dr. varadraj bapat module 2. financial statements

Dr. Varadraj BapatDr. Varadraj Bapat

Module 2.

Financial Statements


Financial Statements

IntroductionBalance SheetElements of Balance Sheet


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.


General purpose Financial Statementexamples Balance Sheet Profit and Loss A/c Cash Flow Statement Fund Flow Statement Segment Revenue Report


Specific purpose Financial Statementexamples Departmental Budget Computation prepared for Income Tax Purpose


Balance SheetBalance 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.


Balance Sheet (Format)

LiabilitiesLiabilities Rs.Rs. AssetsAssets Rs.Rs.

Owners FundOwners Fund XXXX Fixed AssetsFixed Assets XXXX

Non Current Non Current LiabilitiesLiabilities

XXXX Non current Non current InvestmentsInvestments

XXXX

Current LiabilitiesCurrent Liabilities XXXX Current AssetsCurrent Assets XXXX

Every balance sheet shall give a true and fair view of state of affairs of the company as at the end of financial year.


Particulars(format as per revised

Schedule VI)

As at As at

31st Mar 2011

31st Mar 2010

I. EQUITY AND LIABILITIES

1 Shareholder's Funds

(a) Share Capital -

-


(b) Reserves and Surplus -

-

(c) Money received against Share Warrants

-

-

2 Share Application Money pending allotment

-

-

3 Non-Current Liabilities

(a) Long-Term Borrowings -

-


(b) Deferred Tax Liabilities (Net)

-

-

(c) Other Long Term Liabilities -

-

(d) Long-Term Provisions -

-

4 Current Liabilities

(a) Short-Term Borrowings -

-

(b) Trade Payables -

-


(c) Other Current Liabilities

-

-

(d) Short-Term Provisions

-

-

TOTAL

-

-

II. ASSETS 1 Non-Current Assets (a) Fixed Assets

(i) Tangible Assets

-

-

(ii) Intangible Assets

-

-


(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 -

-


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

-

-


Elements of Balance Sheet

Assets

Liabilities

Owners Fund


Assets

Probable future economic benefitProbable future economic benefitWhat is owned or controlledWhat is owned or controlled

ExamplesExamples CashCash Land and BuildingLand and Building InvestmentsInvestments MachineryMachinery


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


Types of assets•Fixed Assets•Current Assets•Investments

Fixed Assets

Tangible Intangible


Tangible

Land & Building

Machinery

Furniture

In-tangible

Goodwill

Trade-Marks

Patents


Current Assets

Monetary Non-Monetary

Debtors

Bank

RM Stock

FG Stock


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.


•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.


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


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


Current Liabilities

• Interest accrued but not due on Loan

• Provision for Tax• Bank Overdraft


Provision: Provision means any amount retained Provision means any amount retained

by way of providing for any known by way of providing for any known liability of which amount can not be liability of which amount can not be determined with substantial determined with substantial accuracy.accuracy.

Provision refers to an amount set Provision refers to an amount set aside for meeting claims which are aside for meeting claims which are admissible but the amount whereof admissible but the amount whereof has not been confirmed.has not been confirmed.


ExamplesExamples

Provision for payment of electricity Provision for payment of electricity charges (but bill is not yet received).charges (but bill is not yet received).

Provision for taxes (till final amount is Provision for taxes (till final amount is assessed by authorities.)assessed by authorities.)

Provision for bonusProvision for bonus Amount set aside for writing off bad Amount set aside for writing off bad

debts. debts.


Contingent LiabilityContingent Liability

Contingent liability can be defined asContingent liability can be defined asa) 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


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.


Owners FundOwners 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.


Assets= Liabilities + Owners Fund

Therefore,Owners Fund= Assets – Liabilities

Owners Fund= Capital + Retained

Earnings

Balance Sheet Equation


Balance Sheet Equation A = L + O 1. Company borrows from bank

++ ++ (+ Bank, + Bank Loan Payable)

2. Issue of shares by company

++ ++ (+ Bank, + Equity Shares)


3.(a) Cash purchase of equipment3.(b) Collection of Debtors

(a)(a) +,+,--

(+ Equipment, - Bank)

(b)(b) +,+,--

(+ Bank, - Debtors)

(a)(a) -- -- (- Loan Payable, - Bank)(- Loan Payable, - Bank)(b)(b) -- -- (- Creditors, - Bank)(- Creditors, - Bank)

4.(a) Company repays bank loan4.(a) Company repays bank loan

4.(b) Payment of Creditors / supplier4.(b) Payment of Creditors / supplier


A=L+O

-- -- (- Bank, - Reserves)

-- -- (- Bank, - Equity Capital)

5. Company pays dividend to shareholders

6. Company purchases shares from shareholder, pays immediately (buy-back of shares)


A=L+O

-- ++ (- Loan Payable, + Equity shares)

+,-+,- (- Creditors, + Loan Payable)

7. Liability is converted into equity shares e.g., loan is converted into equity shares

8. Company incurs new liability to pay existing liability, e.g., Creditors are converted into long-term loan


A=L+O

+,-

(+ Equity Capital, - Reserves)

9. Company distributes stock dividend to stockholders (Bonus Shares)


Vertical Format of Balance Sheet

Sources of FundsSources of Funds Rs.Rs. Rs.Rs.

Owners FundOwners Fund XXXX

Borrowing FundsBorrowing Funds

Secured LoanSecured Loan XXXX

Unsecured LoanUnsecured Loan XXXX XXXX

Total Capital EmployedTotal Capital Employed XXXX


Application of FundApplication of Fund Rs.Rs. Rs.Rs.

Fixed AssetsFixed Assets XXXX

InvestmentsInvestments XXXX

Working CapitalWorking Capital

Current AssetsCurrent Assets XXXX

Current LiabilitiesCurrent Liabilities (XX)(XX)

Net Working CapitalNet Working Capital XXXX

Total Assets EmployedTotal Assets Employed XXXX


Every company has to prepare balance sheet in the form set out in Part I of Schedule VI of Companies Act.


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.


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.


7. On January 31, ShriRam Company collects the account receivable and puts in bank.

Prepare Balance sheet of the

concern after each transaction.


1. On January 2, owners invest Rs.15,000 in ShriRam Company to begin the

business.ShriRam Company

Balance SheetJanuary 2, Year 1

LiabilitiesLiabilities AssetsAssets

CapitalCapital 15,00015,000 BankBank 15,00015,000

TotalTotal 15,00015,000 TotalTotal 15,00015,000


2. On January 3, ShriRam Company borrows Rs. 10,000

from DhanLakshmi Bank.ShriRam Company Balance Sheet

January 3, Year 1Liabilities AssetsPaid-up capital

15,000 Bank 25,000

DhanLakshmi Bank Loan

10,000

Total 25,000 Total 25,000


3. On January 5, ShriRam Company purchases Rs. 18,000 of inventory from suppliers, on account Payment due on January 8

ShriRam Company Balance SheetJanuary 5, Year 1

LiabilitiesLiabilities AssetsAssets

Paid-up capitalPaid-up capital 15,00015,000 BankBank 25,00025,000

DhanLakshmi DhanLakshmi Bank Loan Bank Loan

10,00010,000 InventoryInventory 18,00018,000

Accounts Accounts Payable/CreditorsPayable/Creditors

18,00018,000

TotalTotal 43,00043,000 TotalTotal 43,00043,000


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 33,000

Reserves 2,000 Inventory 12,000


10,000

Creditors 18,000



5. On January 10, ShriRam Company pays for inventory purchased on January 5.


Liabilities Assets




10,000

Creditors Nil



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


Liabilities Assets




10,000 Debtors 6,000



7. On January 31, ShriRam Company collects the debtors and puts in bank.


Liabilities Assets




10,000 Debtors Nil



Exercise 2:Exercise 2:

Show the effect of each transaction Show the effect of each transaction on the balance sheet of M/s. Krishna on the balance sheet of M/s. Krishna Book StoresBook Stores

Shyam and Murlidhar set up a book Shyam and Murlidhar set up a book stall M/s. Krishna Book Stores in their stall M/s. Krishna Book Stores in their town. On 1 Jan 2010, Shyam opened town. On 1 Jan 2010, Shyam opened new bank account in the name of new bank account in the name of their partnership by depositing Rs. their partnership by depositing Rs. 100000 cash and Murlidhar brought 100000 cash and Murlidhar brought his own shop worth Rs. 200000 as his own shop worth Rs. 200000 as capital.capital.


On 2 January 2010, store purchased On 2 January 2010, store purchased book of Rs. 75000 and Stationary of book of Rs. 75000 and Stationary of Rs. 10000 on immediate payment Rs. 10000 on immediate payment from SK International.from SK International.

On 5 January 2010, Stores supplies On 5 January 2010, Stores supplies books of Rs. 90000 (costing 60000) books of Rs. 90000 (costing 60000) to Saraswati Highschool. School to Saraswati Highschool. School paid cheque Rs. 45000 immediately paid cheque Rs. 45000 immediately and reaming amount will be paid on and reaming amount will be paid on 10 January 2010.10 January 2010.


On 9 January 2010, books costing On 9 January 2010, books costing 47000 purchased on credit from 47000 purchased on credit from SSK and Associates.SSK and Associates.

On 10 January 2010, Rs. 15000 On 10 January 2010, Rs. 15000 received from Saraswati received from Saraswati Highschool.Highschool.

On 15 January 2010, cheque of Rs. On 15 January 2010, cheque of Rs. 47000 paid to creditors.47000 paid to creditors.


Balance Sheet as on 1 Jan 2010

Liabilities Amount Assets Amount

Capital

Shyam 100000 Shop Premises

200000

Murlidhar 200000 Bank 100000

300000 300000




Capital


200000


Inventory 85000

300000 300000




Capital

Shyam 100000 Shop Premises 200000


Profit and Loss A/c

30000 Sundry Debtors 45000

Inventory 25000

330000 330000




Capital


200000


Profit and Loss A/c

30000 Inventory 72000

Sundry Creditors

47000 Sundry Debtors

45000

377000 377000




Capital


200000


Profit and Loss A/c


Sundry Creditors

47000 Sundry Debtors

30000

377000 377000




Capital


200000


Profit and Loss A/c


Sundry Debtors

30000

330000 330000

dr. varadraj bapat module 2. financial statements

Documents

varadraj bapatdr

varadraj bapatc

varadraj bapatmodule

varadraj bapatb reserves

varadraj bapatan asset

intangible assets

b noncurrent investments

d cash