2nd PUC Accountancy Question Bank Chapter 3 Financial Statements of a Company

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Karnataka 2nd PUC Accountancy Question Bank Chapter 3 Financial Statements of a Company

2nd PUC Accountancy Financial Statements of a Company NCERT Textbook Questions and Answers

2nd PUC Accountancy Financial Statements of a Company Short Answer Type Questions and Answers

Question 1.
What is public company?
Answer:
A public company is defined as a company that offers a part of its ownership in the form of shares, debentures, bonds, securities to the general public through stock market:

Question 2.
What is private limited company?
Answer:
As defined by the Section 3. (1) (iii) of Companies Act 1956, private limited company is defined by the following characteristics:

  • It restricts the right to transfer its shares.
  • There must be at least two and a maximum of 50 members (excluding current and former employees) to form a private company.
  • It ca not invite application from the general public to subscribe its shares, or debentures.
  • It cannot invite or accept deposits from persons other than its members, Directors and their relatives.

Question 3.
Define Government Company?
Answer:
As per the Section 617 of Company Act of 1956, a Government Company means any company in which not less than 51% of the paid up share capital is held by the Central Government, or by any State Government or Governments, or partly the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government Company as thus defined.

Question 4.
What do you mean by a listed company?
Answer:
Those public companies whose shares are listed and can be traded in a recognised stock exchange for public trading like, Tata Moto. s, Reliance, etc are called Listed Company. These companies are also called Quota Cornpanies.

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Question 5.
What are the uses of securities premium?
Answer:
As per the Section 78 of the Companies Act of 1956, the amount of securities premium can be used by the company for the following activities:

  • For paying up unissued shares of the company to be issued to members of the company as fully paid bonus share.
  • For writing off the preliminary expenses of the company.
  • For writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company.
  • For paying up the premium that is to be payable on redemption of preference shares or debentures of the company.
  • Further, as per the Section 77A, the securities premium amount can also be utilised by the company to Buy-back its own shares.

Question 6.
What is buy-back of shares?
Answer:
Buy-back of shares means repurchasing of its own shares by a company from the market for reducing the number of shares in the open market.

Question 7.
Write a brief note on ‘Minimum Subscription’.
Answer:
When shares are issued to the general public, the minimum amount that must be subscribed by the public so that the company can allot shares to the applicants is termed as Minimum Subscription. As per the Company Act of 1956, the Minimum Subscription of share cannot be less than 90% of the issued amount. If the Minimum Subscription is not received, the company cannot allot shares to its applicants and it shall immediately refund the entire application amount received to the public.

2nd PUC Accountancy Financial Statements of a Company Long Answer Type Questions and Answers

Question 1.
Explain the nature of the financial statements.
Answer:
The nature of the financial statements depends upon the following aspects;
1. Recorded facts: The items recorded in the financial statements reflect their original cost i.e. the cost at which they were acquired. Consequently, financial statements do not reveal the current market price of the items. Further, financial statements fail to capture the inflation effects.

2. Conventions: The preparation of financial statements is based on some accounting conventions like, Prudence Convention, Materiality Convention, Matching Concept, etc. The adherence to such accounting conventions makes financial statements easy to understand, comparable and reflects the true and fair financial position of the company.

3. Accounting Assumptions: These basic accounting assumptions like Going Concern Concept, Money Measurement Concept, Realisation Concept, etc are called as postulates. While preparing financial statements, certain postulates are adhered to. The nature of these postulates is reflected in the nature of the financial statements.

4. Personal Judgments: Personal value judgments play an important role in deciding the nature of the financial statements. Different judgments are attached to different practices of recording.transactions in the financial statements. Thus, personal judgments determine the nature of the financial statements to a great extent.

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Question 2.
Explain in detail about the significance of the financial statements.
Answer:
The importance of financial statements is mentioned below:
1. Provides Information: Financial statements provide information to various accounting users both internal as well as external users. It acts as a basic platform for different accounting users to derive information according to varying needs. For example, the financial statements on one hand help the shareholders and investors in assessing the viability and return on their investments, while on the other hand, the financial statements help the tax authorities in calculating the amount of tax liability of the company.

2. Cash Flow: Financial statements provide information about the cash flows of the company. The financial statements help the creditors and other investors.in determining solvency of company.

3. Effectiveness of Management: The comparability feature of the financial statements enables management to undertake comparisons like inter-firm and intra-firm comparisons. This not only helps in assessing the viability and performance of the business but also helps in’ designing policies and drafting policies. The financial statements enhance the effectiveness and efficacy of the management.

4. Disclosure of Accounting Policies: Financial statements provide information about the various policies, important changes in the methods, practices and process of accounting by the company. The disclosure of the accounting policies makes financial statements simple, true and enables different accounting users to understand without any ambiguity.

5. Policy Formation by Government: It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the government in the formulation of various policy measures and to address various economic problems like employment, poverty etc.

6. Attracts Investors and Potential Investors: They invest or plan to invest in the business. Hence, in order to assess the’viability and prospectus of their investment, creditors need information about profitability and solvency of the business.

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Question 3.
Explain the limitations of financial statements.
Answer:
The following are the limitations of financial statements.
1. Historical Data: The items recorded in the financial statements reflect their original cost i.e. the cost at which they were acquired. Consequently, financial statements do not reveal the current market price of the items. Further, financial statements fail to capture the inflation effects.

2. Ignorance of Qualitative Aspect: A financial statement does not reveal the qualitative aspects of a transaction. The qualitative aspects like colour, size and brand position in the market, employee’s qualities and capabilities are not disclosed by the financial statements.

3. Biased: Financial statements are based on the personal judgments regarding the use of methods of recording. For example, the choice of practice in the valuation of inventory, method of depreciation, amount of provisions, etc. are based on the personal value judgments and may differ from person to person. Thus, the financial statements reflect the personal value judgments of the concerned accountants and clerks.

4. Inter-firm Comparisons: Usually, it is difficult to compare the financial statements of two companies because of the difference in the methods and practices followed by their respective accountants.

5. Window dressing: The possibility of window dressing is probable. This might be because of the motive of the company to overstate or understate the assets and liabilities to attract more investors or to reduce taxable profit. For example, Satyam showed high fixed deposits- in the Assets side of its Balance Sheet for better liquidity that gave false and misleading signals to the investors.

6. Difficulty in Forecasting: Since the financial statements are based on historical data, so they fail to reflect the effect of inflation. This drawback makes forecasting difficult. Prepare the format of income statement and explain its elements
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2nd PUC Accountancy Question Bank Chapter 3 Financial Statements of a Company - 2

Prepare the format of balance sheet and explain the various elements of balance sheet.
Vertical form of balance sheet
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1. Share Capital: It is the first item on the Liabilities side. It consists of the following items:

  • Authorised Capital
  • Issued Capital: Equity share and preference share.
  • Subscribed Capital less Call in Arrears add Forfeited Shares

2. Reserve and Surplus: As per the Schedule VI,  it consists of the following items:

  • Capital Reserve
  • Capital Redemption Reserve
  • Security Premium
  • Other Reserve less Debit balance of P & L A/c
  • Credit balance of P & L A/c
  • Proposed Additions.
  • Sinking Fund

3 . Secured Loans

  1. Debentures
  2. Loan and advances from bank etc.

4. Unsecured Loans

  • Fixed Deposits
  • Loan & Advances from subsidiaries

5. Fixed Assets: These are those assets that are used for more than one year, like:

  • Goodwill
  • Land
  • Building
  • Plant ec Machinery
  • Patents, Trade Marks
  • Livestock
  • Vehicles, etc.

6. Current Assets: Assets that can be easily converted into cash or cash equivalents are termed as current assets. These are required to run day to day business activities; for example, cash, debtors, stock, etc.

7. Current Liabilities: Those liabilities that are incurred with an intention to be paid or are payable within a year; for example, bank overdraft creditors, bills payable, outstanding wages, short-term loans, etc are called current liabilities.

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Question 4.
Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?
Answer:
The various parties that are directly or indirectly interested in the financial statements of a company can be categorized into the following two categories:
Internal Parties: The following are the various internal accounting users who are directly related to the company.

a) Owner: The owner/s is/’are interested in the profit earned or loss incurred during an accounting period. They are interested in assessing the profitability and viability of the capital invested by them in the business.

b) Management: The financial statements help the management in drafting various policies measures, facilitating planning and decision making process. The financial statements also enable management to exercise various cost controlling measures and to remove inefficiencies.

c) Employees and workers: They are interested in the timely payment of wages and salaries, bonus and appropriate increment in their wages and salaries. With the help of the financial statements they can know the amount of profit earned by the company and can demand reasonable hike in their wages and salaries.

External Parties: There are various external users of accounting who need accounting information for decision making, investment planning and to assess the financial position of the business. The various external users are given below.

a) Banks and other financial institutions: Banks provide finance in the form of loans and advances to various businesses. Thus, they need information regarding liquidity, creditworthiness, solvency and profitability to advance loans.

b) Creditors: These are those individuals and organisations to whom a business owes money on account of credit purchases of goods and receiving services; hence, the creditors require information about credit worthiness of the business.

c) Investors and potential investors: They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business.

d) Tax “authorities: They need information about sales, revenues, profit and taxable income in order to determine the levy various types of tax on the business.

e) Government: It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the government in the formulation of various policies measures and to address various economic problems like employment, poverty etc.

f) Researchers: Various research institutes like NGOs and other independent research institutions like CRISIL, stock exchanges, etc. undertake various research projects and the accounting information facilitates their research work.

g) Consumers: Every business tries to build up reputation in the eyes of consumers, which can be created by the supply of better quality products and post-sale services at reasonable and alfordable prices. Business that has transparent financial records, assists the customers to know the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its products and, thus, helps in repo building of the business.

h) Public: Public is keenly interested to know the proportion of the profit that the business spends on various public welfare schemes; for example, charitable hospitals, funding schools, etc. This information is also revealed by the profit and loss account and balance sheet of the business.

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Question 5.
Financial statements reflect a combination of recorded facts, accounting conventions and personal judgments’ discuss.
Answer:
The financial statements are the end-products of the accounting process. The financial statements not only reveal the true financial position of the company but also help various accounting users in decision making and policy designing process. The nature of the financial statements depends upon the following aspects like recorded facts, conventions, concepts, and personal judgment.

1. Recorded facts: The items recorded in the financial statements reflect their original cost i.e. the cost at which they were acquired. Consequently, financial statements do not reveal the current market price of the items. Further, financial statements fail to capture the inflation effects.

2. Conventions: The preparation of financial statements is based on some accounting conventions like,: Prudence Convention, Materiality Convention, Matching Concept, etc. The adherence to such accounting conventions makes financial statements easy to understand, comparable and reflects the true and fair financial position of the company.

3. Accounting Assumptions: These basic accounting assumptions like Going Concern Concept, Money Measurement Concept, Realisation Concept, etc are. called as postulates. While preparing financial statements, certain postulates are adhered to, The nature of these postulates is reflected in the nature of the financial statements.

4. Personal Judgments: Personal value judgments play an important role in deciding the nature of the financial statements. Different judgments are attached to different practices of recording transactions in the financial statements. Thus, personal judgments determine the nature of the financial statements to a great extent.

Question 6.
Explain the process of preparing income statement and balance sheet.
Answer:
The process of preparing Horizontal Form of Income Statement is explained below in a chronological order:

  1. Prepare a Trial Balance on the basis of the balances of various accounts in the ledger.
  2. Record Opening Stock, Purchases, Manufacturing Expenses and other direct expenses on the debit side of Trading Account
  3. Record Sales and Closing Stock on the credit side of the Trading Account.
  4. Ascertain the balancing figure by totalling both the sides of the Trading Account If the credit side exceeds the debit side, then the balancing figure is termed as Gross Profit, but if the debit side exceeds the credit side, then the balancing figure is termed as Gross Loss.
  5. Carry forward the Gross Profit (Gross Loss) to the credit (debit) side of the Profit and Loss Account.
  6. Record all current year’s operating and non-operating revenue expenditures with their relevant adjustments on the debit side of the Profit and Loss Account.
  7. Record ail current year’s operating and non-operating revenue incomes with their relevant adjustments on the credit side of the Profit and Loss Account.
  8. Ascertain the balancing figure by totalling both the sides of the Profit and Loss Account. If the credit exceeds the debit side, then the balancing figure is termed as Net Profit, but if the debit side exceeds the credit side, then the balancing figure is termed as Net Loss.

The process of preparing Horizontal Form of Balance Sheet is explained below in a chronological order:

  1. Prepare a Trial Balance on the basis of the balances of various accounts in the ledger.
  2. Record all the debit balances of Real and Personal Accounts on the left hand side (i.e. Assets side) of the Balance Sheet after making all adjustments for provision and other related items.
  3. Record all the credit balances of Real and Personal Accounts on the right hand side (i.e. Liabilities side) of the Balance Sheet after making all adjustments for interest and outstanding items.
  4. Add Net Profit to the Opening Capital and deduct Net Loss, if any from the Opening Capital
  5. Ascertain the total of two sides, jvhich must be equal.

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2nd PUC Accountancy Financial Statements of a Company Numerical Questions and Answers 

Question 1.
Show the following items in the balance sheet as per the provisions of the companies Act, 1956 in (Revised) Schedule VI:
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Question 2.
On 1stApril, 2013, Jumbo Ltd., issued 10,000; 12% debentures of₹ 100 each a discount of 20%; redeemable after 5 years. The company decided to write-off discount on issue of such debentures over the life time of the Debentures. Show the items of the company immediately after the issue of these debentures.
Answer:
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Question 3.
From the following information prepare the balance sheet of Gitanjali Ltd. Invntories ₹ 14,00,000; Equity Share Capital ₹ 20,00,000; Plant and Machinery ₹ 10,00, 000; Preference Share Capital ₹ 12,00,000; Debenture Redemption Reserve ₹ 6,00,000; Outstanding Expenses ₹ .3,00,000; Proposed-Dividend ₹ 5,00,000; Land and Building ₹ 20,00,000; Current Investment ₹ 8,00,000; Cash. Equivalent ₹ 10,00,000; Short term loan from Zaveri Ltd. (A Subsidiary Company of Twilight Ltd.) ₹ 4,00,000; Public Deposits ₹ 12,00,000.
Answer:
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2nd PUC Accountancy Question Bank Chapter 3 Financial Statements of a Company - 10

Question 4.
From the following information prepare the balance sheet of Jam Ltd. Inventories ₹ 7,00,000; Equity Share Capital ₹ 16,00,000; Plant and Machinery ₹ 8,00,000; Preference Share Capital ₹ 6,00,000; General Reserves ₹ 6,00,000; Bills payable Rs 1,50,000; Provision for taxation ₹ 2,50,000; Land and Building k 16,00,000; Non-current Investments ₹ 10,00,000; Cash at Bank ₹ 5,00,000; Creditors ₹ 2,00,000; 12% Debentures ₹ 12,00,000.
Answer:
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Note to account
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Question 5.
Prepare the balance sheet of Jyoti Ltd., as at March 31, 2018 from the following information. Building ₹ 10,00,000; Investments in the shares of Metro Tyers Ltd. ₹ 3,00,000; Stores & Spares ₹ 1,00,000; Discount on issue of 10% debentures of ₹ 10,000; Statement of Profit and Loss (Pr.). ₹ 90,000; 5,00,000 Equity Shares of ₹ 20 each fully paid-up; Capital Redemption Reserve ₹ 1,00,000; 10% Debentures ₹ 3,00,000; Unpaid dividends ₹ 90,000; Share options outstanding account ₹ 10,000.
Answer:
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Question 6.
Brinda Ltd., has furnished the following information:
(a) 25,000,10% debentures of ₹ 100 each;
(b) Bank Loan of ₹ 10,00,000 repayable after 5 years;
(c) Interest on debentures is yet to be paid.
Show the above items in the balance sheet of the company as at March 31, 2018.
Answer:
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Question 7.
Prepare a Balance sheet of Black Swan Ltd., as at March 31, 2013 from the following information:
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Answer:
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