Financial Statements of a Company Class 12 Notes: CBSE Accountancy Chapter 3

• Financial statements are papers that show all the important details about how well a company is doing financially.

• The balance sheet tells us what a company owns (assets), owes (liabilities), and what's left over for the owners (equity) on a specific date.

• Profit and loss statements show how much money a company makes from sales, how much it spends on expenses, and whether it ends up with a profit or loss over a period, usually a year.

• Cash flow statements track how money comes into and goes out of a company during a period, showing how well it manages its cash.

• Financial ratios, like how much cash a company has compared to what it owes, help us understand how financially healthy a company is and how efficiently it's running.

• Notes to financial statements give more details and explanations about the numbers in the main financial statements.

• Auditors check financial statements to make sure they're accurate and follow all the rules.

• People who use financial statements, like investors and banks, rely on them to make decisions about the company.

• Financial statements are made according to rules and laws to make sure they're fair and clear.

1.  What is the meaning of Financial Statements?

Financial statements are official yearly reports used by company management to share financial details with owners and external parties like investors, tax authorities, government, and employees. These reports include the balance sheet, which shows a company's financial position at the end of the accounting period, the profit and loss statement that summarizes its earnings and expenses, and the cash flow statement detailing its cash movements.

2. Nature of Financial Statements:

• Financial Statements are created using factual data and numbers. 

• They follow specific Accounting Conventions and are built on assumptions called postulates.

• Personal judgement plays a role at times in preparing these statements.

3. Objectives of Financial Statements:

• Provide information about the economic resources and obligations of a business.

• Inform about the earning capacity of the business.

• Detailed information about cash flows.

• Evaluate the effectiveness of management.

• Disclose information about business activities affecting society.

• Explain the accounting policies used.

4. Types of Financial Statements:

The financial statements generally include two statements: 

1. Balance Sheet

2. Statement of profit and loss

5. Shareholders Fund

Shareholders' funds are categorized on the balance sheet into:

a) Share Capital: Information regarding share capital should be provided in the notes to accounts.

b) Reserves and Surplus: Reserve and Surplus are categorized into several types:

• Capital Reserve

• Capital Redemption Reserve

• Securities Premium Reserve

• Debenture Redemption Reserve

• Revaluation Reserve

• Share Options Outstanding Account

• Other Reserves, specifying their nature and purpose

• Surplus refers to the balance in the statement of profit and loss, indicating allocations such as dividends, bonus shares, transfers to or from reserves, etc.

c) Funds received from Share Warrants: Money received against Share Warrants represents funds received by the company, which are later converted into shares at a predetermined rate on a specified future date. These funds are reported separately under 'shareholder's fund'.

6. Current/Non-current Classification: They are classified into four following items:

• Current Assets: These are assets that are likely to be converted into cash or used up within a year or the company's normal business cycle.

• Current Liabilities: These are debts and obligations that the company expects to pay off or settle within a year or during its normal operating cycle.

• Non-current Assets: These are assets that are not expected to be turned into cash or used up within a year.

• Non-current Liabilities: These are debts and obligations that are not expected to be settled within a year.

7. Current/Non-current Distinction: 

• An item is classified as current if it is part of the entity's normal operating cycle.

• It is considered current if it is expected to be realized or settled within twelve months.

• Items held primarily for trading purposes are also classified as current.

• Cash and cash equivalents fall under the current category.

• If the entity lacks the unconditional right to defer settling a liability for at least twelve months after the reporting period, it is classified as current.

• Assets and liabilities that do not meet these criteria are categorized as non-current.

8. Share Application Money Pending Allotment: 

• Non-Current Classification Threshold: If it exceeds this limit or is mostly non-refundable, it will be classified as non-current.

• Borrowings: Borrowings are divided into:

• Long-Term Borrowings: Repayable in over twelve months.

• Short-Term Borrowings: Repayable on demand or within twelve months.

• Current Maturities: Repayable within twelve months or the operating cycle, noted under other current liabilities.

• Deferred Tax Assets/Liabilities: Deferred tax assets and liabilities are always considered non-current.

• Trade Payables: formerly sundry creditors, now termed Trade payables, are classified as current or non-current.

• Proposed Dividend: Proposed by the Board of Directors and approved by shareholders at the Annual General Meeting, shown as contingent liabilities.

• Provisions: Provisions settled within twelve months from the balance sheet date are classified as short-term provisions under current liabilities.

• Fixed Assets: Both tangible and intangible assets are categorized as non-current.

• Investments:

• Current Investments: Expected to be realized within twelve months.

• Non-Current Investments: Others are not expected to be realized within twelve months.

• Inventories: Always treated as current assets.

• Trade Receivables: Receivables realized beyond twelve months from the reporting date are classified as "Other non-current assets."

• Cash and Cash Equivalents: Always current, including qualifying amounts.

9. The Statement of Profit and Loss includes:

• Revenue from operations: Money earned from selling products, providing services, and other income directly tied to daily business activities.

• Other income: Extra earnings beyond regular operations, like interest (for non-finance companies), dividends, gains or losses from selling investments, and other income after deducting related expenses.

• Expenses: Costs involved in running the business, covering operational expenses, administrative costs, and other spending needed to generate revenue.

10. Uses and Importance of Financial Statements: 

• They inform shareholders about how well management is performing.

• Governments use them to shape industrial, taxation, and economic policies.

• Financial statements are vital for assessing creditworthiness.

• Investors rely on them to gauge both short-term and long-term financial health and profitability.

• Shareholders use financial statements to make informed decisions.

• Trade associations analyze these statements to support and protect their members.

• Stock exchanges use financial statements to gauge transparency in financial reporting and request necessary information to safeguard investor interests.

11. Limitations of Financial Statements: 

• Financial statements may not accurately reflect the current situation due to potential discrepancies in asset realization.

• Biases in reporting can skew results, presenting a financial position that may not be realistic.

• These statements provide aggregate information but lack detailed breakdowns.

• Important qualitative information is often missing from financial statements.

• They serve as interim reports rather than comprehensive assessments of financial health.

5 Important Topics of Class 12 Financial Statement of a Company Chapter 3

Importance of Class 12 Accountancy Financial Statement of a Company Notes

• Revision notes help us quickly understand and remember key concepts before exams.

• They save time by focusing on essential information and skipping unnecessary details.

• These notes simplify complex topics, making them easier to understand and use.

• They provide practical examples that show how theoretical knowledge is used in real-life situations.

• Revision notes ensure thorough preparation by covering all important topics in a structured manner.

• They increase confidence by clearly understanding what to expect in exams.

• Accessible formats like PDFs allow for easy studying anytime and anywhere.

Tips for Learning the Class 12 Accountancy Chapter 3 Financial Statement of a Company Notes

• Study how a balance sheet is structured, including what a company owns, owes, and its overall value.

• Learn about the profit and loss statement, which shows how much money a company makes, spends, and its final profit or loss.

• Understand the cash flow statement, which tracks how money moves in and out of a company, affecting its ability to pay bills.

• Explore financial ratios like the current ratio, debt-to-equity ratio, and profit margins to assess different aspects of a company's financial health.

• Look into accounting policies to see how companies decide to report their financial transactions, ensuring consistency.

• Discover the importance of reserves and surpluses, including capital and revaluation reserves, which impact a company's financial stability.

• Review practical examples to see how these concepts apply in real-life situations, enhancing your understanding of financial statements.

Conclusion

Class 12 Accountancy Chapter 3 on Financial Statements of a Company helps understand key concepts like balance sheets, profit and loss statements, and cash flow. These notes simplify financial topics, clarify ratios, and explain accounting rules. Practical examples show how these concepts work in real life. Learning about reserves and surpluses gives insight into financial stability and profit sharing. These revision notes are designed to help you prepare well for exams and get practical knowledge about financial statements.

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