Accounting and Finance

Course Code: 21VMB0C103

Unit 4: Financial Statements

Prof. Sathyanarayana K
 Important Terms

• Cost of goods sold: direct costs in the process of production.

 Direct material, Direct wages, Direct expenses
• Gross profit: Profit a business makes after subtracting all the costs related to
manufacturing from its sales of products or services.
 Sales – COGS
• Gross Profit Margin: Gross Profit Margin is calculated by dividing gross profit
by sales. Normally expressed in percentage.

• Gross Profit/Gross Loss: Difference between Revenue Received and COGS

• Operating expenses: Day-to-day expenses related to business
 Rent, Salary, Commission, Advertisement
• Administrative Expenses: Expenses other than Manufacturing, expenses related
to management and support activities.
 Top management Salaries, Depreciation
 Important Terms

• Operating Income (EBIT): Gross Profit - (Operating and Admin expenses).

• Net Profit: Deduct all expenses from Revenue
 Sales – COGS = Gross Profit – General and administrative expenses = Net Profit
 It is also “Accounting profit” as non-cash transactions are included in it.
 Fixed overhead: The expenses incurred irrespective of the level of sales ex: Rent
for office space, Insurance premiums, Salaries for administrative staff, and Fees
for licenses.
• Operating Profit is a checkpoint to gauge how productively a company is using its
assets and controlling its administrative and fixed overhead expenses.
• Operating profits are calculated before deductions for interest, depreciation,
amortization, and taxes – frequently referred by the acronym EBITDA
• Net Loss: Expenses more than Revenues
 Important Terms

Classification of Expenses

Based on Activity
• Manufacturing
• Administrative
• Selling
• Finance

Based on the Nature of Expenses

• Direct
• Indirect
 Liabilities Side Items

Shareholders’ funds
• Share capital
• Reserves
• Surplus

Non-current liabilities
• Bank loans
• Debenture

Current liabilities
• Short term borrowings like bank overdraft, cash credit
• Trade payables
• Outstanding expenses
• Short term provision
 Asset Side Items

Non-current assets
• Fixed assets
• Long-term investments

Current assets
• Inventories
• Trade receivables
• Short-term investments
• Cash in hand
• Cash at Bank
• Prepaid expenses
 Dividends and Reserves

• Dividends are Rewards to shareholders, paid by companies from the profits earned
• Reserves are undistributed profits
• Different types of reserves
 Revenue Reserves: Retained earnings, created with the help of the earnings
generated through the primary operations
 Specific Reserves: Created by businesses to meet specific financial obligations. Ex:
Dividend Equalization Reserve, Asset Replacement reserve, Debenture Redemption
Reserve.
 Capital Reserves: Created straight from capital earnings
 Unlike revenue reserves, these earnings are not distributed as dividends.
 Do not tend to occur frequently
 Created with the help of profits generated through forfeiture of shares or Sale of
fixed assets or Revaluation of existing assets.
 Earnings Per Share

• The company’s profit is divided by the outstanding shares of its common stock (Equity)
• A figure that describes a public company's profit per outstanding share of stock,
calculated on a quarterly or annual basis.
• An indicator of a company's profitability.
• The higher the EPS, the more profitable the company is considered to be.
• A high EPS indicates greater value because investors will pay more for a company's
shares.
• Indicates how much money a company makes for each of its shares and is a widely
used metric for estimating corporate value.
 Earnings Per Share

Basic EPS
• Basic EPS does not factor in the dilutive effect of shares that could be issued by the
company.
• When the capital structure of a company includes items such as stock options, and
warrants, these investments if exercised could increase the total number of shares
outstanding in the market.
• ABC Company’s Income is ₹1.67cr., No. of shares are 0.50 cr.,
Basic EPS = 1.67/0.50
= ₹3.34

Diluted EPS
• ABC Company has convertible instruments worth 0.25 cr. If this number is added to its
total shares outstanding, its diluted weighted average shares outstanding will be 0.50 +
0.25 = 0.75cr shares.
• The company's diluted EPS is:
Diluted EPS = 1.67/0.75
= ₹2.23
 Treatment of Closing Stock

• Unsold stock of finished goods and raw materials

• Stock verification
• Recorded at cost or market price whichever is lower
• Shown as a credit entry in the trading account and as a debit (assets side)
entry in the balance sheet
 Treatment of Adjustments

• Write off of preliminary expenses: Consider as a loss in P&L A/c and Deduct from
Preliminary expenses on the Assets side of the Balance Sheet.
• Depreciation of Fixed Assets: Consider as an expense in P&L A/c and deduct from
respective fixed assets on the Assets side of the Balance Sheet.
• Outstanding Expenses: Add to respective expenses in P&L A/c and Consider under Current
Liabilities on the Liabilities side of the Balance Sheet.
• Closing Stock: Deduct from opening stock in P&L A/c and consider under Current Assets
on the Assets side of the Balance Sheet.
• Outstanding Interest on Debt: (Instruments like Bank Loans or Debenture): Add to
respective expenses in the P&L A/c under Finance Cost and consider under Current
Liabilities on the Liability side of the Balance Sheet.
• Tax Provision: Deduct from Earnings/Profit before tax in P&L A/c and Consider under
short-term provisions on the Liability side of the Balance Sheet.
• Proposed Dividend: Deduct from Earnings/Profit after tax in P&L A/c and Consider under
short-term provisions on the Liability side of the Balance Sheet
 Treatment of Adjustments

• Provide for doubtful debts: Add to Bad Debts in P&L A/c and deduct from Debtors
under current assets on the Assets side of the Balance Sheet
• Prepaid Expenses: Deduct from respective expenses in P&L A/c and consider under
Current Assets on the Asset side of the Balance Sheet.
• Outstanding Income: Add to respective income in P&L A/c and consider under Current
Assets on the Asset side of the Balance Sheet.
 Final Accounts Format
Statement of Profit and Loss
Name of the Company……….
Profit and loss statement for the year ending…….. Rupees in …………..
Sl. No Particulars Note No. Amount Amount
I Revenue from operations XXX

II Other Incomes XXX

III Total Revenue XXXX
IV Expenses:
a) Cost of materials consumed XXX
b) Purchase of stock in trade XXX
c) Changes in inventories of finished goods, work-in-progress and XXX
stock-in-trade
d) Employee benefit expenses XXX
e) Finance cost XXX
f) Depreciation & Amortization expense XXX
g) Other expenses XXX
Total Expenses XXXX

Profit Before Tax XXXX

V Tax expense XXX
VI Profit After Tax XXXX
 Final Accounts Format
Balance Sheet
Name of the Company……….
Balance Sheet as on ………………. Rupees in …………..
Sl. No Particulars Note No. Amount Amount
I EQUITY AND LIABILITIES

(1) Shareholder’s funds

(a) Share capital XXX
(b) Reserves and Surplus XXX
(c) Money received against share warrants XXX
XXXX
(2) Share application money pending allotment XXXX
(3) Non-current liabilities
(a) Long-term borrowings XXX
(b) Deferred tax liabilities XXX
(c) Other long-term liabilities XXX
(d) Long-term provisions XXX XXXX
(4) Current liabilities
(a) Short-term borrowings XXX
(b) Trade payables XXX
(c) Other current liabilities XXX
(d) Short-term provisions XXX XXXX
 Final Accounts Format

Sl.
Particulars Note No. Amount Amount
No
II ASSETS
(1) Non-current assets
(a) Fixed Assets
(i) Tangible assets XXX
(ii) Intangible assets XXX
(iii) Capital work-in-progress XXX
(iv) Intangible assets under development XXX
(b) Non-current investments XXX
(c) Deferred tax assets (net) XXX
(d) Long-term loans and advances XXX
(e) Other non-current assets XXX XXXX

(2) Current assets

(a) Current investments XXX
(b) Inventories XXX
(c) Trade receivables XXX
(d) Cash and cash equivalents XXX
(e) Short-term loans and advances XXX
(f) Other current assets XXX XXXX
 Financial Statements

Cost of Goods Sold (COGS) = Opening Stock + Purchases – Closing Stock

Revenue XXXX
- COGS XX
Gross Profit XXXX
- Operating Expenses XXX
Operating Profit (EBIT) XXXX
- Interest XX
Earnings Before Tax XXXX
- Tax XX
Net Profit (EAT) XXXX
- Preference Dividend XX
Profit Available for Equity Shareholders XXXX
No. of Equity Shares XXXX
EPS (Profit Available for Equity Shareholders/No. of Equity Shares) XX
 Financial Accounts
Trial balance of Mehul Company Ltd. for the year ended 31st March, 2022
Particulars Amount Particulars Amount
Stock 68,000Equity Share Capital (Shares of Rs.10 each) 250,000
Furniture & Fixtures 50,00011% Debentures 50,000
Discount 4,000Bank Loans 64,500
Loan to Directors 8,000Bills Payable 12,500
Advertisement 2,000Creditors 15,600
Bad Debts 3,500Sales 426,800
Commission 12,000Rent Received 4,600
Purchase 231,900Transfer fees 1,000
Plant and Machinery 86,000Profit & Loss Appropriation Account 13,900
Rentals 2,500Provision for Depreciation on Plant and Machinery 14,600
Current Account 4,500
Cash 800
Interest on Bank Loan 11,600
Preliminary Expenses 1,000
Wages 90,000
Consumables 8,400
Freehold Land 154,600
Tools and Equipment 24,500
Goodwill 26,500
Debtors 28,700
Bills Receivables 15,300
Dealer Aids 2,100
Transit Insurance 3,000
Trade Expenses 7,200
Distribution Freight 5,400
Debenture Interest 2,000
853,500 853,500
Additional Information:
· Closing stock as on 31st march, 2020, ₹82,300 & Tax @ 30%
· Depreciation on furniture & fixtures @5%, Freehold land @2% and Tools and Equipment @5% to be provided
 Financial Accounts
Profit & Loss Account of Mehul Company Ltd., for the year ended 31.03.2022
Particulars Note Amount
I Revenue From Operations 426,800
II Other Receipts 1 5,600
III Total Receipts 432,400
IV Expenses
Purchase of Stock in Trade 231,900
Changes in Inventory 2 -14,300
Employee Benefit Cost (Wages) 90,000
Finance Cost 3 17,100
Depreciation & Amortisation 4 6817
Other Operating Expenses 5 50,100
Total Expenses 381,617
V Profit for the year 50,783
Less: Tax @ 30% 15,235
Profit After Tax (PAT) 35,548
Add: Previous Year's Profit 13,900
49,448
Less: Transferred to General Reserves -
49,448
Less: Preference Dividend -
49,448
Less: Equity Dividend -
Balance Transferred to Balance Sheet 49,448

EPS = Profit available for Equity Shareholders/No. of Equity Shares

EPS 1.98
 Financial Accounts
Balance Sheet of Mehul Company Ltd, as on 31.03.2022
Particulars Note Amount
I Equity & Liabilities
1. Shareholders Funds
a) Share Capital 250,000

b) Reserves & Surplus (From P&L) 49,448

2. Non-Current Liabilities
a) Long Term Liabilities 6 114,500
3. Current Liabilities
a) Trade Payables 7 28,100
b) Other Current Liabilities 8 18,735
Total Liabilities 460,783
II Assets
1. Non-Current Assets
a. Fixed Assets
i. Tangible Assets 9 293,683
ii. Intangible Assets (Goodwill) 26,500
2. Other Non-Current Assets 10 9,000
3. Current Assets
a) Inventory 82,300
b) Trade Receivables 11 44,000
c) Cash and Cash equivalent 12 5,300
Total Assets 460,783
 Financial Accounts
Note 1: Other Receipts Note 5: Other Operating Expenses Note 8: Other Current Liabilities
Rent Received 4,600 Discount 4,000 Outstanding Debenture Interests 3,500
Transfer fees 1,000 Advertisement 2,000 Provision for Taxataion 15,235
5,600
Bad Debts 3,500 18,735
Note 2: Changes in Inventory Commission 12,000
Rentals 2,500 Note 9: Tangible Assets
Opening Stock 68,000
Furniture & Fixtures 50,000
Less: Closing Stock (82,300) Dealer Aids 2,100
Less: Depreciation 2,500 47,500
(14,300) Consumables 8,400 Plant and Machinery 86,000
Transit Insurance 3,000 Provision for Depreciation 14,600 71,400
Note 3: Finance Cost
Trade Expenses 7,200 Freehold Land 154,600
Interest on Bank Loan 11,600
Distribution Freight 5,400 Depreciation 3,092 151,508
Debenture Interest 2,000
Tools and Equipments 24,500
Outstanding Debenture Interest 3,500 50,100
Less: Depreciation 1,225 23,275
17,100 293,683
Note 4: Depreciation & Amortisation Note 6 : Long Term Liabilities
11% Debentures 50,000 Note 10: Other Non-current Assets
On Furniture & Fixtures @ 5% 2,500
Freehold Land @ 2% 3,092 Bank Loans 64,500 Loan to Directors 8,000
Tools and Equipments 1,225 114,500 Preliminary Expenses 1,000
6,817 9,000

Notes 7: Current Liabilities Note 11: Trade Receivables

Bills Payable 12,500 Debtors 28,700
Creditors 15,600 Bills Receivables 15,300
28,100 44,000

Note 12: Cash and Cash Equivalents

Cash 800
Current Account 4,500
5,300
 Financial Accounts

2. Following are the details of Nithin Co., Ltd., Prepare company final accounts for the year ended 31 st March 2015.
Trial Balance
Particulars Debit Credit 3,00,000
Authorised Capital (10,00,000 shares of Rs.10 each) Good will
Subscribed capital (5,00,000 shares of Rs.10 each) 5,000,000 1,50,000
8,00,000 Interim Dividend paid
Cash in hand
1,12,500
17,50,000 Debenture Interest paid
Cash at Bank
Provision for bad debts as on 31.03.2014 40,000
15,00,000 30,00,000 Profit & Loss A/c 230,000
Purchases & Sales
Advertising Expenses 80,000
1,00,000 Insurance 9,000
Salaries
8,00,000
2,50,000 Freehold premises
Wages
2,50,000
Purchases and Sales returns 25,000 15,000 Patents
3,00,000 Travelling expenses 50,000
Calls in arrears Adjustments:
Discount 56,000 80,000
Bank charges 2,000 1. Depreciate Buildings and Furniture by 10% and Machinery by 15%
Telephone charges 5,500
Carriage 10,000 2. Write off Rs.10,000 from Preliminary expenses
Electricity charges 20,000
Preliminary Expenses 85,000 3. Last quarter's debenture interest is due
105,00,000
Dividend received on investment in shares 10,000 4. Stock on 31.03.2015 is Rs.8,00,000 10,500,000
5,00,000 5. Transfer Rs.2,00,000 to General Reserve
Investment in Fixed Deposit 6. Wages Rs.25,000 and Salaries Rs.35,000 are outstanding
10% Debentures 1,500,000 7. Insurance was prepaid to the extent of Rs.1,000
7,50,000 8. Write off bad debts of Rs.10,000 and create a Reserve for bad debts at 5%
Debtors & Creditors 375,000 9. A fire broke out in the factory and goods worth Rs.20,000 were completely destroyed. The
Share Premium 25,000 insurance company accepted the claim for Rs.16,000 and paid the claim.
General Reserve 185,000
 Financial Accounts
Profit & Loss Account of Nithin & Co., for the year ended 31.03.2015
Particulars Note Amount
I Revenue From Operations 1 2,975,000
II Other Receipts 2 90,000
III Total Receipts 3,065,000
IV Expenses
Purchase of Stock in Trade 3 1,465,000
Changes in Inventory 4 50,000
Employee Benefit Cost 5 410,000
Finance Cost 6 150,000
Other Operating Expenses 7 432,500
Depreciation & Amortization 8 200,000
Total Expenses 2,707,500
V Profit (Loss) for the Year 357,500
Tax @ 25% 89,375
Profit After Tax 268,125
Previous Year's Profit 230,000
498,125
Less: Transfer to General Reserve 200,000
298,125
Preference Dividend -
298,125
Proposed Dividend -
Balance Transferred to Balance Sheet 298,125
 Financial Accounts
Balance Sheet of Nithin & Co., for the year ended 31.03.2015
Particulars Note Amount
I Equity & Liabilities
1. Share Holders Fund
a) Share Capital 9 4,700,000
b) Reserves & Surplus 10 708,125
2. Non-Current Liabilities
a) Long-term Liabilities (Deben) 1,500,000
3. Current Liabilities
a) Trade Payables 11 415,000
c) Other Current Liabilities 12 186,875
Total Liabilities 7,510,000
II Assets
1. Non-Current Assets
a) Fixed Assets
i) Tangible Assets 13 2,200,000
ii) Intangible Assets (Patents & Goodwill) 550,000
iii) Long term Investments 500,000
2. Other Non-Current Assets 14 75,000
3. Current Assets
a) Inventory 800,000
b) Trade Receivables 15 818,000
c) Cash and Cash Equivalents 2,550,000
d) Other Current Assets 16 17,000
Total Assets 7,510,000
 Financial Accounts
Note 1: Revenue from Operations Note 6: Finance Cost
Sales 3,000,000 Debenture Interest 112,500
Less Sales Returns 25,000 Add: Outstanding 37,500
2,975,000 150,000
Note 2: Other Receipts
Dividend received on investment in shares 10,000 Note 7: Other Operating Expenses
Discount 80,000 Bank charges 2,000
90,000 Carriage 10,000
Note 3: Purchase of Stock in Trade Interim Dividend paid 150,000
Purchases 1,500,000 Advertising Expenses 80,000
Less Purchase Returns 15,000 Travelling expenses 50,000
1,485,000 Discount 56,000
Less: Goods destroyed by fire 20,000 Telephone charges 5,500
1,465,000 Electricity charges 20,000
Note 4: Changes in Inventory Insurance 9,000
Opening 850,000 Less: Prepaid 1,000 8,000
Less Closing Stock 800,000 Bad debts 30,000
50,000 Less: Old RBD (40,000)
Note 5: Employee Benefit Cost Add: New RBD 37,000
Salary 100,000 Add: Bad Debts Written off during the year 10,000 37,000
Wages 250,000 Loss on goods destroyed by fire 4,000
Add: Outstanding Wages 60,000 Preliminary expenses written off 10,000
410,000 432,500
 Financial Accounts
Note 13: Tangible Assets
Note 8: Depreciation & Amortization
Buildings @ 10% 50,000 Buildings 500,000
Furniture - 10% 30,000 Less: Depreciation 50,000 450,000
Machinery - 15% 120,000 Plant & Machinery 800,000
200,000
Less: Depreciation 120,000 680,000
Note 9: Share Capital
Authorised 10,000,000 Furniture 300,000
Subscribed 5,000,000 Less: Depreciation 30,000 270,000
Less: Calls in arrears 300,000 Freehold Premises 800,000
4,700,000 2,200,000
Note 10: Reserves & Surplus
General Reserve 185,000 Note 14: Other Non-Current Assets
Add: Current Year Transfer 200,000 Preliminary Expenses 85,000
Add: Share Premium 25,000
Add: Profit Transferred 298,125 Less: Written off 10,000
708,125 75,000
Less: Discount on issue of Shares - Note 15: Trade Receivables
708,125 Debtors 750,000
Note 11: Trade Payable Less: Bad Debts Written off 10,000
Creditors 375,000
Less New RBD 37,000 703,000
Bills Payable 40,000
415,000 Bills Receivables 115,000
Note 12: Other Current Liabilities 818,000
Outstanding wages & Salary 60,000 Note 16: Other Current Assets
Outstanding Debenture Interest 37,500 Prepaid Insurance 1,000
Provision for taxation 89,375 Claim received from Ins Company 16,000
Proposed Dividend - 17,000
186,875