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Practice each question, then open the answer or worked solution.
State the meaning of financial statements.
Financial statements are the end products of an accounting process It provides a true picture of the performance of the company over a time period, and such a statement is used by different users of accounting information. These statements are prepared annually.
What are the limitations of financial statements?
The limitations are
1. Financial statements reflect historical data, i.e., it reflects the original price of the items or the price at which items were acquired. It fails to highlight the current price of items as per market and also inflated prices due to rising inflation in the market. Hence, data and information are historical in nature.
2. Financial statements do not portray the qualitative aspects of any transaction, the aspects such as size, colour, quality and capabilities. Only quantitative data, which can be expressed in monetary value, are considered
3. Financial statements are biased in nature, as they are dependent on human interference.
4. It becomes difficult to assess the performance of another company.
5. It will be difficult to forecast, as the statement is prepared based on historical data.
List any three objectives of financial statements.
The objectives of preparing financial statements are
1. A financial statement provides timely and reliable information on the economic status of a company on a periodical basis. It also makes information available to external users or stakeholders who do not have direct access to the information.
2. A financial statement helps in revealing the true financial position of a company. It contains information related to liquidity, profitability, financial viability and solvency of an organisation.
3. A financial statement is helpful in evaluating the earning capacity of a firm.
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors
The following are the importance of financial statements for
1. Shareholders: For a shareholder, a financial statement is helpful in determining the viability and profit-making capacity of a business. It provides businesses with sufficient data to analyse the financial health and performance of the business.
2. Creditors: A financial statement is essential for a creditor to understand the creditworthiness of the business along with liquidity. It helps them to decide whether further investments can be done in this business.
3. Government: A financial statement helps the government in determining GDP, national income, industrial growth etc., which leads to the formulation of various policies and addressing problems like poverty, unemployment, etc.
4. Investors: For Investors who have invested or those planning to invest, a financial statement is necessary. The financial statement helps determine the prospects and viability of new investments.
How will you disclose the following items in the Balance Sheet of a company:
(i) Loose Tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures Redemption Reserve
(iv) Mastheads and publishing titles
(v) 10% debentures
(vi) Proposed dividends
(vii) Share forfeited account
(viii) Capital Redemption Reserve
(ix) Mining Rights
(x) Work-in-progress
Disclosure of various items in the Balance Sheet of a company is given below.
