NCERT Solutions Class 12 Financial Statements of a Company: Students can find attached complete NCERT Solutions for CBSE Class 12 Accountancy Chapter 3, Financial Statements of a Company. A PDF download link has been attached here for you to save for future reference. These NCERT Solutions have been designed by our subject experts as per the updated CBSE Syllabus 2023-2024.
Students often keep us asking questions regarding the methods to be followed to score a high percentage in the examinations. They are confused about the studying pattern and materials that should be adapted and used while preparing for Board Examinations. The most important task is to practice NCERT Solutions. Since CBSE’s Board Exams follow the NCERT Syllabus completely, it is important to have a fair understanding of the kind of questions present in NCERT. After this, the in-text questions present in between the chapters have to be solved by students. You can also refer to the study materials attached below to enhance your preparation for Board Examinations.
Related:
CBSE Class 12 Accountancy Syllabus 2023-24 (PDF)
CBSE Class 12 Accountancy Sample Paper 2023-24 (PDF)
NCERT Solutions for Class 12 Accountancy 2023-2024
MCQs for CBSE Class 12 Accountancy 2023-2024
NCERT Solutions for Class 12 Accountancy Chapter Financial Statements of a Company are:
Short Answer Questions
1. State the meaning of financial statements?
Answer. The annual financial reports of a company which show the financial position of the company at the end of each accounting year are called financial statements. It is called as the balance sheet or position statement and indicated the loss and profit position of the company.
2. What are the limitations of financial statements?
Answer. Limitations of financial statements are as follows:
- It does not reflect the current market situation.
- Some of the assets may not realize the stated value.
- It might be biased since it is influenced by personal judgments.
- It presents aggregate information only.
- The financial statement misses out on important information.
- It lacks representation of qualitative information
- They are only interim reports.
3. List any three objectives of financial statements?
Answer. Three objectives of financial statements are:
- To provide information about the economic resources and obligations of a business
- To provide information about the earning capacity of the business
- To provide information about cash flows
4. State the importance of financial statements to :
(i) Shareholders– Financial statements showcase a company’s debts, profit and loss situation, and financial position in the market on the basis of which shareholders then decide the number of shares they want to buy.
(ii) Creditors– Creditors use financial statements as a gadget to understand the financial position of the company and whether it would be able to repay its debt or not.
(iii) Government– On the basis of the financial statement of a company, the government decides the taxation policies and other rules and regulations based on the position and functioning of the company.
(iv) Investors– Investors also look at financial statements to know where the company stands, whether should they buy the shares of the company, or invest in the company based on its financial situation.
5. How will you disclose the following items in the Balance Sheet of a company;
(i) Current assets, inventory– Current assets are disclosed in the main head and the inventory is disclosed in subhead
(ii) Contigent liabilities in notes to accounts– It is disclosed in the main head in Notes to Account
(iii) Shareholders Funds, Reserve, and Surplus– Shareholders funds are disclosed in the main head and reserves and surplus are disclosed in subhead
(iv) Fixed Assets, Intangible Assets– Fixed assets are shown in the subhead and intangible assets are a part of the subhead
(v) Proposed Dividend for the current year– It is disclosed under the head current liabilities and sub-head short term provision
(vi) Non Current Liabilities– They are disclosed in the main head
(vii) Arrears of Dividend on Commutative Preference Shares– They are disclosed under the current liabilities and subhead other current liabilities
Long Answer Questions
1. Explain the nature of the financial statements.
Answer. The nature of financial statements can be explained by the following points:
- Financial statements present recorded facts only. These facts are presented in the form of costs. Every figure or detail present in the balance sheet is based on fact.
- Financial statements are prepared on the basis of accounting conventions such as valuing inventory at cost or market price, whichever is the lower convention of materiality is followed in dealing with small items like pencils, pens, postage stamps, etc.
- Financial statements are prepared on the basis of assumptions known as postulates. Some of the examples of postulates are going concern postulate, money measurement postulate, realization postulate, etc.
- Sometimes, the financial statements depend on personal prejudices, biases, opinions, and judgments.
2. Explain in detail about the significance of the financial statements.
Answer. Financial statements are significant because of the following mentioned reasons:
- They help to clarify the performance of management to its shareholders. The relationship between the performance of management and ownership expectations can be decoded through financial statements.
- Financial statements present the industrial, taxation, and other economic policies of the government.
- On the basis of financial statements, credit-giving institutions lend credit to companies.
- Financial statements help investors to assess long-term and short-term solvency and the profitability of the investment.
- They help shareholders in taking decisions such as the continuation or discontinuation of an investment.
- Trade associations take the help of financial statements in providing service and protection to their members.
- Financial statements help stock exchanges in figuring out the extent of transparency in reporting the record
3. Explain the limitations of financial statements.
Answer. The limitations of financial statements are:
- It does not reflect the current market situation since it presents the historical cost of the company.
- Some of the assets may not realize the stated value.
- It might be biased since it involves the intervention of accounting concepts and personal judgments.
- It presents aggregate information which might make decision-making difficult.
- The financial statement does not present information relating to the loss of markets and thus misses out on important information.
- It lacks representation of qualitative information like industrial relations, industry climate etc since they present only quantitative information.
- They are only interim reports as they provide information about the profit and loss situation of a company at present. They don’t predict the overall earning of the company at a specific period of time.
4. Prepare the format of statement of profit and loss and explain its items upto the ascertainment of profit before tax.
Answer. The format of statement of profit and loss is presented below in the table.
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S.No |
Particulars |
Note No |
Figure as at the end of the current reporting period |
Figure as at the end of previous reporting period |
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I |
Revenue from operations |
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II |
Other income |
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III |
Total Revenue (I+II) |
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IV |
Expenses: Cost of materials consumed Purchases of stock-in-trade Changes in inventories of finished goods Work-in-progress and stock-in-trade Employee benefits expense Finance costs Depreciation and amortization expense Other expenses Total expenses |
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V |
Profit before extraordinary items and tax (III-IV) |
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VI |
Exceptional items |
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VII |
Profit before extraordinary items and tax (V-VI) |
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VIII |
Extraordinary items |
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IX |
Profit before tax (VII-VIII) |
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X |
Tax expense: (1) Current tax (2) Deferred tax |
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XI |
Profit/(Loss) for the period from continuing operations (IX-X) |
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XII |
Profit/(Loss) from discontinuing operations |
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XIII |
Tax expense of discontinuing operations |
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XIV |
Profit/(Loss) from Discontinuing operations (after tax) (XII-XIII) |
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XV |
Profit/(Loss) for the period (XI + XIV) |
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XVI |
Earnings per equity share: (1) Basic (2) Diluted |
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The items present in the table above have been discussed here:
- Revenue from operations includes:
- Sale of products
- Sale of services
- Other operating revenues
In respect to a finance company, revenue from operations shall include revenue from interest, dividends, and income from other financial services.
- Other income
- Interest income (in case of a company other than a finance company)
- Dividend income
- Net gain/loss on sale of investments
- Other non-operating income (net of expenses directly attributable to such income)
- Expenses
- Cost of Materials
- Purchase of Stock-in-trade
- Changes in inventories of finished goods, WIP and stock-in-trade
- Employees benefit expenses
- Finance cost
- Depreciation
- Other expenses-direct expenses, indirect expenses and non-operating expenses
5.Prepare the format of balance sheet and explain the various elements of balance sheet.
Answer. The format of balance sheet is presented in the table below:
|
S.No |
Particulars |
Note No |
Figure as at the end of current reporting period |
Figure as at the end of previous reporting period |
|
I |
Equity And Liabilities 1) Shareholder’s Funds (a) Share Capital (b) Reserves and Surplus (c) Money received against share warrants 2) Share Application money pending allotment 3) Non-current Liabilities (a) Long term borrowings (b) Deferred tax liabilities (net) (c) Other long term liabilities (d) Long term provisions 4) Current Liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions |
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II |
Assets 1) Non-Current Assets (a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long-term loans and advances (e) Other non-current assets 2) Current Assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short term loans and advances (f) Other current assets |
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The elements of Balance Sheet are:
- Shareholder’s Funds– They are classified into
- Share Capital
- Reserves and Surplus
- Money received against Share Warrants
- Share Capital– This is to be included in the notes to account.
- Reserve and Surplus– They are classified into
- Capital Reserve
- Capital Redemption Reserve
- Securities Premium Reserve
- d)Debenture Redemption Reserve
- Revaluation Reserve
- Share Options Outstanding Account
- Other Reserves (Specifying nature and purpose)
- Surplus: Balance in statement of profit and loss; disclosing allocations and Appropriations such as dividend, bonus shares, transfer to/from the reserve, etc.
- Share application money pending allotment– When share application money is not issued to the capital and is non-refundable, then it is non-current.
- Non-current liabilities– long-term borrowings, Deferred tax assets/liabilities, long term trade payable(long term borrowings), long-term provisions, fixed assets, non-current investments, trade receivables(non-current assets)
- Current liabilities– cash and cash equivalent, current assets(trade receivables, current investments), inventories, shot-term provisions, proposed dividend,short term liabilities(trade payable, short-term borrowings)
6. Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?
Answer. Financial statements are useful to various parties who are interested in the affairs of an undertaking. Such parties are mentioned below:
- Shareholders– Financial statements help shareholders in taking important decisions such as the continuation or discontinuation of investment and provide information regarding the status, safety and return on their investment.
- Investors– Investors also look at financial statements to know where the company stands, and whether should they buy shares of the company, or invest in the company based on its financial situation.
- Creditors– Creditors use financial statements as a gadget to understand the financial position of the company and whether it would be able to repay its debt or not.
- Lenders– Financial statements help lenders to provide information regarding the financial position of the company and whether will it be able to repay the loans and debts or not.
- Customers– Customers always want to understand the market position of the company based on which they take their buying decisions. The financial statement provides this information to the customers.
- Management– Financial statements reflects the performance of management. Thus, it can help them in taking corrective steps if necessary.
- Government– On the basis of the financial statement of a company, the government decides the taxation policies and other rules and regulations based on the position and functioning of the company.
- Trade Associations– Financial statements help in providing service and protection to their members. They may develop standard ratios and design a uniform system of accounts.
- Stock Exchanges– Financial statements helps stock exchanges to understand the extent of transparency in reporting on financial performance and enable them to call for required information to protect the interest of investors.
- Internal members– The most important role of financial statements is to provide information on the financial condition, aspects affecting it, and profit and loss situation, to its internal members.
7. ‘Financial statements reflect a combination of recorded facts, accounting conventions and personal judgement’s. Discuss.
Answer. Financial statements are based on recorded facts. It presents facts about a company’s debts, repayments, loans, assets, liabilities, owners, shareholder and a lot more. All of this information is jotted down in the statement of profit and loss or balance sheet. These are the two types of financial statements that a company writes. These accounting reports are totally based on facts and figures gathered via multiple transactions, contracts, or deals. But, at the same time, the books of account also get intervened by the personal judgment of their writers. The data and record gets manipulated to balance the profit and loss situation. Further, the books have to be written down as per the accounting concepts which limits the writing of the books. Thus, it is a fact that financial statements are a combination of recorded facts, accounting conventions, and personal judgment.
8. Explain the process of preparing income statement and balance sheet.
Answer. The process of preparing income statement and balance sheet are:
Income statement:
- At first, a trial balance has to be prepared as per the balance in multiple accounts.
- Then, the revenue generated has to be calculated. This can be calculated by Sales conducted- sales return.
- Add the revenue generated through other sources such as cash discount, sales of assets.
- Subtract expenses from the revenue
- Subtract the amount of tax paid by the company
Balance Sheet:
- Mention the records under equity and liabilities
- Mention the records under the assets both current and non-current
- Compare the amount generated after all the calculations. If it is equal, the balance sheet is prepared and if not, re-do the calculations and mentions.
For complete NCERT Solutions for CBSE Class 12 Financial Statements of a Company, click on the link below
Also Find:
CBSE Class 12 Syllabus 2023-24 (All Subjects)
CBSE Class 12 Sample Papers 2023-24 (All Subjects)
