Chapter financial-statements-of-a-company: Financial Statements of a Company Case Study Questions | accountancy Class 12 CBSE

Chapter financial-statements-of-a-company: Financial Statements of a Company Case Study Questions | accountancy Class 12 CBSE | ByteNotes.in

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Ramesh is a Class 12 student studying Accountancy. His teacher asked him to understand the nature of financial statements. She explained that financial statements are prepared on the basis of historical cost, following accounting conventions such as valuing inventory at cost or market price, whichever is lower. She also mentioned that certain basic assumptions called postulates — like going concern, money measurement, and realisation postulate — are used. Ramesh noted that personal judgements also play a role, for instance, in estimating the useful life of assets for depreciation and provisions for doubtful debts. He realised that these statements are a combination of recorded facts, accounting principles, and personal judgements, and are prepared following accounting standards and requirements of law.

Question 1: What is the basis of recording transactions in financial statements?

The original cost or historical cost is the basis of recording transactions in financial statements.
Assets purchased at different times and prices are recorded and shown at their original cost, not at current market prices.

Question 2: What does the money measurement postulate assume, and why is it considered a limitation?

The money measurement postulate assumes that the value of money will remain the same in different periods.
This is a limitation because in reality there is a drastic change in purchasing power of money over time, making comparisons across periods unreliable.

Question 3: Explain the role of personal judgements in the preparation of financial statements with three examples.

Depreciation is provided based on personal judgement about the useful economic life of fixed assets.
Provisions for doubtful debts are made on estimates and personal judgements about the recoverability of debts.
While valuing inventory at cost or market value, whichever is less, personal judgements are needed to determine both cost and market value.
These judgements are made to follow the convention of conservatism and avoid overstatement of assets and income.

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Priya Ltd. is preparing its annual financial statements as per Schedule III of the Companies Act, 2013. The accountant is classifying items under current and non-current categories. The company has trade receivables expected to be collected within 8 months, a bank loan repayable after 3 years, investments expected to mature in 15 months, loose tools, and deferred tax liabilities. The accountant also noted that the company's trade payables are due within 6 months. He had to decide the correct classification and presentation of each item on the face of the balance sheet. He referred to Schedule III to ensure compliance with the Companies Act, 2013 and applicable accounting standards.

Question 1: Under which head will loose tools be classified in the balance sheet?

Loose tools are classified under 'Inventories' which falls under Current Assets in the balance sheet.
All inventories, including loose tools, are always treated as current assets as per Schedule III.

Question 2: How will deferred tax liabilities and the bank loan repayable after 3 years be classified in the balance sheet?

Deferred tax liabilities are always classified as non-current liabilities as per Schedule III of the Companies Act, 2013.
The bank loan repayable after 3 years (more than 12 months) is classified as long-term borrowings under non-current liabilities.

Question 3: State the criteria for classifying an item as a current asset or current liability as per Schedule III.

An item is classified as current if it is involved in the entity's operating cycle.
It is current if it is expected to be realised or settled within twelve months from the reporting date.
It is current if it is held primarily for trading purposes.
It is current if it is cash and cash equivalent.
For liabilities, an item is current if the entity does not have an unconditional right to defer settlement for at least 12 months after the reporting period.
All other assets and liabilities are non-current.

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Sunita Ltd. has the following details in its books: General Reserve of Rs. 5,00,000 (since March 31, 2016) and a debit balance in the Statement of Profit and Loss of Rs. 8,00,000 for the year 2016–17. The accountant needs to present these figures correctly in the balance sheet as per Schedule III. He knows that a debit balance in the Statement of Profit and Loss must be shown as a negative figure under 'Surplus'. He also has to show the net Reserve and Surplus figure, even if the resultant amount is negative, under the head 'Reserve and Surplus'. The company's turnover is Rs. 80 crore, so rounding-off rules also need to be applied.

Question 1: How should the debit balance in the Statement of Profit and Loss be disclosed as per Schedule III?

The debit balance of the Statement of Profit and Loss should be shown as a negative figure under the head 'Surplus' within Reserve and Surplus.
It is deducted from the credit balances of other reserves while arriving at the net Reserve and Surplus figure.

Question 2: What will be the net Reserve and Surplus figure for Sunita Ltd. and how will it appear in the balance sheet?

General Reserve: Rs. 5,00,000; Less: Debit balance in P&L: Rs. 8,00,000; Net Reserve and Surplus = Rs. (3,00,000) i.e., negative Rs. 3,00,000.
As per Schedule III, even if the resulting figure is negative, it is still shown under the head 'Reserve and Surplus' as a negative figure — (Rs. 3,00,000).

Question 3: State the rounding-off rules for financial statements under Schedule III and apply the appropriate rule for Sunita Ltd.

If turnover is less than Rs. 100 crore, figures may be rounded off to the nearest hundreds, thousands, lakhs or millions or decimal thereof.
If turnover exceeds Rs. 100 crore, figures must be rounded off to the nearest lakhs or millions or decimal thereof.
Since Sunita Ltd.'s turnover is Rs. 80 crore (less than Rs. 100 crore), it may round off figures to the nearest hundreds, thousands, lakhs, etc.
Rounding-off requirements are mandatory as per Schedule III.

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Arush Ltd. issued 5,000, 10% debentures of Rs. 100 each at par, but redeemable at a premium of 5% after 5 years. The finance manager needs to prepare the relevant items in the balance sheet. The premium on redemption of debentures represents a future liability and needs to be recorded immediately on issue. It is to be shown under 'Other Long-term Liabilities.' The loss arising from the premium obligation is debited to the Statement of Profit and Loss, reducing the Reserve and Surplus. Cash received from the issue of debentures is shown under Cash and Cash Equivalents. The company also needs to disclose this in the notes to accounts properly.

Question 1: Under which head will the 10% debentures be shown in the balance sheet?

The 10% debentures will be shown under 'Long-term Borrowings' under Non-current Liabilities in the balance sheet.
They are long-term because they are redeemable after 5 years, which exceeds the 12-month threshold.

Question 2: Where is the premium on redemption of debentures shown in the balance sheet and why?

Premium on redemption of debentures is shown under 'Other Long-term Liabilities' under Non-current Liabilities.
It represents a future obligation payable at the time of redemption (after 5 years) and must be provided for at the time of issue itself.

Question 3: Calculate the total amount shown under Non-current Liabilities and explain the impact on Reserve and Surplus for Arush Ltd.

Long-term Borrowings: 5,000 × Rs. 100 = Rs. 5,00,000.
Premium on Redemption: 5,000 × Rs. 5 = Rs. 25,000, shown under Other Long-term Liabilities.
Total Non-current Liabilities = Rs. 5,00,000 + Rs. 25,000 = Rs. 5,25,000.
The premium on redemption is debited to Statement of Profit and Loss, resulting in a debit balance of Rs. 25,000 shown as negative under Reserve and Surplus.

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Case Set 5

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Dinkar Ltd. has an authorised capital of Rs. 50,00,000 divided into equity shares of Rs. 100 each. The company invited applications for 40,000 shares. Applications for 36,000 shares were received. All calls were made and duly received except for 500 shares on which the final call of Rs. 20 was not received. The company forfeited 200 shares on which the final call was not received. The accountant needs to prepare the Share Capital note and present it in the balance sheet as per Schedule III of the Companies Act, 2013, clearly distinguishing between subscribed and fully paid-up and subscribed but not fully paid-up capital.

Question 1: What is the difference between authorised capital and issued capital?

Authorised capital is the maximum amount of capital a company is permitted to raise by issuing shares as per its Memorandum of Association.
Issued capital is that part of the authorised capital which has been offered to the public for subscription.
In Dinkar Ltd., authorised capital is Rs. 50,00,000 while issued capital is Rs. 40,00,000 (40,000 shares × Rs. 100).

Question 2: How are calls-in-arrears and forfeited shares shown in the Notes to Accounts for Share Capital?

Calls-in-arrears are deducted from subscribed but not fully paid-up capital. In this case: 300 shares × Rs. 20 = Rs. 6,000 deducted from Rs. 30,000.
Forfeited shares amount (200 shares × Rs. 80 already paid = Rs. 16,000) is added back, as the amount received on forfeited shares is credited to Share Forfeiture Account.

Question 3: Prepare the Notes to Accounts for Share Capital of Dinkar Ltd. showing the total share capital figure.

Authorised Capital: 50,000 equity shares of Rs. 100 each = Rs. 50,00,000.
Issued Capital: 40,000 equity shares of Rs. 100 each = Rs. 40,00,000.
Subscribed and fully paid-up: 35,500 shares × Rs. 100 = Rs. 35,50,000.
Subscribed but not fully paid-up: 300 shares × Rs. 100 (fully called) = Rs. 30,000; Less: Calls-in-arrears (300 × Rs. 20) = Rs. 6,000; Net = Rs. 24,000; Add: Share Forfeiture A/c (200 × Rs. 80) = Rs. 16,000; Subtotal = Rs. 40,000.
Total Share Capital = Rs. 35,50,000 + Rs. 40,000 = Rs. 35,90,000.

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Chapter financial-statements-of-a-company: Financial Statements of a Company | Case Study Questions

Passage

Question 1: What is the basis of recording transactions in financial statements?

Question 2: What does the money measurement postulate assume, and why is it considered a limitation?

Question 3: Explain the role of personal judgements in the preparation of financial statements with three examples.

Passage

Question 1: Under which head will loose tools be classified in the balance sheet?

Question 2: How will deferred tax liabilities and the bank loan repayable after 3 years be classified in the balance sheet?

Question 3: State the criteria for classifying an item as a current asset or current liability as per Schedule III.

Passage

Question 1: How should the debit balance in the Statement of Profit and Loss be disclosed as per Schedule III?

Question 2: What will be the net Reserve and Surplus figure for Sunita Ltd. and how will it appear in the balance sheet?

Question 3: State the rounding-off rules for financial statements under Schedule III and apply the appropriate rule for Sunita Ltd.

Passage

Question 1: Under which head will the 10% debentures be shown in the balance sheet?

Question 2: Where is the premium on redemption of debentures shown in the balance sheet and why?

Question 3: Calculate the total amount shown under Non-current Liabilities and explain the impact on Reserve and Surplus for Arush Ltd.

Passage

Question 1: What is the difference between authorised capital and issued capital?

Question 2: How are calls-in-arrears and forfeited shares shown in the Notes to Accounts for Share Capital?

Question 3: Prepare the Notes to Accounts for Share Capital of Dinkar Ltd. showing the total share capital figure.

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