx
Depreciation and amortization expense xxx xxx
Other expenses
xxx xxx
Total expenses xxx xxx
V. Profit before exceptional and extraordinary xxx xxx
items and tax (III-IV)
VI. Exceptional items xxx xxx
VII. Profit before extraordinary items and tax (V-VI) xxx xxx
VIII. Extraordinary Items xxx xxx
IX. Profit before tax (VII-VIII) xxx xxx
X. Tax expense:
(1) Current tax xxx xxx
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(2) Deferred tax xxx xxx xxx xxx

XI. Profit (Loss) for the period from continuing xxx xxx
operations (VII-VIII)
XII. Profit/(Loss) from discontinuing operations xxx xxx
XIII. Tax expense of discontinuing operations xxx xxx
XIV. Profit/(Loss) from discontinuing operations (after xxx xxx
tax) (XII-XIII)
XV. Profit (Loss) for the period (XI + XIV) xxx xxx
XVI. Earnings per equity share:
(1) Basic xxx xxx
(2) Diluted xxx xxx

CASH FLOW STATEMENT

INTRODUCTION

A Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company
during a specific period.
The primary objective of cash flow statement is to provide useful information about cash flows (inflows and
outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing
activities and financing activities.

CASH FLOW FROM OPERATING ACTIVITY

Operating activities are the activities that constitute the primary or main activities of an enterprise. For example,
for a company manufacturing garments, operating activities are procurement of raw material, incurrence of
manufacturing expenses, sale of garments, etc. These are the principal revenue generating activities (or the main
activities) of the enterprise and these activities are not investing or financing activities. The amount of cash from
operations’ indicates the internal solvency level of the company, and is regarded as the key indicator of the extent
to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability
of the enterprise, paying dividends, making of new investments and repaying of loans without recourse to external
source of financing. Cash flows from operating activities are primarily derived from the main activities of the
enterprise. They generally result from the transactions and other events that enter into the determination of net
profit or loss. Examples of cash flows from operating activities are:
Cash Inflows from operating activities
Cash receipts from sale of goods and the rendering of services.
Cash receipts from royalties, fees, commissions and other revenues.

Cash Outflows from operating activities

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Cash payments to suppliers for goods and services.

Cash payments to and on behalf of the employees.
Cash payments to an insurance enterprise for premiums and claims, annuities, and other policy benefits.
Cash payments of income taxes unless they can be specifically identified with financing and investing activities.

CASH FLOW FROM INVESTING ACTIVITY

As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such
as machinery, furniture, land and building, etc. Transactions related to long-term investment are also investing
activities.
Separate disclosure of cash flows from investing activities is important because they represent the extent to which
expenditures have been made for resources intended to generate future income and cash flows. Examples of cash
flows arising from investing activities are:
Cash Outflows from investing activities
Cash payments to acquire fixed assets including intangibles and
Capitalised research and development.
Cash payments to acquire shares, warrants or debt instruments of other enterprises other than the instruments
those held for trading purposes.
Cash advances and loans made to third party (other than advances and loans made by a financial enterprise wherein
it is operating activities).

Cash Inflows from Investing Activities

Cash receipt from disposal of fixed assets including intangibles.
Cash receipt from the repayment of advances or loans made to third Parties (except in case of financial enterprise).
Cash receipt from disposal of shares, warrants or debt instruments of Other enterprises except those held for
trading purposes.
Interest received in cash from loans and advances.
Dividend received from investments in other enterprises.

CASH FLOW FROM FINANCING ACTIVITY

As the name suggests, financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds
from issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc. As per AS-3,
financing activities are activities that result in changes in the size and composition of the owners’ capital (including
preference share capital in case of a company) and borrowings of the enterprise. Separate disclosure of cash flows
arising from financing activities is important because it is useful in predicting claims on future cash flows by
providers of funds ( both capital and borrowings ) to the enterprise.
Examples of financing activities are:
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Cash Inflows from financing activities

Cash proceeds from issuing shares (equity or/and preference).
Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.

Cash Outflows from financing activities

Cash repayments of amounts borrowed.
Interest paid on debentures and long-term loans and advances.
Dividends paid on equity and preference capital.

Treatment of Some Peculiar Items

Extraordinary items
Extraordinary items are not the regular phenomenon, e.g., loss due to theft or earthquake or flood. Extraordinary
items are non-recurring in nature and hence cash flows associated with extraordinary items should be classified
and disclosed separately as arising from operating, investing or financing activities. This is done to enable users to
understand their nature and effect on the present and future cash flows of an enterprise.
Interest and Dividend
In case of a financial enterprise (whose main business is lending and borrowing), interest paid, interest received
and dividend received are classified as operating activities while dividend paid is a financing activity. In case of a
non-financial enterprise, as per AS-3, it is considered more appropriate that payment of interest and dividends are
classified as financing activities whereas receipt of interest and dividends are classified as investing activities.
Taxes on Income and Gains
Taxes may be income tax (tax on normal profit), capital gains tax (tax on capital profits), dividend tax (tax on the
amount distributed as dividend to shareholders). AS-3 requires that cash flows arising from taxes on income should
be separately disclosed and should be classified as cash flows from operating activities unless they can be
specifically identified with financing and investing activities. This clearly implies that:
a) Tax on operating profit should be classified as operating cash flows.
b) Dividend tax, i.e., tax paid on dividend should be classified as financing activity along with dividend paid.
c) Capital gains tax paid on sale of fixed assets should be classified under investing activities.
Non-cash Transactions
As per AS-3, investing and financing transactions that do not require the use of cash or cash equivalents should be
excluded from a cash flow statement.
Examples of such transactions are – acquisition of machinery by issue of equity shares or redemption of debentures
by issue of equity shares. Such transactions should be disclosed elsewhere in the financial statements in a way that
provide all the relevant information about these investing and financing activities. Hence, assets acquired by issue
of shares are not disclosed in cash flow statement due to non-cash nature of the transaction.