2nd PUC Accountancy Question Bank Chapter 8 Financial Statements of a Company

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Karnataka 2nd PUC Accountancy Question Bank Chapter 8 Financial Statements of a Company

2nd PUC Accountancy Financial Statements of a Company Text Book Questions and Answers

Short Questions and Answers

Question 1.
What do you mean by financial statements?
Answer:
Financial statements are the end product of accounting system, prepared with an intention to judge the financial position of the business. It consists of income statement and balance sheet.

Question 2.
What are the limitations of financial statements.
Answer:

Do not reflect current situation.
Assets may not realise.
No qualitative information.
They are only interim reports.

Question 3.
list any three objectives of Financial Statements?
Answer:

To provide information about earning capacity of the business.
To provide information about cash flows.
To judge effectiveness of the management.
Disclosing accounting policies.

Question 4.
State the importance of financial statements to
(i) Shareholders (ii) creditors (iii) government (iv) investors
Answer:
The following are the various internal accounting users who are directly related to the company.
1. Owner: The owner/’s is/are interested in the profit earned or loss incurred during an accounting period. They are interested in assessing the profitability and viability of the capital invested by them in the business.

2. Management: The financial statements help the management in drafting various policies measures, facilitating planning and decision making process. The financial statements also enable management to exercise various cost controlling measures and to remove inefficiencies.

3. Employees and workers: They are interested in the timely payment of wages and salaries, bonus and appropriate increment in their wages and salaries. With the help of the financial statements they can know the amount of profit earned by the company and can demand reasonable hike in their wages and salaries.

External Parties
There are various external users of accounting who need accounting information for decision making, investment planning and to assess the financial position of the business. The various external users are given below.

1. Banks and other financial institutions: Banks provide finance in the form of loans and advances to various businesses. Thus, they need information regarding liquidity credit worthiness, solvency and profitability to advance loans.

2. Creditors: These are those individuals and organisations to whom a business owes money on account of credit purchases of goods and receiving services; hence, the creditors require information about credit worthiness of the business.

3. Investors and potential investors: They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business.

4. Tax authorities: They need information about sales, revenues, profit and taxable income in order to determine the levy various types of tax on the business.

3. Government: It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the government in the formulation of various policies measures and to address various economic problems like employment, poverty etc.

6. Researchers: Various research institutes like NGOs and other independent research institutions like CRISIL, stock exchanges, etc. undertake various research projects and the accounting information facilitates their research work.

7. Consumers: Every business tries to build up reputation in the eyes of consumers, which can be created by the supply of better quality products and post-sale services at reasonable and affordable prices. Business that has transparent financial records, assists the customers to know the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its products and, thus, helps in repo building of the business.

8. Public: Public is keenly interested to know the proportion of the profit that the business spends on various public welfare schemes; for example, charitable hospitals, funding schools, etc. This information is also revealed by the profit and loss account and balance sheet of the business.

Question 5.
How will you disclose the following items in the Balance Sheet of a company;
Answer:

Long Questions and Answers

Question 1.
Explain the nature of the financial statements.
Answer:
The financial statements are the end-products of the accounting process. The financial statements not only reveal the true financial position of the company but also help various accounting users in decision making and policy designing process. The nature of the financial statements depends upon the following aspects like recorded facts, conventions, concepts, and personal judgment

1. Recorded facts: The items recorded in the financial statements reflect their original cost i.e. the cost at which they were acquired. Consequently, financial statements do not reveal the current market price of the items. Further, financial statements fail to capture the inflation effects.

2. Conventions: The preparation of financ ial statements is based on some accounting conventions like, Prudence Convention, Materiality Convention, Matching Concept, etc. The adherence to such accounting conventions makes financial statements easy to understand, comparable and reflects the true and fair financial position of the company.

3. Accounting Assumptions: These basic accounting assumptions like Going Concern Concept, Money Measurement Concept, Realisation Concept, etc are called as postulates. While preparing financial statements, certain postulates are adhered to. The nature of these postulates is reflected in the nature of the financial statements.

4. Personal Judgments: Personal value judgments play an important role in deciding the nature of the financial statements. Different judgments are attached to different practices of recording transactions in the financial statements. For example, recording stock either at market value or at the cost requires value judgment.

Similarly, provision on various assets, method of charging depreciation, period related to writing off intangible assets depends on personal judgment. Thus, personal judgments determine the nature of the financial statements to a great extent.

Question 2.
Explain in detail about the significance of the financial statements.
Answer:
The importance of financial statements is mentioned below.
1. Provides Information: Financial statements provide information to various accounting users both internal as well as external users. It acts as a basic platform for different accounting users to derive information according to varying needs. For example, the financial statements on one hand help the shareholders and investors in assessing the viability and return on their investments, while on the other hand, the financial statements help the tax authorities in calculating the amount of tax liability of the company.

2. Cash Flow: Financial statements provide information about the cash flows of the company. The financial statements help the creditors and other investors in determining solvency of company.

3. Effectiveness of Management: The comparability feature of the financial statements enables management to undertake comparisons like inter-firm and intra-firm comparisons. This not only helps in assessing the viability and performance of the business but also helps in designing policies and drafting policies. The financial statements enhance the effectiveness and efficacy of the management.

4. Disclosure of Accounting Policies: F inancial statements provide information about the various policies, important changes in the methods, practices and process of accounting by the company. The disclosure of the accounting policies makes financial statements simple, true and enables different accounting users to understand without any ambiguity.

5. Policy Formation by Government: It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the government in the formulation of various policy measures and to address various economic problems like employment, poverty etc.

6. Attracts Investors and Potential Investors: They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business.

Question 3.
Explain the limitations of financial statements.
Answer:
The following are the limitations of financial statements.
1. Historical Data: The items recorded in the financial statements reflect their original cost i.e. the cost at which they were acquired. Consequently, financial statements do not reveal the current market price of the items. Further, financial statements fail to capture the inflation effects.

2. Ignorance of Qualitative Aspect: Financial statements does not reveal the qualitative aspects of a transaction. The qualitative aspects like colour, size and brand position in the market, employee’s qualities and capabilities are not disclosed by the financial statements.

3. Biased: Financial statements are based on the personal judgments regarding the use of methods of recording. For example, the choice of practice in the valuation of inventory, method of depreciation, amount of provisions, etc. are based on the personal value judgments and may differ from person to person. Thus, the financial statements reflect the personal value judgments of the concerned accountants and clerks.

4. Inter- firm Comparisons: Usually, it is difficult to compare the financial statements of two companies because of the difference in the methods and practices followed by their respective accountants.

5. Window dressing: The possibility of window dressing is probable. This might be because of the motive of the company to overstate or understate the assets and liabilities to attract more investors or to reduce taxable profit. For example, Satyam showed high fixed deposits in the Assets side of its Balance Sheet for better liquidity that gave false and misleading signals to the investors.

6. Difficulty in Forecasting: Since the financial statements is based on historical data, so they fail to reflect the effect of inflation. This drawback makes forecasting difficult.

Question 4.
Prepare the format of statement of profit and loss and explain its elements.
Answer:

Question 5.
Prepare the format of balance sheet and explain the various elements of balance sheet.
Answer:

Elements of Balance Sheet
1. Share Capital: It is the first item on the Liabilities side. It consists of the following items:

Authorised Capital
Issued Capital: Equity share and preference share.
Subscribed Capital less Call in Arrears add Forfeited Shares

2. Reserve and Surplus: As per the Schedule VI, it consists of the following items:

Capital Reserve
Capital Redemption Reserve
Security Premium
Other Reserve less Debit balance of P & L A/c
Surplus: Credit balance of P & L A/c
Proposed Additions
Sinking Fund

3. Secured Loans

Debentures
Loan and advances from bank etc.

4. Unsecured Loans

Fixed Deposits
Loan & Advances from subsidiaries

5. Fixed Assets: These are those assets that are used for more than one year, like:

Goodwill
Land
Building
Plant & Machinery
Patents, Trade Marks
Livestock
Vehicles, etc.

6. Current Assets: Assets that can be easily converted into cash or cash equivalents are termed as current assets. These are required to run day to day business activities; for example, cash, debtors, stock, etc.

7. Current Liabilities: Those liabilities that are incurred with an intention to be paid or are payable within a year; for example, bank overdraft creditors, bills payable, outstanding wages, short-term loans, etc are called current liabilities.

Question 6.
Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?
Answer:
The various parties that are directly or indirectly interested in the financial statements of a company can be categorized into the following two categories:
1. Internal parties
2. External parties

Internal Parties
The following are the various internal accounting users who are directly related to the company.
1. Owner: The owner/s is/are interested in the profit earned or loss incurred during an accounting period. They are interested in assessing the profitability and viability of the capital invested by them in the business.

1. Banks and other financial institutions: Banks provide finance in the form of loans and advances to various businesses. Thus, they need information regarding liquidity, creditworthiness, solvency and profitability to advance loans.

3. Investors and potential investors- They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business.

4. Tax authorities: They need information about sales, revenues, profit and taxable income in order to determine the levy various types of tax on the business.

5. Government: It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the government in the formulation of various policies measures and to address various economic problems like employment, poverty etc.

Question 7.
‘Financial statements reflect a combination of recorded facts, accounting conventions and personal judgments’ discuss.
Answer:
The financial statements are the end-products of the accounting process. The financial statements not only reveal the true financial position of the company but also help various accounting users in decision making and policy designing process. The nature of the financial statements depends upon the following aspects like recorded facts, conventions, concepts, and personal judgment

2. Conventions: The preparation of financial statements is based on some accounting conventions like, Prudence Convention, Materiality Convention, Matching Concept, etc. The adherence to such accounting conventions makes financial statements easy to understand, comparable and reflects the true and fair financial position of the company.

Question 8.
Explain the process of preparing income statement and balance sheet.
Answer:
The process of preparing Horizontal Form of Income Statement is explained below in a chronological order.\

Prepare a Trial Balance on the basis of the balances of various accounts in the ledger.
Record Opening Stock, Purchases, Manufacturing Expenses and other direct expenses on the debit side of Trading Account
Record Sales and Closing Stock on the credit side of the Trading Account.
Ascertain the balancing figure by totaling both the sides of the Trading Account. If the credit side exceeds the debit side, then the balancing figure is termed as Gross Profit, but if the debit side exceeds the credit side, then the balancing figure is termed as Gross Loss.
Carry forward the Gross Profit (Gross Loss) to the credit (debit) side of the Profit and Loss Account.
Record all current year’s operating and non-operating revenue expenditures with their relevant adjustments on the debit side of the Profit and Loss Account.
Record all current year’s operating and non operating revenue incomes with their relevant adjustments on the credit side of the Profit and Loss Account.
Ascertain the balancing figure by totaling both the sides of the Profit and Loss Account. If the credit exceeds the debit side, then the balancing figure is termed as Net Profit, but if the debit side exceeds the credit side, then the balancing figure is termed as Net Loss.

The process of preparing Horizontal Form of Balance Sheet is explained below in a chronological order.

Prepare a Trial Balance on the basis of the balances of various accounts in the ledger.
Record all the debit balances of Real and Personal Accounts on the left hand side (i.e. Assets side) of the Balance Sheet after making all adjustments for provision and other related items.
Record all the credit balances of Real and Personal Accounts on the right hand side (i.e. Liabilities side) of the Balance Sheet after making all adjustments for interest and outstanding items.
Add Net Profit to the Opening Capital and deduct Net Loss, if any from the Opening Capital
Ascertain the total of two sides, which must be equal.

2nd PUC Accountancy Financial Statements of a Company Numerical Questions and Answers

Question 1.
Show the following items in the balance sheet as per the provisions of the companies Act, 1956 in (Revised) Schedule VI:

Answer:

Question 2.
On 1 April, 2013, Jumbo Ltd., issued 10,000; 12% debentures of Rs. 100 each a discount of 20%, redeemable after 5 years. The company decided to write-off discount on issue of such debentures over the life time of the Debentures. Show the items in the balance sheet of the company immediately after the issue of these debentures.
Answer:

Question 3.
From the following information prepare the balance sheet of Gitanjali Ltd.
Inventories Rs. 14,00,000;
Equity Share Capital Rs. 20,00,000;
Plant and Machinery Rs. 10,00,000;
Preference Share Capital Rs. 12,00,000;
Debenture Redemption Reserve Rs. 6,00,000;
Outstanding Expenses Rs. 3,00,000;
Proposed Dividend Rs. 5,00,000;
Land and Building Rs. 20,00,000;
Current Investments Rs. 8,00,000;
Cash Equivalent Rs. 10,00,000;
Short term loan from Zaveri Ltd. (A Subsidiary Company of Twilight Ltd.) Rs. 4,00,000;
Public Deposits Rs. 12,00,000.
Answer:

Question 4.
From the following information prepare the balance sheet of Jam Ltd.
Inventories Rs. 7,00,000;
Equity Share Capital Rs. 16,00,000;
Plant and Machinery Rs. 8,00,000;
Preference Share Capital Rs. 6,00,000;
General Reserves Rs. 6,00,000;
Bills payable Rs. 1,50,000;
Provision for taxation Rs. 2,50,000;
Land and Building Rs. 16,00,000;
Non-current Investments Rs. 10,00,000;
Cash at Bank Rs. 5,00,000;
Creditors Rs. 2,00,000; 12%
Debentures Rs. 12,00,000.
Answer:

Question 5.
Prepare the balance sheet of Jvoti Ltd., as at March 31, 2013 from the following information. Building Rs. 10,00,000; Investments in the shares of Metro Tyers Ltd. Rs. 3,00,000; Stores & Spares Rs. 1,00,000; Discount on issue of 10%
debentures Rs. 10,000; Statement of Profit and Loss (Dr.) Rs. 90,000; 5,00,000 Equity Shares ef Rs. 20 each fully paid-up; Capital Redemption Reserve Rs. 1,00,000; 10% Debentures Rs. 3.00,000; Unpaid dividends Rs. 90,000; Share options outstanding account Rs. 10,000.
Answer:

Question 6.
Brinda Ltd., has furnished the following information:
(a) 25,000, 10% debentures of Rs.100 each;
(b) Bank Loan of Rs.10,00,000 repayable after 5 years;
(c) Interest on debentures is yet to be paid.
Show the above items in the balance sheet of the company as at March 31, 2013.
Answer:

Question 7.
Prepare a balance sheet of Black Swan Ltd., as at March 31, 2013 from the following information:

Answer:

2nd PUC Accountancy Financial Statements of a Company Additional Questions and Answers

Question 1.
Name two types of financial statements.
Answer:
Types of financial statements are:

Income statement or profit and loss account
Balance sheet or position statement.

Question 2.
Give the meaning of preliminary expenses.
Answer:
Preliminary expenses refer to expenses incurred prior to commencement of business or for expansion of business.

Question 3.
What do you mean by proposed dividend?
Answer:
Proposed divided is the divided proposed by boar of directors in their board meeting and will be paid to the shareholders on seeking the approval towards the same in the annual general meeting.

Question 4.
Give the meaning of interim dividend.
Answer:
Interim dividend is the dividend paid by the company in between two annual general meetings. It appears in trial balance and must be shown under note no. 4 ‘Dividend and appropriations’ in the income statement.

Question 5.
State any two merits of financial statements.
Answer:

Report on performance of the management function.
Basis for taxation policies.
Basis for granting of credit
Helps to Employees.

Question 6.
What is EPS?
Answer:
The portion of a company’s profit allocated to each share. Earnings per share serves as an indicator of a company’s profitability.
EPS = (Profits available to equity shareholders)÷No of shares

Question 7.
What are Tangible assets? Give an examples
Answer:
Assets that have a physical form are called as tangible assets. It includes machinery, land & building, etc.

Question 8.
What is corporate dividend Tax?
Answer:
It is the tax paid by companies on the dividend declared or distributed or paid to the shareholders, as per income tax act. Currently the tax rate is 16.995%.

Question 9.
What do you mean by fixed assets?
Answer:
It refers to assets which are meant for long term use and the volume of which do not change frequently. They include land and buildings, plant and machinery, furniture and fixtures, trademarks, Brand names etc. Fixed assets are usually shown at it’s written down value, ie, they are shown after deducting deprecation for the year.

Question 10.
What is Amortisation?
Answer:
Amortisation refers to writing of sunk cost, deferred revenue expenses and intangible assets which need not be replaced.

Question 11.
What are Intangible assets? Give an Examples.
Answer:
Assets which do not have physical form are known as intangible assets. It includes patents Goodwill, trademarks etc.

Question 12.
Write any two items which are shown in ‘Reserves & Surplus’.
Answer:
Items which are shown in Reserves & Surplus are:

Capital reserve.
Security premium.
General reserve.
Debenture redemption reserve.

Question 13.
What do you mean by Shareholders fund?
Answer:
Shareholders’ funds is the total value of investments made by the shareholders in a company.
It includes Share capital, Reserves & Surplus etc.

Question 14.
Write any two items which are shown in fixed assets.
Answer:
Items which are shown in fixed assets are:

Furniture and Fixtures
Plant and machinery
Land and buildings etc.

Question 15.
Write any two items which are shown in Miscellaneous Expenses and Losses.
Answer:
Items which are shown in miscellaneous and losses are:

Preliminary expenses
Discount on issue of shares or debentures
Under writing commission.