CBSE Class 12 Accountancy Part 2: Company Accounts & Financial Statement Analysis

What Does Accountancy Part 2 Cover?

NCERT Part 2 has two big units. Unit 1: Accounting for Companies covers Issue of Shares (at par, premium, or discount for sweat equity), forfeiture and reissue of shares, and Issue of Debentures (including debentures issued as collateral security and redemption). Unit 2: Analysis of Financial Statements covers the format of a company's Financial Statements under Schedule III, Comparative and Common-Size Statements, Accounting Ratios (liquidity, solvency, activity, profitability), and the Cash Flow Statement prepared by the indirect method. These topics test both conceptual clarity (why an entry is passed) and procedural accuracy (correct format, correct classification), so practising full journal entries and ratio calculations — not just reading theory — is essential for scoring well.

Key Terms You Must Know

Share Capital

The amount a company raises by issuing shares, shown under 'Shareholders' Funds' in the Balance Sheet; can be Authorised, Issued, Subscribed, Called-up and Paid-up capital.

Securities Premium

The amount charged over the face value of a share, kept in the Securities Premium Reserve and usable only for purposes listed in Section 52 of the Companies Act, 2013 (e.g., writing off preliminary expenses, issuing bonus shares).

Forfeiture of Shares

Cancellation of shares by the company because the shareholder failed to pay allotment or call money; the amount already received is transferred to the Share Forfeited Account.

Debenture

A debt instrument acknowledging a loan taken by the company, carrying a fixed rate of interest that must be paid regardless of profit.

Comparative Statement

A statement showing figures of two or more years side by side along with the absolute change and percentage change, helping to spot trends.

Common-Size Statement

A statement expressing each item as a percentage of a common base (Revenue from Operations for Statement of P&L, Total Assets for Balance Sheet), enabling comparison across companies of different sizes.

Accounting Ratio

A mathematical relationship between two related items of financial statements, used to judge liquidity, solvency, efficiency, or profitability.

Cash Flow Statement

A statement showing inflows and outflows of cash classified under Operating, Investing and Financing Activities during an accounting period, prepared as per AS-3.

Steps to Prepare Cash Flow Statement (Indirect Method)

1. Step 1: Start with Net Profit before Tax — Take Net Profit as per Statement of P&L and add back Provision for Tax, Proposed/Interim Dividend if already appropriated, to arrive at Net Profit before Tax and Extraordinary Items.
2. Step 2: Adjust for Non-Cash and Non-Operating Items — Add back Depreciation, Amortisation, Loss on Sale of Fixed Assets/Investments, Interest on Borrowings (financing item); subtract Profit on Sale of Fixed Assets/Investments and Interest/Dividend Received (investing item).
3. Step 3: Adjust for Working Capital Changes — Add decrease in Current Assets and increase in Current Liabilities; subtract increase in Current Assets and decrease in Current Liabilities to get Cash Generated from Operations.
4. Step 4: Deduct Tax Paid — Subtract actual Income Tax paid during the year to arrive at Net Cash Flow from Operating Activities.
5. Step 5: Compute Cash Flow from Investing Activities — List purchase/sale of fixed assets, investments, and interest/dividend received; net them to get Cash Flow from Investing Activities.
6. Step 6: Compute Cash Flow from Financing Activities and Total — List proceeds/repayment of shares, debentures, loans, and dividend/interest paid; net them, then add all three activity totals to the Opening Cash & Cash Equivalents to verify it equals Closing Cash & Cash Equivalents.

Fully Worked Examples

• Example 1 — Forfeiture and Reissue of Shares: X Ltd issued 10,000 equity shares of ₹10 each at a premium of ₹2, payable ₹3 on application, ₹5 on allotment (including premium ₹2), and ₹4 on first & final call. Mr. A, holding 200 shares, paid application money but failed to pay allotment and call; his shares were forfeited. Later 150 of these were reissued at ₹8 per share, fully paid.
  Step 1 (Forfeiture entry): Share Capital A/c Dr 2,000 (200×₹10); Securities Premium A/c Dr 400 (200×₹2, since premium was never received); To Share Allotment A/c 1,000 (200×₹5); To Share First & Final Call A/c 800 (200×₹4); To Share Forfeited A/c 600 (200×₹3, application money retained).
  Step 2 (Reissue entry): Bank A/c Dr 1,200 (150×₹8); Share Forfeited A/c Dr 300 (150×₹2, discount on reissue); To Share Capital A/c 1,500 (150×₹10).
  Step 3 (Transfer to Capital Reserve): Forfeited amount belonging to 150 reissued shares = (600/200)×150 = ₹450. Discount allowed on reissue = ₹300. Gain = 450−300 = ₹150. Entry: Share Forfeited A/c Dr 150; To Capital Reserve A/c 150.

• Example 2 — Liquidity Ratios: Current Assets = ₹1,80,000 (including Inventory ₹40,000 and Prepaid Expenses ₹10,000); Current Liabilities = ₹90,000.
  Step 1: Current Ratio = Current Assets ÷ Current Liabilities = 1,80,000 ÷ 90,000 = 2:1.
  Step 2: Quick Assets = Current Assets − Inventory − Prepaid Expenses = 1,80,000 − 40,000 − 10,000 = 1,30,000.
  Step 3: Quick Ratio = Quick Assets ÷ Current Liabilities = 1,30,000 ÷ 90,000 = 1.44:1 (approx). A Current Ratio near 2:1 and Quick Ratio near 1:1 is generally considered a healthy sign of short-term solvency.

• Example 3 — Cash Flow from Operating Activities: Net Profit before Tax ₹50,000; Depreciation ₹10,000; Loss on Sale of Machinery ₹2,000; Profit on Sale of Investment ₹3,000; Decrease in Debtors ₹5,000; Increase in Creditors ₹4,000; Increase in Stock ₹6,000; Tax Paid ₹8,000.
  Step 1: Operating profit before working capital changes = 50,000 + 10,000 + 2,000 − 3,000 = 59,000.
  Step 2: Adjust working capital: +5,000 (debtors decrease) + 4,000 (creditors increase) − 6,000 (stock increase) = +3,000. Cash generated from operations = 59,000 + 3,000 = 62,000.
  Step 3: Less Tax Paid 8,000. Net Cash Flow from Operating Activities = ₹54,000.

Common Mistakes Students Make

• Forgetting to debit Securities Premium A/c during forfeiture when the premium amount was never actually received from the defaulting shareholder.
• Confusing 'discount on reissue' with the amount transferred to Capital Reserve — only the balance left in Share Forfeited A/c after adjusting the discount goes to Capital Reserve, not the full forfeited amount.
• Including Proposed Dividend or Interest on Debentures paid as an operating item — Interest and Dividend paid belong to Financing Activities, while Interest/Dividend received usually belongs to Investing Activities.
• Treating Cash Equivalents like Marketable Securities as part of Investing Activities instead of excluding them from Current Assets in the Cash Flow Statement.
• Calculating Quick Ratio without subtracting Prepaid Expenses along with Inventory from Current Assets.
• Writing ratios without the correct unit or format (e.g., writing '2' instead of '2:1' for Current Ratio) — CBSE deducts marks for missing ratio notation.

Board Exam Tip

In numerical questions on Issue/Forfeiture of Shares, always show working notes calculating the amount due, amount received, and amount forfeited per share separately — CBSE awards step marks even if the final journal entry has a small error. For Cash Flow Statement questions, always prepare the answer in the exact AS-3 format with three separate sections (Operating, Investing, Financing) and reconcile Opening and Closing Cash & Cash Equivalents at the end; skipping this reconciliation line costs marks even when your figures are correct.

Practice Questions with Solutions

• Q: A company issued 5,000 equity shares of ₹10 each at a premium of ₹3 per share, payable ₹5 on application (including ₹1 premium), ₹4 on allotment (including ₹2 premium), and ₹4 on first & final call. All money was duly received. Pass journal entries for issue of shares.
  A: Step 1: On Application — Bank A/c Dr 25,000 (5,000×5); To Share Application A/c 25,000.
  Step 2: Application money transferred — Share Application A/c Dr 25,000; To Share Capital A/c 20,000 (5,000×4, face value portion); To Securities Premium A/c 5,000 (5,000×1).
  Step 3: On Allotment due — Share Allotment A/c Dr 20,000 (5,000×4); To Share Capital A/c 10,000 (5,000×2); To Securities Premium A/c 10,000 (5,000×2).
  Step 4: On receipt of allotment money — Bank A/c Dr 20,000; To Share Allotment A/c 20,000.
  Step 5: On call due and received — Share First & Final Call A/c Dr 20,000 (5,000×4); To Share Capital A/c 20,000; then Bank A/c Dr 20,000; To Share First & Final Call A/c 20,000.
  Final answer: Total Share Capital raised = ₹50,000; Total Securities Premium = ₹15,000, all entries passed as above.

• Q: Y Ltd forfeited 100 shares of ₹10 each, ₹8 called up, on which the shareholder had paid only application money of ₹3 per share. These shares were later reissued at ₹7 per share as ₹8 paid-up. Pass journal entries for forfeiture, reissue and transfer to Capital Reserve.
  A: Step 1: Forfeiture entry — Share Capital A/c Dr 800 (100×8 called up); To Share Allotment/Call A/c 500 (100×5, unpaid amount); To Share Forfeited A/c 300 (100×3, received).
  Step 2: Reissue entry — Bank A/c Dr 700 (100×7); Share Forfeited A/c Dr 100 (100×1, discount = 8 paid-up value − 7 received); To Share Capital A/c 800 (100×8).
  Step 3: Transfer to Capital Reserve — Balance in Share Forfeited A/c = 300 − 100 = 200; Entry: Share Forfeited A/c Dr 200; To Capital Reserve A/c 200.
  Final answer: Capital Reserve credited with ₹200; all 100 forfeited shares fully reissued.

• Q: From the following figures calculate Debt-Equity Ratio and Proprietary Ratio: Equity Share Capital ₹5,00,000; Reserves & Surplus ₹1,00,000; Long-term Borrowings ₹3,00,000; Total Assets ₹10,00,000.
  A: Step 1: Shareholders' Funds = Equity Share Capital + Reserves & Surplus = 5,00,000 + 1,00,000 = 6,00,000.
  Step 2: Debt-Equity Ratio = Long-term Debt ÷ Shareholders' Funds = 3,00,000 ÷ 6,00,000 = 0.5:1.
  Step 3: Proprietary Ratio = Shareholders' Funds ÷ Total Assets = 6,00,000 ÷ 10,00,000 = 0.6:1.
  Final answer: Debt-Equity Ratio = 0.5:1; Proprietary Ratio = 0.6:1, showing the company relies more on owners' funds than borrowed funds, which is generally a safer capital structure.

• Q: Classify the following items under the correct heads of Cash Flow Statement: (a) Purchase of Machinery, (b) Issue of Debentures, (c) Depreciation on Fixed Assets, (d) Dividend Paid, (e) Sale of Investments, (f) Interest Received on Investments.
  A: Step 1: Purchase of Machinery — Investing Activity (cash outflow, acquisition of fixed asset).
  Step 2: Issue of Debentures — Financing Activity (cash inflow, raising long-term borrowed funds).
  Step 3: Depreciation on Fixed Assets — Added back to Net Profit under Operating Activities (non-cash expense, not a separate cash flow line).
  Step 4: Dividend Paid — Financing Activity (cash outflow to shareholders).
  Step 5: Sale of Investments — Investing Activity (cash inflow from disposal of investment).
  Step 6: Interest Received on Investments — Investing Activity (cash inflow from investment income).
  Final answer: (a) Investing, (b) Financing, (c) Added back in Operating, (d) Financing, (e) Investing, (f) Investing.

• Q: Prepare a Comparative Statement of Profit & Loss from the following: Revenue from Operations 2022 ₹8,00,000, 2023 ₹10,00,000; Total Expenses 2022 ₹6,00,000, 2023 ₹7,00,000 (ignore tax).
  A: Step 1: Absolute Change in Revenue = 10,00,000 − 8,00,000 = 2,00,000; % Change = (2,00,000 ÷ 8,00,000) × 100 = 25%.
  Step 2: Absolute Change in Expenses = 7,00,000 − 6,00,000 = 1,00,000; % Change = (1,00,000 ÷ 6,00,000) × 100 = 16.67%.
  Step 3: Net Profit 2022 = 8,00,000 − 6,00,000 = 2,00,000; Net Profit 2023 = 10,00,000 − 7,00,000 = 3,00,000.
  Step 4: Absolute Change in Net Profit = 3,00,000 − 2,00,000 = 1,00,000; % Change = (1,00,000 ÷ 2,00,000) × 100 = 50%.
  Final answer: Revenue grew 25%, Expenses grew 16.67%, and Net Profit grew 50% — showing improved operating efficiency in 2023 compared to 2022.

Frequently Asked Questions