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

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

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Question 1

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What are financial statements? Name the statements included under this term as per the chapter.

Financial statements are basic and formal annual reports through which corporate management communicates financial information to owners and external parties such as investors, tax authorities, and employees.
They include three statements: the balance sheet (position statement) as at the end of the accounting period, the statement of profit and loss, and the cash flow statement.
These are the end products of the accounting process and serve as sources of information for drawing conclusions about a company's profitability and financial position.

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Question 2

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What does the 'going concern postulate' mean and how does it affect the preparation of financial statements?

The going concern postulate assumes that the enterprise will continue to exist and operate for a longer period of time, without any intention of liquidation.
Because of this postulate, assets are recorded and presented at their historical cost rather than at current market or liquidation value in the balance sheet.
This postulate is one of the basic assumptions underlying the preparation of financial statements, and its use means that financial statements do not show the current financial condition of a concern.

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Question 3

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Explain the role of personal judgements in the preparation of financial statements.

Depreciation is provided by estimating the useful economic life of fixed assets, which requires a personal judgement by the accountant or management.
Provisions for doubtful debts are made on estimates and judgements about the likelihood of recovery from debtors, introducing subjectivity into the figures.
Personal judgements are guided by the convention of conservatism, aiming to avoid overstatement of assets, liabilities, income, and expenditure in the financial statements.

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Question 4

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State any two specific objectives of preparing financial statements.

Financial statements are prepared to provide adequate, reliable, and periodical information about economic resources and obligations of a business to investors and other external parties.
They are prepared to provide useful financial information that can be used to predict, compare, and evaluate the business firm's earning capacity.
They also aim to provide information useful to investors and creditors for predicting, comparing, and evaluating potential cash flows in terms of amount, timing, and related uncertainties.

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Question 5

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Under which head and sub-head are 'Trade Receivables' and 'Trade Payables' shown in the balance sheet as per Schedule III?

Trade Receivables are shown under the major head 'Assets', specifically under 'Current Assets' as a sub-head, since they are amounts receivable from customers in the normal course of business.
Trade Payables are shown under the major head 'Equity and Liabilities', specifically under 'Current Liabilities' as a sub-head on the face of the balance sheet.
Trade payables to be settled beyond 12 months from the date of balance sheet or beyond the operating cycle are classified under 'Other Long-term Liabilities' with a note to accounts.

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Question 6

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What is the rounding-off rule for figures in the presentation of financial statements under Schedule III?

Rounding off of figures to be reported in financial statements is based on the size of turnover of the company, and the requirement is mandatory.
For companies with turnover less than Rs. 100 crore, figures may be rounded to the nearest hundreds, thousands, lakhs, or millions or decimal thereof.
For companies with turnover greater than Rs. 100 crore, figures must be rounded to the nearest lakhs or millions or decimal thereof.

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Question 7

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How is proposed dividend treated in the financial statements of a company? Give reason.

Proposed dividend is not shown as a liability in the balance sheet because it is proposed by the Board of Directors but must be declared (approved) by shareholders at the Annual General Meeting, making it contingent upon their approval.
Since declaration of proposed dividend is contingent upon shareholders' approval, it is shown as a contingent liability as per AS-4 (Contingencies and Events Occurring after the Balance Sheet Date) and disclosed in Notes to Accounts.
Once shareholders declare the dividend, it becomes a confirmed liability and is accounted in the books; thus, proposed dividend of the previous year is recorded in the current year after it is declared.

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Question 8

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Explain the current/non-current distinction for investments and inventories in the balance sheet.

Inventories are always treated as current assets regardless of the expected period of realisation, and they are shown under current assets on the face of the balance sheet.
Investments are classified into current and non-current categories: investments expected to be realised within twelve months are classified as current investments under current assets.
All other investments that are not expected to be realised within twelve months are classified as non-current investments under non-current assets; both categories are shown on the face of the balance sheet.

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Question 9

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What is the 'realisation postulate' in the context of financial statements?

The realisation postulate is a basic accounting assumption that governs when revenue is recognised in the Statement of Profit and Loss.
Under this postulate, while preparing the statement of profit and loss, revenue is included in the sales of the year in which the sale was undertaken, even though the sale price may be received over a number of years.
This means revenue recognition is based on the point of sale (transfer of ownership), not on actual cash receipt, ensuring that income is reported in the correct accounting period.

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Question 10

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State any two limitations of financial statements.

Financial statements are prepared on the basis of historical cost, so the values of assets and liabilities shown do not reflect current market situation due to changes in purchasing power of money.
Financial statements contain only monetary information and do not include qualitative information such as industrial relations, labour relations, industrial climate, and quality of work.
Financial statements show only aggregate information rather than detailed data, which may limit their usefulness for specific decision-making by users.

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Question 11

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What are 'Reserves and Surplus' and how are they classified under Schedule III?

Reserves and Surplus represent retained earnings, accumulated reserves, and surplus from operations, shown under Shareholders' Funds on the equity and liabilities side of the balance sheet.
They are classified into: Capital Reserve, Capital Redemption Reserve, Securities Premium Reserve, Debenture Redemption Reserve, Revaluation Reserve, Share Options Outstanding Account, Other Reserves, and Surplus (balance in statement of profit and loss).
A debit balance of the Statement of Profit and Loss is shown as a negative figure under the 'Surplus' head, and the net balance of Reserves and Surplus is shown even if it is negative.

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Question 12

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What is 'Money Received against Share Warrants' and where is it disclosed in the balance sheet?

Money Received against Share Warrants is the amount received by the company which will be converted into shares at a specified date on a specified rate.
The instrument issued against the amount so received is referred to as share warrants, and this item represents a commitment to issue shares in the future.
Money Received against Share Warrants is required to be disclosed as a separate line item under 'Shareholders' Funds' on the face of the balance sheet.

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Question 13

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How are borrowings classified in a company's balance sheet under Schedule III?

Total borrowings are categorised into long-term borrowings, short-term borrowings, and current maturities of long-term debt.
Loans repayable in more than twelve months or one operating cycle are classified as long-term borrowings on the face of the balance sheet under non-current liabilities.
Loans repayable on demand or whose original tenure is not more than twelve months or one operating cycle are classified as short-term borrowings under current liabilities; current maturities of long-term loans (amounts repayable within twelve months) are shown under other current liabilities.

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

What are financial statements? Name the statements included under this term as per the chapter.

What does the 'going concern postulate' mean and how does it affect the preparation of financial statements?

Explain the role of personal judgements in the preparation of financial statements.

State any two specific objectives of preparing financial statements.

Under which head and sub-head are 'Trade Receivables' and 'Trade Payables' shown in the balance sheet as per Schedule III?

What is the rounding-off rule for figures in the presentation of financial statements under Schedule III?

How is proposed dividend treated in the financial statements of a company? Give reason.

Explain the current/non-current distinction for investments and inventories in the balance sheet.

What is the 'realisation postulate' in the context of financial statements?

State any two limitations of financial statements.

What are 'Reserves and Surplus' and how are they classified under Schedule III?

What is 'Money Received against Share Warrants' and where is it disclosed in the balance sheet?

How are borrowings classified in a company's balance sheet under Schedule III?

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