Financial Statements

Introduction
A financial statement is a collection of data organised according to logical and consistent accounting procedures. The term financial statement generally refers to the two statements: 1. The position statement or the balance sheet; and 2. The income statement or the profit and loss account. Financial statements can be prepared A. Horizontal Form (T shape) or B. Vertical Form (Statement type). Financial Statements are the outcome of summarising process of accounting. Financial statement are also called financial reports.

Nature of Financial Statements

The financial statement s are prepared on the basis of recording facts. The recorded facts are those which can be expressed in monetary terms. The statements are prepared for a particular period, generally one year. The transactions are recorded in a chronological order, as and when the events happen. The following points explain the nature of financial statements. I. Recorded Facts. II. Accounting Conventions III. Postulates. IV. Personal Judgements.

Objectives of Financial Statements.

The primary objective of financial statements is to assist in decision making. i. To provide reliable financial information about economic resources and obligations of a business firm. ii. To provide other needed information about changes in such economic resources and obligations. iii. To provide reliable information about changes in net resources arising out of business activities. iv. To provide financial information that assists in estimating the earning potential of business. v. To disclose, to the extent possible, other information related to the financial statements that is relevant to the needs of the users of these statements.

Anatomy/Types of financial statements.

a) A balance sheet b) An income statement c) A statement of changes in owners account, and d) A statement of changes in financial position.
i. Funds Flow statement. ii. Cash flow statement.

Financial Statements Analysis

Financial Statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. Financial analysis is the process of identifying the financial strength and weaknesses of the firm by properly establishing strategic relationship between the items of the balance sheet, profit and loss account and other operative data.

Methods or Devices of Financial Analysis

1) 2) 3) 4) 5) 6) Comparative statements; Trend analysis; Common size statements; Funds flow analysis; Cash flow analysis; Ratio analysis.

Comparative Statements
The comparative financial statements are statements of financial position at different periods; of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. The comparative statement may show: i. Absolute figures (Rs.) ii. Change in absolute figures i.e. , increase or decrease in absolute figures. iii. Absolute data in terms of percentages. iv. Increase or decrease in terms of percentages. The two comparative statements are 1. Balance Sheet, and 2. Income Statement

Comparative Statements (Balance Sheet)

1
Particulars

2
Values at the begging of the year

3
Values at the end of the year

4 = (3-2)
Absolute change

5 = (4/2)x 100
Percentage of change (%)

ASSETS A. Current Assets: Total C. Assets (A) B. Fixed Assets Total Fixed Assets (B) TOTAL ASSETS (A+B)

xxxx XXXX xxxx XXXXX XXXX xxxx xxxx xxxx xxxx xxx xxxx xxxx

Xxxx XXXX Xxxx XXXX XXXX xxxx xxxx xxxx xxxx xxx xxxx xxxx

xxx XXX xxx XXX XXX xxx xxx xxx xx xx xx xx

xx XX xx XX XX xx xx xx Xx Xx Xx xx

LIABILITIES &CAPITAL Current Liabilities

Total C. Liabilities (C) Long Term debts Total Long term debts (D) Share holders funds (E) Outside Liabilities ( C+D) Total Liabilities (C+D+E)

1. Following are the Balance Sheets of a company for the year 2009 and 2010. prepare, a comparative balance sheet and study its financial position. Liabilities Equity share capital Reserves & surplus Debentures 2009 (Rs.) 4,00,000 3,12,000 50,000 2010 (Rs.) 6,00,000 3,54,000 1,00,000 Assts Land & buildings 2009 (Rs.) 2010 (Rs.) 2,70,000 1,70,000 7,86,000 77,000

Plant & machinery 3,10,000 Furniture 55,000

Long-term loan
Accounts payable Other current liabilities

1,50,000
2,55,000 7,000

2,55,000
1,17,000 10,000

Other fixed assets

Cash in hand Sundry Debtors Inventory Prepaid expenses Other C. assets

20,000
1,18,000 2,09,000 1,60,000 3,000 29,000

30,000
10,000 1,90,000 1,30,000 3,000 40,000

11,74,000

14,36,000

11,74,000 14,36,000

2. Following are the Balance Sheets of a company for the year 2008 and 2009. prepare, a comparative balance sheet and study its financial position. (HW) Liabilities Share capital Reserves 6% Debentures Bills payable Dividends payable Taxation provision 8,000 2008(Rs.) 2009(Rs.) 5,25,000 1,75,535 1,25,000 3,750 5,75,000 59,070 1,00,000 3,000 1,43,000 25,000 48,000 Assts Goodwill Plant & machinery Patents Investments Cash in hand Sundry Debtors Inventory Prepaid expenses Debenture discount 9,49,285 9,53,070 2008 (Rs.) 80,000 1,74,000 30,000 1,05,000 1,70,650 1,38,760 2,35,800 3,200 6,875 9,49,285 2009 (Rs.) 5,000 1,61,000 24,000 25,800 2,87,000 1,53,000 2,87,670 4,600 5,000 9,53,070

Sundry creditors 1,12,000

3. Following income statements are given for the years ending 2008 and 2009. rearrange them in a comparative form and make comments. 2008 To cost of goods sold To administrative expenses To selling exp. To Interest paid To loss on sale of machinery 9,00,000 93,250 2009 9,50,000 95,980 By sales By Interest and dividend By profit from sale of land 2008 15,25,000 7,500 2009 17,00,000 6,200

1,90,000 8,000 2,500

2,09,000 7,000 800

6,000

8,000

To income-tax
To net profit

85,000
2,59,750 15,38,500

1,68,000
2,83,420 17,14,200 15,38,500 17,14,200

4. The following are the income statements of Swastik Ltd. for the years 2007 and 2008. prepare, a comparative income statement and comment on the profitability of the company. 2007 Opening stock Purchases less returns Wages Salaries Rent , rates Depreciation Selling expenses Loss on sale of plant Discount allowed Interest paid Net profit 5,000 12,000 4,26,000 12,17,000 85,000 5,00,000 60,000 42,000 35,000 40,000 12,000 2008 2,00,000 5,50,000 80,000 64,000 40,000 60,000 12,000 8,000 7,000 14,000 4,12,500 14,47,500 12,17,000 14,47,500 Sales less returns Closing stock Dividends Income from Inv 2007 2,00,000 5,000 12,000 2008 2,25,000 7,500 15,000 10,00,000 12,00,000

5. Following are the balance sheets of A Ltd and B Ltd on 30st December 2011. prepare a common size statements. (Rs. In lakhs) A Ltd. (Rs.) Cash Sundry debtors 27 220 B Ltd (Rs.) 72 226

Stock
Prepaid expenses Other current assets Fixed assets

100
11 10 635

174
21 21 513

Total assets
Liabilities &Capital Sundry creditors Other current liabilities

1003
42 78

1027
154 62

Long term liabilities

Capital Total liabilities

225
658 1003

318
493 1027

Funds Flow Statement

Funds flow statement consists of 1. Statement of Changes in Working capital 2. Statement showing funds from operation or (profit and loss adjustment account) 3. Statement of sources and application of funds or Funds flow statement.

6. The following are the summarised trial balances of ABC Ltd. as at 31st March 2009 and 2010. 2009 Dr Rs. Fixed assets Current assets 23,36,960 9,60,540 Cr Rs. 2010 Dr. Rs. 24,60,500 7,91,800 Cr. Rs.

Debenture discount
Issued capital Equity Preference

30,000
15,00,000 3,00,000

25,000
15,00,000 4,00,000

Share premium
Debentures Current liabilities Provision for Dep.

30,000
5,00,000 6,20,000 1,80,000

10,000
5,00,000 4,40,000 1,95,000

Provision for D/D

Dividend Balance of P&L a/c from pre. year Net profit for the year

6,000
1,50,000 24,400 1,67,100

5,000
1,91,500 1,55,800