Chapter financial-statements-of-a-company: Financial Statements of a Company Long Questions | accountancy Class 12 CBSE

Chapter financial-statements-of-a-company: Financial Statements of a Company Long Questions | accountancy Class 12 CBSE | ByteNotes.in

Long Answer

Medium difficulty • Structured explanation

Medium

Question 1

Long Form

Explain the nature of financial statements by discussing the four elements that constitute them.

Recorded Facts: Financial statements are prepared on historical cost basis. Figures of cash, trade receivables, and fixed assets are taken from accounting books; assets purchased at different times are shown at original cost, not market value.
Accounting Conventions: Conventions such as valuing inventory at cost or market price whichever is lower, valuing assets at cost less depreciation, and the convention of materiality for small items make statements comparable and realistic.
Postulates: Basic assumptions like going concern (enterprise exists long-term, so assets are at historical cost), money measurement (money's value assumed constant), and realisation postulate (revenue recognised at sale, not cash receipt) underpin the statements.
Personal Judgements: Depreciation on fixed assets, provisions for doubtful debts, and inventory valuation involve estimates and personal opinion guided by the convention of conservatism to prevent overstatement.
Overall, financial statements are summarised reports combining recorded facts, accounting concepts, conventions, policies, standards, and legal requirements — not purely objective documents.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 2

Long Form

Analyse the significance and uses of financial statements for different categories of users.

Stewardship and Management Evaluation: Financial statements report management performance to shareholders, reveal gaps between management performance and ownership expectations, and supply information useful for judging management's ability to utilise business resources effectively.
Investors and Creditors: Prospective investors assess long-term and short-term solvency and profitability; existing shareholders evaluate the safety and return on their investment and decide on continuation or discontinuation; creditors and bankers make credit decisions based on financial performance.
Government and Fiscal Policy: The government relies on financial statements for formulating industrial, taxation, and other economic policies; they provide the basic input for fiscal decisions affecting corporate undertakings.
Trade Associations and Stock Exchanges: Trade associations analyse statements to provide service and protection to members, develop standard ratios, and design uniform systems of accounts; stock exchanges use them to monitor transparency and protect investor interests.
Social Reporting: Financial statements also report activities of the business organisation affecting the society, measuring and describing impacts that are important in the social environment of the enterprise.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 3

Long Form

Critically examine the limitations of financial statements and explain why they must be analysed carefully before use in decision-making.

Historical Cost Basis: Statements are prepared on historical cost; with changing purchasing power, values of assets and liabilities do not reflect current market situation, making them potentially misleading for economic decisions.
Asset Realisation and Bias: Assets shown in the balance sheet may not realise stated values under forced liquidation as they represent unamortised cost; bias arises because statements are based on accounting conventions and personal judgements, making financial position depicted potentially unrealistic.
Aggregate and Incomplete Information: Statements provide only aggregate data, not detailed information; the balance sheet omits vital information such as loss of markets or cessation of agreements that have a vital bearing on the enterprise.
Absence of Qualitative Data: Financial statements contain only monetary information and cannot capture qualitative factors like labour relations, industrial climate, quality of work, and employees' satisfaction.
Interim Nature: The Statement of Profit and Loss covers only a specified period and does not indicate future earning capacity; the balance sheet reflects financial position only at a point in time and does not depict likely changes in the future.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 4

Long Form

Explain the important features of presentation of financial statements as prescribed by Schedule III of the Companies Act 2013.

Schedule III applies to all Indian companies but does NOT apply to insurance companies, banking companies, or companies for which a form of balance sheet or income statement is specified under any other Act.
Accounting Standards shall prevail over Schedule III; terms carry meanings as defined by applicable accounting standards; vertical format for presentation is prescribed; current and non-current bifurcation of assets and liabilities is mandatory.
Disclosure requirements include: rounding off of figures is mandatory based on turnover size; debit balance in statement of profit and loss to be disclosed as negative figure under 'Surplus'; mandatory disclosure for share application money pending allotment.
Terminology changes include replacement of 'Sundry Debtors' with 'Trade Receivables' and 'Sundry Creditors' with 'Trade Payables'; a balance must be maintained between excessive details and omitting important information.
Disclosures on the face of financial statements or in notes are essential and mandatory; both current period and previous period figures must be shown in a comparative column format.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 5

Long Form

Compare the treatment of current and non-current items on the balance sheet with reference to at least five different asset or liability categories.

Inventories: All inventories are always classified as current assets regardless of the period of expected realisation — no non-current category exists for inventories.
Fixed Assets: Both tangible and intangible fixed assets are always non-current assets; even if the useful life of an asset is less than 12 months, it remains non-current.
Investments: Investments expected to be realised within twelve months are current investments under current assets; all others are non-current investments under non-current assets.
Trade Receivables: Those realisable within twelve months are current assets; those realisable beyond twelve months are classified as 'Other Non-current Assets' under non-current assets.
Deferred Tax Assets/Liabilities: Always non-current as per Schedule III; Provisions settled within 12 months are short-term (current), while others are long-term provisions (non-current).

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 6

Long Form

Explain all the items appearing in the 'Expenses' section of the Statement of Profit and Loss as per Schedule III.

Cost of Materials Consumed: Applies to manufacturing companies; consists of raw materials and other materials consumed in manufacturing goods (not applicable to purely trading companies).
Purchases of Stock-in-Trade and Changes in Inventories: Purchases of stock-in-trade means purchases of goods for trading; changes in inventories of finished goods, WIP, and stock-in-trade represent the difference between opening and closing inventory.
Employee Benefit Expenses: All expenses incurred on employees including salary, wages, leave encashment, and staff welfare; may be further categorised into direct and indirect expenses.
Finance Cost: Expenses towards interest charges on borrowings during the year; only interest cost is included here; other financial expenses like bank charges are shown under 'Other Expenses'.
Depreciation and Amortisation, and Other Expenses: Depreciation is the diminution in value of tangible fixed assets; amortisation is writing off intangible assets; other expenses is a residual category for all expenses not falling in the above categories, further categorised as direct, indirect, or non-operating.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 7

Long Form

Discuss the six objectives of financial statements as specified in the chapter and explain their relevance to different stakeholders.

Providing information about economic resources and obligations: Financial statements are prepared to give adequate, reliable, and periodical information about economic resources and obligations to investors and external parties who have limited ability to obtain information independently.
Information about earning capacity and cash flows: They provide useful information to predict, compare, and evaluate a firm's earning capacity and to help investors and creditors assess potential cash flows in terms of amount, timing, and uncertainties.
Judging management effectiveness and societal activities: They supply information useful for judging management's ability to utilise resources effectively; they also report business activities affecting society that can be determined, described, or measured.
Disclosing accounting policies: Financial statements must provide significant policies and concepts followed in accounting and disclose any changes made during the year, enabling users to better understand and interpret the statements.
Overall objective of decision-making: The primary objective is to assist users in decision-making; they provide a basis for investment decisions, credit decisions, fiscal policy formulation, and legal and regulatory compliance assessments.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 8

Long Form

Describe the disclosure requirements for Share Capital under Schedule III in the Notes to Accounts of a company.

For each class of share capital, the following must be disclosed: number and amount of shares authorised, number of shares issued, subscribed fully paid and subscribed but not fully paid, par value per share, and reconciliation of shares outstanding at the beginning and end of the accounting period.
Rights, preferences, and restrictions attaching to each class of shares must be disclosed, including restrictions on distribution of dividends and repayment of capital, along with aggregate number of shares held by the holding company, its ultimate holding company, and their subsidiaries.
Shares reserved for issue under options and contracts/commitments for the sale of shares, shares held by shareholders holding more than 5% (specifying number held), and calls unpaid (aggregate) and forfeited shares (amount originally paid up) must all be disclosed.
For a period of five years immediately preceding the balance sheet date, disclosures must include: aggregate number and class of shares allotted as fully paid pursuant to contracts without cash payment, shares allotted as bonus shares, and shares bought back.
Terms of any securities convertible into equity/preference shares along with the earliest date of conversion in descending order must also be disclosed, ensuring transparency about the company's capital structure and future dilution.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 9

Long Form

Examine the structure of the balance sheet under Schedule III by explaining the Equity and Liabilities side in detail.

Shareholders' Funds: Comprises Share Capital (authorised, issued, subscribed), Reserves and Surplus (capital reserve, securities premium, debenture redemption reserve, revaluation reserve, surplus/balance in P&L), and Money Received against Share Warrants.
Share Application Money Pending Allotment: Amount received for shares not yet allotted, which is non-refundable and does not exceed issued capital; disclosed as a separate item between shareholders' funds and non-current liabilities.
Non-current Liabilities: Includes long-term borrowings (loans repayable after 12 months/operating cycle), deferred tax liabilities (always non-current), other long-term liabilities (e.g., trade payables beyond 12 months), and long-term provisions.
Current Liabilities: Comprises short-term borrowings (repayable within 12 months), trade payables (to be settled within 12 months/operating cycle), other current liabilities (including current maturities of long-term debt, unpaid dividends), and short-term provisions.
The total of Equity and Liabilities must equal the total of Assets, and all items must be shown with their note numbers and comparative figures for the previous reporting period.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 10

Long Form

Describe the statement of profit and loss as a performance document by explaining its structure from revenue to earnings per share.

Revenue Section: The statement starts with Revenue from Operations (sales of products/services, other operating revenues) added to Other Income (interest, dividends, net gains on investments, non-operating income) to arrive at Total Revenue.
Expenses Section: Total Expenses include cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefit expenses, finance costs, depreciation and amortisation, and other expenses.
Profit Computation: Profit before Exceptional Items and Tax is computed as Total Revenue minus Total Expenses; after deducting/adding exceptional items, Profit before Extraordinary Items and Tax is derived; extraordinary items are then adjusted to give Profit before Tax.
Tax and Discontinuing Operations: Tax expense (current tax and deferred tax) is deducted from Profit before Tax to get Profit/Loss from Continuing Operations; Profit/Loss from Discontinuing Operations (after tax) is separately disclosed.
Final Profit and EPS: Profit/Loss for the Period is the sum of continuing and discontinuing operations results; Earnings per Equity Share (Basic and Diluted) is the last item in the statement, indicating return per share.

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Chapter financial-statements-of-a-company: Financial Statements of a Company | Long Questions

Explain the nature of financial statements by discussing the four elements that constitute them.

Analyse the significance and uses of financial statements for different categories of users.

Critically examine the limitations of financial statements and explain why they must be analysed carefully before use in decision-making.

Explain the important features of presentation of financial statements as prescribed by Schedule III of the Companies Act 2013.

Compare the treatment of current and non-current items on the balance sheet with reference to at least five different asset or liability categories.

Explain all the items appearing in the 'Expenses' section of the Statement of Profit and Loss as per Schedule III.

Discuss the six objectives of financial statements as specified in the chapter and explain their relevance to different stakeholders.

Describe the disclosure requirements for Share Capital under Schedule III in the Notes to Accounts of a company.

Examine the structure of the balance sheet under Schedule III by explaining the Equity and Liabilities side in detail.

Describe the statement of profit and loss as a performance document by explaining its structure from revenue to earnings per share.

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