Financial Statements of a Company (Part 2, Chapter 3)

Meaning and Objectives of Financial Statements

Financial statements are the final, summarized output of the accounting process. They are formal records that present a company's financial activities and position in a structured, easy-to-understand manner. According to the Companies Act, 2013, a complete set of financial statements for a company includes:

1. A Balance Sheet as at the end of the financial year.
2. A Statement of Profit and Loss for the financial year.
3. A Cash Flow Statement for the financial year.
4. A Statement of Changes in Equity (if applicable).
5. Explanatory Notes to Accounts.

The primary objectives of preparing these statements are:

• To present a 'true and fair' view: This is the core principle. The statements must accurately reflect the company's financial performance (profit or loss) and financial position (assets and liabilities).
• To provide information for decision-making: Various stakeholders like investors, creditors, employees, and government agencies use this information to make informed economic decisions.
• To assess management's effectiveness: The statements show how efficiently and effectively the management has used the company's resources (stewardship).

Key Components as per Schedule III

Balance Sheet (Part I of Schedule III)

The Balance Sheet is a statement that shows the company's financial position at a specific point in time. It lists the company's Equity, Liabilities, and Assets. Unlike the T-shaped format for sole traders, companies must use a vertical format, which lists Equity and Liabilities first, followed by Assets.

Statement of Profit and Loss (Part II of Schedule III)

This statement, also in a prescribed vertical format, summarises the company's operational performance over the entire financial year. It starts with Revenue from Operations, adds Other Income, and then deducts various expenses (like Cost of Materials Consumed, Employee Benefit Expenses, Finance Costs, Depreciation, etc.) to arrive at the Net Profit or Loss for the period.

Notes to Accounts

These are an integral and legally required part of the financial statements. They provide supplementary information and detailed breakdowns of the figures presented in the Balance Sheet and Statement of Profit and Loss. For example, the detailed calculation of 'Reserves and Surplus' or a list of all 'Property, Plant and Equipment' is shown here.

Understanding the Balance Sheet Format (Schedule III, Part I)

The format of the Balance Sheet is strictly defined and must be memorized. It is presented vertically with two main sections: I. Equity and Liabilities and II. Assets. Each section has major heads and sub-heads.

I. EQUITY AND LIABILITIES

• (1) Shareholder's Funds: This is the owner's stake.
• (a) Share Capital (Equity and Preference shares)
• (b) Reserves and Surplus (General Reserve, Securities Premium, Retained Earnings)
• (2) Non-Current Liabilities: Obligations payable after more than 12 months.
• (a) Long-term borrowings (Debentures, Bank Loans)
• (b) Long-term provisions (Provision for employee benefits)
• (3) Current Liabilities: Obligations due within 12 months.
• (a) Short-term borrowings (Bank Overdraft)
• (b) Trade Payables (Creditors, Bills Payable)
• (c) Other Current Liabilities (Interest accrued but not due on borrowings)
• (d) Short-term provisions (Provision for Tax)

II. ASSETS

• (1) Non-Current Assets: Assets held for long-term use, not for resale.
• (a) Property, Plant and Equipment and Intangible assets (Land, Machinery, Goodwill, Patents)
• (b) Non-current investments
• (c) Long-term loans and advances
• (2) Current Assets: Assets expected to be converted into cash within 12 months.
• (a) Inventories (Stock-in-trade, Raw materials)
• (b) Trade Receivables (Debtors, Bills Receivable)
• (c) Cash and cash equivalents (Cash in hand, Bank balance)
• (d) Short-term loans and advances

Worked Example: Preparing a Balance Sheet

• Problem: From the following balances of Zee Ltd. as at 31st March, 2023, prepare the Balance Sheet as per Schedule III of the Companies Act, 2013. Share Capital: ₹15,00,000; General Reserve: ₹3,00,000; 12% Debentures: ₹5,00,000; Trade Payables: ₹2,50,000; Property, Plant and Equipment: ₹12,00,000; Intangible Assets (Goodwill): ₹2,00,000; Non-current Investments: ₹3,00,000; Inventories: ₹5,50,000; Cash and Cash Equivalents: ₹3,00,000. Solution: Balance Sheet of Zee Ltd. as at 31st March, 2023 | Particulars | Note No. | Amount (₹) | | :--- | :--- | ---: | | I. EQUITY AND LIABILITIES | | | | (1) Shareholder's Funds | | | | (a) Share Capital | | 15,00,000 | | (b) Reserves and Surplus | | 3,00,000 | | (2) Non-Current Liabilities | | | | (a) Long-term borrowings (12% Debentures) | | 5,00,000 | | (3) Current Liabilities | | | | (a) Trade Payables | | 2,50,000 | | Total Equity and Liabilities | | 25,50,000 | | II. ASSETS | | | | (1) Non-Current Assets | | | | (a) Property, Plant and Equipment and Intangible assets | 1 | 14,00,000 | | (b) Non-current investments | | 3,00,000 | | (2) Current Assets | | | | (a) Inventories | | 5,50,000 | | (b) Cash and cash equivalents | | 3,00,000 | | Total Assets | | 25,50,000 | Notes to Accounts | Note No. | Particulars | Amount (₹) | | :--- | :--- | ---: | | 1 | Property, Plant and Equipment and Intangible assets | | | | Property, Plant and Equipment | 12,00,000 | | | Intangible Assets (Goodwill) | 2,00,000 | | | Total | 14,00,000 |

Exam Tips and Common Mistakes

Key Exam Tips:

• Memorize the Format: The major heads and sub-heads of the Balance Sheet and Statement of P&L are non-negotiable. Use mnemonics or repeated practice to commit them to memory.
• Notes to Accounts are Crucial: Always show workings in 'Notes to Accounts' for items like Reserves and Surplus, Long-term Borrowings, Property, Plant and Equipment and Intangible assets, etc. They carry separate marks.
• Current vs. Non-Current: Be very clear about the 12-month rule (operating cycle) for classifying assets and liabilities as current or non-current. For example, a loan payable in 15 months is a Non-Current Liability, while one payable in 10 months is a Current Liability.

Common Mistakes to Avoid:

• Incorrect Classification: Placing an item under the wrong head or sub-head is the most common error. For example, putting 'Loose Tools' under 'Property, Plant and Equipment' instead of 'Inventories'.
• Forgetting Aggregations: Forgetting to club items like Creditors and Bills Payable under 'Trade Payables' or Debtors and Bills Receivable under 'Trade Receivables'.
• Ignoring 'Net' figures: For items like 'Deferred Tax Liabilities (Net)' or 'Net Profit after Tax', ensure you are using the final calculated figure after all adjustments.

Practice Questions with Solutions

• Q: Under what major heads and sub-heads will the following items be presented in the Balance Sheet of a company as per Schedule III? (i) Unclaimed Dividend (ii) Provision for Tax (iii) Patents (iv) Calls-in-Arrears A: Step 1: Identify the nature of each item. - Unclaimed Dividend is a liability the company owes to shareholders. - Provision for Tax is an amount set aside for future tax liability. - Patents are an intangible asset. - Calls-in-Arrears is a deduction from capital. Step 2: Place them under the correct heads and sub-heads as per Schedule III. Final answer: (i) Unclaimed Dividend: Major Head: Current Liabilities, Sub-head: Other Current Liabilities. (ii) Provision for Tax: Major Head: Current Liabilities, Sub-head: Short-term Provisions. (iii) Patents: Major Head: Non-Current Assets, Sub-head: Property, Plant and Equipment and Intangible assets (under Intangible assets). (iv) Calls-in-Arrears: Shown as a deduction from 'Subscribed Capital' under the Major Head: Shareholder's Funds and Sub-head: Share Capital (in Notes to Accounts).
• Q: Calculate the amount of 'Shareholder's Funds' from the following information: Equity Share Capital: ₹10,00,000; General Reserve: ₹2,50,000; Securities Premium: ₹1,00,000; Statement of P&L (Dr. Balance): ₹50,000; 10% Debentures: ₹4,00,000. A: Step 1: Identify the components of 'Shareholder's Funds'. Shareholder's Funds = Share Capital + Reserves and Surplus. Step 2: Identify the components of 'Reserves and Surplus'. This includes General Reserve, Securities Premium, and the balance of the Statement of P&L. A Debit (Dr.) balance in the P&L statement represents a loss and must be deducted. Step 3: Calculate 'Reserves and Surplus'. Reserves and Surplus = General Reserve + Securities Premium - Statement of P&L (Dr. Balance) = ₹2,50,000 + ₹1,00,000 - ₹50,000 = ₹3,00,000. Step 4: Calculate total 'Shareholder's Funds'. Shareholder's Funds = Equity Share Capital + Reserves and Surplus = ₹10,00,000 + ₹3,00,000 = ₹13,00,000. (Note: Debentures are a Non-Current Liability and are not part of Shareholder's Funds). Final answer: Shareholder's Funds = ₹13,00,000.
• Q: Classify the following items as either Current Asset or Non-Current Asset: (i) Cheques in Hand (ii) Loose Tools (iii) Investment in Property (iv) Debtors expected to pay after 15 months A: Step 1: Apply the 12-month rule (or operating cycle) to each item. Assets expected to be realized within 12 months are Current; others are Non-Current. Step 2: Classify each item based on this rule. - Cheques in Hand are highly liquid and part of Cash and Cash Equivalents, hence a Current Asset. - Loose Tools, as per Schedule III, are classified under Inventories, which is a Current Asset. - Investment in Property is held for long-term capital appreciation or rental yields, hence a Non-Current Asset. - Debtors are usually Current Assets, but since these are expected to pay after 15 months, they become a Non-Current Asset (specifically, 'Other Non-Current Assets'). Final answer: (i) Cheques in Hand: Current Asset (ii) Loose Tools: Current Asset (iii) Investment in Property: Non-Current Asset (iv) Debtors expected to pay after 15 months: Non-Current Asset
• Q: A company has an operating cycle of 10 months. It has Trade Receivables amounting to ₹2,00,000, out of which ₹50,000 are expected to be realised in 11 months. How will this be shown in the Balance Sheet? A: Step 1: Understand the rule for classification. An asset is 'Current' if it is expected to be realised within the company's operating cycle OR within 12 months from the reporting date, whichever is longer. Step 2: In this case, the operating cycle is 10 months and the standard period is 12 months. We must use the longer period, which is 12 months. Step 3: Analyse the Trade Receivables. The portion to be realised in 11 months (which is within the 12-month period) is a Current Asset. The remaining portion (₹2,00,000 - ₹50,000 = ₹1,50,000) is assumed to be realisable within the operating cycle (10 months) and is also a Current Asset. Final answer: The entire amount of Trade Receivables, ₹2,00,000, will be shown under the head 'Current Assets' and sub-head 'Trade Receivables'.

Frequently Asked Questions