Download Financial Statements

Module 2.
Financial Statements
Dr. Varadraj Bapat
Financial Statements
Introduction
Balance Sheet
Elements of Balance Sheet

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Financial Statement
Financial statements are records that
provide an information of an
individual’s, organization’s, or
business’ financial status.
They are normally prepared general or
specific purposes.
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General purpose Financial Statement
examples
 Balance Sheet
 Profit and Loss A/c
 Cash Flow Statement
 Fund Flow Statement
 Segment Revenue Report
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Specific purpose Financial Statement
examples
 Departmental Budget
 Computation prepared for Income
Tax Purpose
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Balance Sheet
Balance Sheet portrays value of
economic resources controlled by an
enterprises and the way they are
financed.
A balance sheet or statement of
financial position is a summary of the
financial balances of an entity on a
particular point of time. i.e. summary
of organization's assets, liabilities and
equity as of a specific date.
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Balance Sheet (Format)
Liabilities
Rs.
Assets
Rs.
Owners Fund
XX Fixed Assets
XX
Non Current
Liabilities
Current Liabilities
XX Non current
Investments
XX Current Assets
XX
XX
Every balance sheet shall give a true and
fair view of state of affairs of the company
as at the end of financial year.
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Particulars
(format as per
revised Schedule
VI)
As at
31st
Mar
2011
As at
31st
Mar
2010
-
-
I. EQUITY AND
LIABILITIES
1 Shareholder's
Funds
(a) Share Capital
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(b) Reserves and Surplus
(c) Money received against
Share Warrants
2 Share Application Money
pending allotment
3 Non-Current Liabilities
(a) Long-Term Borrowings
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-
-
-
-
-
-
-
-
(b) Deferred Tax Liabilities
(Net)
(c) Other Long Term Liabilities
(d) Long-Term Provisions
4 Current Liabilities
(a) Short-Term Borrowings
(b) Trade Payables
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-
-
-
-
-
-
-
-
-
-
(c) Other Current Liabilities
-
-
(d) Short-Term Provisions
-
-
TOTAL
-
-
II. ASSETS
1
Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets
-
-
(ii) Intangible Assets
-
-
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(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
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-
-
-
-
-
-
-
-
-
-
-
-
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
TOTAL
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Elements of Balance Sheet
Assets

Liabilities

Owners Fund

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Assets
Probable
future economic benefit
What is owned or controlled
Examples
 Cash
 Land and Building
 Investments
 Machinery
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An asset is a resource controlled by
the enterprise as a result of past
events from which future economic
benefits are expected to flow to the
enterprise.

Resource must have a cost or value
that can be measured reliably

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Types of assets
•Fixed
Assets
•Current Assets
•Investments
Fixed
Assets
Tangible
Intangible
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Intangible
Tangible
Land &
Building
Goodwill
Machinery
TradeMarks
Furniture
Patents
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Current Assets
Monetary
Non-Monetary
Debtors
RM Stock
Bank
FG Stock
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Liabilities
• A liability is a present obligation of
the enterprise arising from past
events, the settlement of which is
expected to the result in an outflow of
a resource embodying economic
benefits.
• A liability is an existing obligation
based on the evidence available on
balance sheet date.
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•A
liability is recognised when outflow
of economic resources in settlement
of
present
obligation
can
be
anticipated and the value of outflow
can be reliably measured.
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Long-Term Liabilities
Long-term
liabilities
are
a
company's debts or obligations
that are to be repaid or
performed beyond one year.
Source of fund
Examples:
• Bank Loan
• Loan from Financial Institution
• Debentures

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Current Liabilities

•
•
Current
liabilities
are
a
company's debts or obligations
that are to be repaid or
performed within one year.
Emerge from normal business
Examples:
• Creditors (Accounts Payable)
• Outstanding Expenses
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Current Liabilities
Interest accrued but not due
on Loan
• Provision for Tax
• Bank Overdraft
•
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Provision:
Provision means any amount retained
by way of providing for any known
liability of which amount can not be
determined
with
substantial
accuracy.
Provision refers to an amount set
aside for meeting claims which are
admissible but the amount whereof
has not been confirmed.
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Examples




Provision for payment of electricity
charges (but bill is not yet received).
Provision for taxes (till final amount
is assessed by authorities.)
Provision for bonus
Amount set aside for writing off bad
debts.
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Contingent Liability
Contingent liability can be defined as
a) a possible obligation that arises
from past events and the existence
of which will be confirmed only by
occurrence or non-occurrence of
one or more uncertain future
events not wholly within the
control of the enterprise
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b) a present obligation that arises
from past events but is not
recognised because:
i) it is not probable that an outflow
of resources consisting economic
benefits will be required to settle
the obligation or
ii)a reliable estimate of the amount
of the obligation cannot be made.
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Owners Fund
Owners fund is defined as residual
interest of an enterprises after
deducting all its liabilities.
Owners fund is the excess of
aggregate assets of an enterprises
over its aggregate liabilities.
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Balance Sheet Equation
Assets= Liabilities + Owners Fund
Therefore,
Owners Fund= Assets – Liabilities
Owners Fund= Capital + Retained
Earnings
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Balance Sheet Equation
A=L+O
1. Company borrows from bank
+ +
(+ Bank, + Bank Loan Payable)
2. Issue of shares by company
+
+ (+ Bank, + Equity Shares)
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3.(a) Cash purchase of equipment
3.(b) Collection of Debtors
(+ Equipment, - Bank)
(a) +,
(b) +,
-
(+ Bank, - Debtors)
4.(a) Company repays bank loan
4.(b) Payment of Creditors / supplier
(a) (b) -
-
(- Loan Payable, - Bank)
(- Creditors, - Bank)
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A=L+O
5. Company pays dividend to shareholders
-
- (- Bank, - Reserves)
6. Company purchases shares from
shareholder, pays immediately
(buy-back of shares)
-
- (- Bank, - Equity Capital)
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A=L+O
7. Liability is converted into equity shares
e.g., loan is converted into equity
shares
- + (- Loan Payable, + Equity shares)
8. Company incurs new liability to pay
existing liability, e.g., Creditors are
converted into long-term loan
+,-
(- Creditors, + Loan Payable)
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A=L+O
9. Company distributes stock dividend to
stockholders (Bonus Shares)
+, (+ Equity Capital, - Reserves)
-
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Vertical Format of Balance
Sheet
Sources of Funds
Owners Fund
Borrowing Funds
Rs.
Secured Loan
XX
Unsecured Loan
XX
Total Capital Employed
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Rs.
XX
XX
XX
Application of Fund
Fixed Assets
Rs.
Investments
Rs.
XX
XX
Working Capital
Current Assets
XX
Current Liabilities
(XX)
Net Working Capital
XX
Total Assets Employed
XX
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Every company has to prepare
balance sheet in the form set out in
Part I of Schedule VI of Companies
Act.
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Exercise 1
1. On January 2, owners invest
Rs.15,000 in ShriRam Company to
begin the business.
2. On January 3, ShriRam Company
borrows Rs. 10,000 from
DhanLakshmi Bank.
3. On January 5, ShriRam Company
purchases Rs. 18,000 of inventory
from suppliers. Payment due on Jan
8.
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4. On January 9, ShriRam Company
sells inventory that cost Rs. 6,000
for Rs. 8,000 in cash.
5. On January 10, ShriRam
Company pays for inventory
purchased on January 5.
6. On January 12, ShriRam
Company sells inventory that cost
Rs. 5,000 for Rs. 6,000, on
account. Payment will be received
on January 31.
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7. On January 31, ShriRam
Company collects the account
receivable and puts in bank.
Prepare Balance sheet of the
concern after each transaction.
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1. On January 2, owners invest
Rs.15,000 in ShriRam
Company to begin the business.
ShriRam Company
Balance Sheet
January 2, Year 1
Liabilities
Assets
Capital
15,000 Bank
15,000
Total
15,000
15,000 Total
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2. On January 3, ShriRam
Company borrows Rs. 10,000
from DhanLakshmi Bank.
ShriRam Company Balance Sheet
January 3, Year 1
Liabilities
Assets
Paid-up
15,000 Bank
25,000
capital
DhanLakshmi 10,000
Bank Loan
Total
25,000 Total
25,000
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3. On January 5, ShriRam
Company purchases Rs. 18,000 of
inventory from suppliers, on
account Payment due on January 8
ShriRam Company Balance Sheet
January 5, Year 1
Liabilities
Assets
Paid-up capital
15,000 Bank
25,000
DhanLakshmi
10,000 Inventory 18,000
Bank Loan
Accounts
18,000
Payable/Creditors
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Total
43,000 Total
43,000
4. On January 9, ShriRam
Company sells inventory that
cost Rs. 6,000 for Rs. 8,000 in
cash.ShriRam Company Balance Sheet
January 9, Year 1
Liabilities
Assets
Paid-up capital 15,000 Bank
Reserves
2,000 Inventory
33,000
12,000
DhanLakshmi
Bank Loan
Creditors
Total
45,000
10,000
18,000
45,000 Total
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5. On January 10, ShriRam
Company pays for inventory
purchased on January 5.
ShriRam Company Balance Sheet
January 10, Year 1
Liabilities
Assets
Paid-up capital 15,000 Bank
15,000
Reserves
2,000 Inventory
12,000
DhanLakshmi
Bank Loan
Creditors
Total
10,000
Nil
27,000 Total
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27,000
6. On January 12, ShriRam Company
sells inventory that cost Rs. 5,000 for
Rs. 6,000, on account. Payment will
be received on January 31
ShriRam Company Balance Sheet
January 12, Year 1
Liabilities
Assets
Paid-up capital 15,000 Bank
15,000
Reserves
3,000 Inventory
7,000
DhanLakshmi 10,000 Debtors
6,000
Bank Loan
Total
28,000 Total
28,000
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7. On January 31, ShriRam
Company collects the debtors
and puts in bank.
ShriRam Company Balance Sheet
January 31, Year 1
Liabilities
Assets
Paid-up capital 15,000 Bank
21,000
Reserves
3,000 Inventory
7,000
DhanLakshmi
Bank Loan
Total
10,000 Debtors
28,000 Total
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Nil
28,000
Exercise 2:
Show the effect of each transaction
on the balance sheet of M/s. Krishna
Book Stores
 Shyam and Murlidhar set up a book
stall M/s. Krishna Book Stores in
their town. On 1 Jan 2010, Shyam
opened new bank account in the
name of their partnership by
depositing Rs. 100000 cash and
Murlidhar brought his own shop
worth Rs. 200000 as capital.
Dr. Varadraj Bapat


On 2 January 2010, store
purchased book of Rs. 75000 and
Stationary of Rs. 10000 on
immediate payment from SK
International.
On 5 January 2010, Stores supplies
books of Rs. 90000 (costing 60000)
to Saraswati Highschool. School
paid cheque Rs. 45000 immediately
and reaming amount will be paid on
10 January 2010.
Dr. Varadraj Bapat



On 9 January 2010, books costing
47000 purchased on credit from
SSK and Associates.
On 10 January 2010, Rs. 15000
received from Saraswati
Highschool.
On 15 January 2010, cheque of Rs.
47000 paid to creditors.
Dr. Varadraj Bapat
Balance Sheet as on 1 Jan 2010
Liabilities
Capital
Shyam
Murlidhar
Amount Assets
100000 Shop
Premises
200000 Bank
300000
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Amount
200000
100000
300000
Balance Sheet as on 2 Jan 2010
Liabilities
Capital
Shyam
Murlidhar
Amount Assets
100000 Shop
Premises
200000 Bank
Inventory
300000
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Amount
200000
15000
85000
300000
Balance Sheet as on 5 Jan 2010
Liabilities
Capital
Shyam
Murlidhar
Profit and
Loss A/c
Amount Assets
100000 Shop Premises
200000 Bank
30000 Sundry Debtors
Inventory
330000
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Amount
200000
60000
45000
25000
330000
Balance Sheet as on 9 Jan 2010
Liabilities
Capital
Shyam
Murlidhar
Profit and
Loss A/c
Sundry
Creditors
Amount Assets
100000 Shop
Premises
200000 Bank
30000 Inventory
47000 Sundry
Debtors
377000
Dr. Varadraj Bapat
Amount
200000
60000
72000
45000
377000
Balance Sheet as on 10 Jan 2010
Liabilities
Capital
Shyam
Murlidhar
Profit and
Loss A/c
Sundry
Creditors
Amount Assets
100000 Shop
Premises
200000 Bank
30000 Inventory
47000 Sundry
Debtors
377000
Dr. Varadraj Bapat
Amount
200000
75000
72000
30000
377000
Balance Sheet as on 15 Jan 2010
Liabilities
Capital
Shyam
Murlidhar
Profit and
Loss A/c
Amount Assets
100000 Shop
Premises
200000 Bank
30000 Inventory
Sundry
Debtors
330000
Dr. Varadraj Bapat
Amount
200000
28000
72000
30000
330000