NCERT Solution for Class 12 Accountancy Part 2 Chapter 3 – Financial Statements of a Company

NCERT solution for class 12 Accountancy Part 2 Chapter 3 – Financial Statements of a Company

Short Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 3

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

(i) Loose Tools

(ii) Uncalled liability on partly paid-up shares

(iii) Debentures Redemption Reserve

(iv) Mastheads and publishing titles

(v) 10% debentures

(vi) Proposed dividends

(vii) Share forfeited account

(viii) Capital Redemption Reserve

(ix) Mining Rights

(x) Work-in-progress

Disclosure of various items in the Balance Sheet of a company is given below.

Long Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 3

1. Explain the nature of the financial statements.

The nature of financial statements are:

1. Financial statement record facts about the items at the original price at which they were purchased and doesn’t take into account the prevailing market price, and also do not include price fluctuations due to inflation.

2.The financial statements are created based on various accounting conventions such as Prudence convention, matching concept etc. and adhering to such conventions result in the statements being easy to understand, compare and reflect the fair and true financial situation of the organisation.

3. A financial statement is based on many concepts such as going concern concept, realisation concept, and money measurement concept. A financial statement adheres to all these concepts when financial statements are prepared.

4. In preparing financial statements personal judgements play an important role. For example when determining which method to charge depreciation and recording of stock at market value or cost price. All these are based on personal judgement.

2. Explain in detail about the significance of the financial statements.

Importance of financial statements:

1. It provides information to various users of accounting information which can be both internal and external. Users derive information as per their needs from such statements. For example it provides shareholders an idea about the viability of business while the same statement can be used by tax authorities to determine tax payable by organisation.

2. It helps management in comparing performance which can be on both inter and intra firm basis, it helps in determining the viability of business and also is helpful in framing of policies for business. It enhances the decision making capabilities of the management.

3. Financial statements help creditors and investors determine the state of solvency of a business which influences decision to offer loans and credit.

4. Financial statements help provide information on different policies, methods, best practices and accounting processes. Disclosing accounting policies simplifies financial statements and makes users of accounting information.

5. The government uses accounting information to determine various parameters of national growth like GDP, National Income, Industrial growth etc.

6. Investors need information on business solvency and profitability to offer further loans and invest in business and such information is obtained from financial statements.

3. Explain the limitations of financial statements.

Limitation are:

1. Financial statements reflect historical data i.e. it reflects the original price of the items or the price at which items were acquired. It fails to highlight the current price of items as per market and also inflated price due to rising inflation in the market. Hence data and information are historical in nature.

2. Financial statement do not portray the qualitative aspects of any transaction, the aspects such as size, colour, quality and the capabilities. Only quantitative data which can be expressed in monetary value are considered.

3. Financial statement are biased in nature as it is dependent on the personal judgement regarding the way transactions are recorded

4. It becomes difficult to assess the financial performance of one company with another due to differences in practices and methods adopted by each company.

5. It will be difficult to forecast as the statement is prepared based on historical data as it fails to capture inflation rates.

6. The company can manipulate the data to show better liquidity position which can give false impression to the investors leading to project cancellation

.

4. Prepare the format of statement of Profit and Loss and explain its items.

As per the REVISED SCHEDULE VI, the statement is as follows

Items of Profit and Loss Statement are:

1. Revenue from Operations: Revenue which is earned from the basic operating activities of an organisation. The source of revenue varies for financing and non-financing companies. For financing companies the revenue sources are: Interest, dividends and other types of financial services while for a non-financing company, it includes revenues earned from sales of products and services and other operating activities.

2. Other Incomes: Refers to incomes that are earned separately and not from any operating activity. These are the sources: Gain on sale of investments, income from interest, dividends as such.

3. Expenses: These include all the expenses such as cost of materials consumed, purchasing of stock in trade, also changes in inventories, stock in trade and work in progress.

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

COMPANY’S BALANCE SHEET- As per REVISED SCHEDULE VI

The elements of a balance sheet consists of:

A. Shareholder Funds

1. Share Capital consists of Authorised capital, Subscribed capital and Issued capital equity and preference share.

2. Reserves and Surplus consists of Capital Reserve, Debenture Redemption, Capital Redemption Reserve, Tax Reserve, General Reserve and Share warrants. Share warrants provide the holder to have ownership of equity shares of a company. When money is received from selling share warrants it is called as money received against warrants.

B. Share Application money pending allotment: It refers to application on which allotment is pending but amount is received. It takes place when a company issues equity shares publicly in order to raise funds.

C. Non-Current Liabilities: It consists of following items: long term borrowings, deferred tax liablities, long term provisions and other long term liabilities.

D. Current liabilities: It consists of following items: short term liabilities, trade payables, short term provisions

E. Assets which include Non-current and Current Assets. Non-current assets can be long term loans, plant, machinery, furniture, goodwill etc. while current assets are investment is shares and debentures, finished goods, raw materials, cash and cash equivalents, bank balance, cheques not encashed, short-term.

6. Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?

The various parties interested in financial statements of a company can be broadly classified as: 1. Internal and 2. External

Internal Users

1. Owners: The interest of an owner is towards knowing whether profit is earned or loss is incurred by the business. They are more interested in knowing about the viability of the capital that is invested in the business.

2. Management: Financial statements help management in devising new policies for growth of business and also provides management with the insights required for implementing various cost cutting measures.

3. Employees: They are interested in timely payments, bonuses and appraisals at the decided time. Financial statements help employees to learn about financial position of the organisation so that appropriate salary can be demanded.

External Users:

1. Banks and Financial Institutions: Such institutions provide credit so it is necessary to understand the liquidity, solvency and creditworthiness of the organisation for loan requirements in future.

2. Creditors: Businesses own money to creditors and hence it is important for them to have information about credit worthiness of the business.

3. Investors or potential investors: These are people who will provide funds by means of investment in business, hence the viability and solvency of an organisation will help in making investment decisions.

4. Tax Authorities: Information is required by them for determining the types of taxes that can be charged on the organisation.

5. Government: Government needs information to determine National Income, GDP and industrial growth. Financial statements help government in formulating various policies and address issues like poverty and unemployment.

6. Consumers: An organisation publishing financial statement makes consumers aware of the profits they are earning and the relative expenses that goes into providing services at affordable prices, thus helping in gaining a good name among consumers.

7. Public: Public knowledge of financial statements is about how the business is spending money for social welfare.

8. Researchers: Researchers use the financial statements to predict market trends and undertake research projects.

7. `Financial statements reflect a combination of recorded facts, accounting conventions and personal judgments’ discuss.

Financial statements reveal the true financial position of a company and help in formulating various decisions and policy making. The nature of financial statements are dependent on these aspects:

1. Financial statement record facts about the items at the original price at which they were purchased and doesn’t take into account the prevailing market price, and also do not include price fluctuations due to inflation.

2.The financial statements are created based on various accounting conventions such as Prudence convention, matching concept etc. and adhering to such conventions result in the statements being easy to understand, compare and reflect the fair and true financial situation of the organisation.

3. A financial statement is based on many concepts such as going concern concept, realisation concept, and money measurement concept. A financial statement adheres to all these concepts when financial statements are prepared.

4. In preparing financial statements personal judgements play an important role. For example when determining which method to charge depreciation and recording of stock at market value or cost price. All these are based on personal judgement.

8. Explain the process of preparing income statement and balance sheet.

Process of preparing income statement and balance sheet is as follows:

Income Statement:

1. Prepare a trial balance as per balance of different accounts in the ledger.

2. Determine revenue received from the business operation which is achieved by subtracting sales return from sales conducted.

3. Add incomes received other than revenue (such as cash discount, profit earned from sale of assets.

4. Deduct expenses from total revenue to determine profit before tax.

5. Deduct tax paid by company from the amount determined as profit before tax to arrive at Net Profit or Loss.

Balance Sheet:

Balance sheet consists of two parts: Equity and Liabilities and Assets.

1. The equity and liabilities contain shareholder funds, non-current liabilities, current liabilities and share application money pending allotment are recorded.

2. Assets are recorded next, it contains all non-current and current assets

3. Tally the total of both sides. It must be equal for the total to tally.

Numerical Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 3

1. Show the following items in the balance sheet as per the provisions of the Companies Act, 2013 in Schedule III:

The solution for this question is as follows:

2. On 1^st Aril, 2017, Jumbo Ltd. issued 10,000; 12% debentures of ₹. 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.

The solution for this question is as follows:

3. From the following information prepare the balance sheet of Gitanjali Ltd., as per the (Revised) Schedule VI:

Inventories ₹. 14,00,000; Equity Share Capital ₹. 20,00,000; Plant and Machinery ₹. 10,00,000; Preference Share Capital ₹. 12,00,000; Debenture Redemption Reserve ₹. 6,00,000; Outstanding Expenses ₹. 3,00,000; Proposed Dividend ₹. 5,00,000; Land and Building ₹. 20,00,000; Current Investments ₹. 8,00,000; Cash Equivalent ₹. 10,00,000; Short term loan from Zaveri Ltd. (A Subsidiary Company of Twilight Ltd.) ₹. 4, 00,000; Public Deposits ₹. 12, 00,000.

The solution for this question is as follows:

4. From the following information prepare the balance sheet of Jam Ltd. as per the (revised) Schedule VI:

Inventories ₹. 7, 00,000; Equity Share Capital ₹. 16, 00,000; Plant and Machinery ₹. 8, 00,000; Preference Share Capital ₹. 6, 00,000; General Reserve’s ₹. 6, 00,000; Bills payable ₹. 1, 50,000; Provision for taxation ₹. 2, 50,000; Land and Building ₹. 16, 00,000; Noncurrent Investments ₹. 10, 00,000; Cash at Bank ₹. 5, 00,000; Creditors ₹. 2, 00,000; 12% Debentures ₹. 12,00,000.

The solution for this question is as follows:

5. Prepare the balance sheet of Jyoti Ltd. as at March 31, 2017 from the following information:

Building ₹. 10,00,000; Investments in the shares of Metro Tyers ₹. 3,00,000; Stores & Spares ₹. 1,00,000; Discount on issue of 10% debentures ₹. 10,000; Statement of Profit and Loss (Dr.) ₹. 90,000; 5,00,000 Equity Shares of ₹. 20 each fully paid-up; Capital Redemption Reserve ₹. 1,00,000; 10% Debentures ₹. 3,00,000; Unpaid dividends ₹. 90,000; Share options outstanding account ₹. 10,000.

The solution for this question is as follows:

6. Brinda Ltd. has furnished the following information:

(a) 25,000, 10% debentures of ₹. 100 each;

(b) Bank Loan of ₹. 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, 2017.

The solution for this question is as follows:

7. Prepare a balance sheet of Black Swan Ltd., as at March 31, 2017 form the following information:

The solution for this question is as follows: