financial · financial statements serve as a horoscope of a business. this is so because they...

FINANCIALSTATEMENT ANALYSIS

M.S. Srihari Krishna Rao (SKR) Vedula SanthiM.Com., MBA (M.Phil.), M.Com., MBA, M.A. (Eco), M.Phil.,Head, Department of Commerce, Principal,Sai Sudhir Degree and PG College, Jahnavi Degree College for Women,ECIL X Road, Hyderabad. Narayanaguda, Hyderabad.

Sai Krishna Goli K. ShailajaM.Com., LL.B., M.Com., MBA,Head, Department of Commerce, Faculty, Department of Commerce,Arora Degree College, Indian Institute of Management &Chikkadpally, Hyderabad. Commerce (IIMC),

Khairatabad, Hyderabad.

[As per New CBCS Syllabus for 2nd Year, 4th Semester B.Com. (Gen./Hons.)for Various Universities in Telangana State w.e.f. 2016-2017]

AS PER SCHEDULE III OF THE COMPANIES ACT, 2013 GUIDELINES ISSUED BY ACCOUNTING STANDARDS AND

IFRS WITH REFERENCE OF PRACTICAL FINANCIAL STATEMENT OF DIFFERENT COMPANIES

ISO 9001:2008 CERTIFIED

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First Edition : 2018

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Dedicated toMy Beloved Parents

Late Sri M. Sangisetti Yadagiri Rao

&

Late Smt. Sangisetti Chandrakala

PREFACE

The academic reforms recommended by the UGC in the recent past have led to overallimprovement in the higher education system. The Choice Based Credit System provides a‘cafeteria’ approach in which students can pick courses of their choice, learn at their ownpace, take up additional courses and acquire more than the required credits. The new systemhelps students develop critical thinking as well as analytical ability, and makes them job-ready.

This book has been written strictly as per the Schedule III of the Companies Act 2013,Guidelines issued by Accounting Standards and IFRS, with reference of practical financialstatement of different companies of all the chapters and each chapter had clearly explainedwith Working Notes on International Accounting Standards and Indian Accounting Standards(IAS) based and IFRS topics incorporated in this book.

An attempt had been made to present the concepts in easily understandable, with simpleand lucid language. Each aspects of the chapters of the book had clearly explained with suitableexamples and ample of illustrations and every care had been taken to include adequate numberof problems for practice at the end of each Unit with number of practical problems of variousUniversity Questions.

I would like to thank my Guide and Inspirator Sri D.Venkatiah, M.Tech., Retd.Superintendent of Engineer.

My wholehearted gratitude and thanks to Smt. R. Usha Rani, Chairperson, Sai-SudhirGroup of Institutions, Hyderabad , who had motivated me and given her valuable suggestionsand guidance while preparing this book.

And I would like to thank Prof. S.V. Satyanarayana, Chairman, BOS, Department ofCommerce, Osmania University, Hyderabad, who is my Teacher and my Role Model. Hisinspiration in handling the subjects had made me to write this prestigious project.

Also, I would like to thank Dr. Meera Naidu, Principal, Sai-Sudhir PG College, andD.S. Vittal, Principal, Degree College, J. Pradeep Kumar, Head, Department of Computer

Science and to all my colleagues. Also, I would like to thank Mr. V. Sridhar Reddy (myLecturer), Poreddy Anjan Reddy (Classmate) of Noble Degree College, DSNR, and S. ShekarReddy (Classmate) of Sri Sai Degree College, DSNR and my friend Shri Vadakam SreeShailam, SP Degree College, Secunderabad.

I would like to thank to Shri A. Paremeswar, Chairman Jahnavi Group of Institutions,Shri K. Raghuveer, Principal, IIMC and B. Viswanadham, Principal, Arora Degree College,Hyderabad.

And last but not the least, I should like to thank my life partner Smt. D. Madhavi andmy daughter S. Sahithya who had helped in proofreading, spared their valuable time andpatience, while preparing this project. Without their support, this book would not come invein.

And I would like to thank our Publisher M/s. Himalaya Publishing House Pvt. Ltd.,Shri Niraj Pandey, Shri Vijay Pandey and Mr. G.Anil Kumar (Assistant Sales Manager,Hyderabad Branch), V. Srinivasa Raju (Senior Executive) and Mr. Janiga, Raj Kumar and P.Bhaskar (Senior Executives), and Mr. Durga Prasad for who had cheerfully and skilfullyhandling DTP work.

While I have taken all possible care to see that the book had no errors, some errors maycrept in. I look forward for constructive criticisms and concrete suggestions for the bettermentof the book are always welcomed, and shall see to rectify them in our consecutive revisededitions.

Hyderabad

February 2018 M.S. Srihari Krishna Rao (SKR)

SYLLABUS

Paper (BC 407): FINANCIAL STATEMENT ANALYSIS

Paper: BC 407 Maximum Marks: 100

PPW: 4 Hours Exam Duration: 3 Hours

Credits: 4

Objective: To acquire knowledge and techniques of Financial Statements Analysis.

UNIT - I: INTRODUCTION:

Financial Statements: Meaning – Components: Assets – Liabilities – Equity – Incomeand Expenditure and their Features – Constituents: Income Statement and BalanceSheet and their Features – Information Incorporated and their Qualitative Requirements– Limitations (Theory Only).

UNIT - II: TECHNIQUES OF FINANICAL STATEMENT ANALYSIS:

Meaning – Objectives – Techniques: Comparative Statement, Common Size Statement,Trend Analysis (Including Problems).

UNIT - III: RATIO ANALYSIS:

Meaning – Objectives – Classification – Advantages and Limitations – Computation ofVarious Ratios: Activity Ratios – Liquidity Ratios – Solvency Ratios – Profitability Ratios(Including Problems).

UNIT - IV: FUNDS FLOW ANANLYSIS:

Concept of Fund – Meaning and Importance – Statement of Changes in Working Capital– Statement of Sources and Application of Funds – Limitations (Including Problems).

UNIT - V: CASH FLOW ANALYSIS (AS-3):

Meaning – Importance – Differences between Funds Flow and Cash Flow Statements –Procedure for Preparation of Cash Flow Statement (Including Problems).

CONTENTS

UNIT - I

Introduction 1 - 33

Unit - II

Techniques of Financial Statement Analysis 34 - 91

Unit - III

Ratio Analysis 92 - 158

Unit - IV

Funds Flow Analysis 159 - 232

Unit - V

Cash Flow Analysis (AS-3) 233 - 294

Financial Statements: Meaning – Elements: Assets, Liabilities, Equity, Income andExpenditure and their Features – Constituents Income Statement and Balance Sheetand their Features – Information Incorporated and their Qualitative Requirements –Limitations.

Introduction to Financial StatementsThe ultimate objective or result of the financial accounting is communicating the true

and fair financial position to the needy in the prescribed manner known as FinancialStatement. It includes preparation of Income statement and Balance Sheet. It is intended toconvey the profitability position and the overall financial soundness of the concern.

Meaning of Financial StatementsFinancial statements are the essential documents of business. They are the outputs of

financial accounting. They are the final products of the accounting process. They arestatements containing financial information of a business enterprise. They convey certainmessage to feel financial pulse of an organization. The basic purpose of preparing financialstatements is to convey information about financial position of the enterprise to owners,creditors and the investors.

According to IAS-1 Paragraph 10, a complete set of financial statements includes:

(i) a statement of Financial Position (balance sheet) at the end of the period.

(ii) a statement of profit or loss and other comprehensive income for the period.

UNIT - I

INTRODUCTION

2 Financial Statement Analysis

(iii) a statement of changes in equity for the period

(iv) a statement of cash flows for the period

(v) Notes, comprising a summary of significant accounting policies and otherexplanatory notes.

(vi) Comparative information prescribed by the standard.

DefinitionsAccording to AICPA, "Financial statements are prepared for the purpose of presenting

a periodical review of report on progress by the Management and deal with the status ofthe investment in the business and the results achieved during the period under review.They reflect a combination of recorded facts, accounting conventions and personalJudgements and conventions applied affect them materially".

Kohler says "A Balance Sheet, Income Statement, Funds Statement or any Supportingstatement or other presentation of financial data derived from accounting records".

According to section 2 (40) of The Companies Act 2013, "Financial statements" inrelation to a company includes:

(i) A Balance Sheet as at the end of the financial year.

(ii) A Profit and Loss Statement/an Income and Expenditure Account (in case of anon-profit organisation) for the financial year.

(iii) Cash Flow Statement for the financial year.

(iv) A Statement of Changes in Equity, if applicable.

(v) Any Explanatory note annexed to any document referred to in sub-clause (i) to(iv).

A complete set of Financial Statements contain the following statements:

Financial Satements

BalanceSheet

Income Statement

Statementof changesin Equity

CashflowStatement

Accountingpolicies and

notes

Objectives of Financial StatementsFinancial statements serve as a horoscope of a business. This is so because they enable

readers to measure financial position of a concern. The main objective of financial statementsis to provide information about the financial position and performance of an enterprisethat is useful to users in making decisions. The other objectives are summarized below:

Introduction 3

1. To provide information about assets and liabilities of a firm.

2. To provide useful information to various parties interested in financialstatements.

3. To present true and fair view of the business.

4. To estimate the earning capacity of the enterprise.

5. To determine the debt capacity of the concern.

6. To decide about the future prospects of the business.

Thus, the ultimate objective of Financial Statements is to get better in sight about thefinancial strengths and weaknesses of the firm.

Nature of Financial StatementsThe following characteristics of financial statements indicate their nature:

1. Recorded Facts

The term recorded facts refers to the data drawn from accounting records. Onlythose facts which have been recorded in the books are shown in the financialstatements.

2. Accounting Principles

In the preparation of financial statements, certain accounting principles, conceptsand conventions are followed. For example: The principle of cost price or marketprice whichever is less is followed for valuation of stock.

3. Assumptions

Business transactions are recorded on certain assumptions. For example: Inpreparing financial statements, the accountants make many assumptions likethat the value of money remains constant, going concern concept, etc.

4. Personal Judgment

The financial statements are affected by the personal judgment of accountants.For example: The method of stock valuation, method of depreciation, etc. dependon the personal judgment of the accountant. The accountant can select one of theavailable methods of stock valuation, depreciation, etc.


Essential of Financial Statements (or)Qualitative Requirements of Financial Statements

The financial statements should possess the following essential qualities:

1. Understandability

Financial statements should be easily understandable by users. For this, theinformation contained in these statements should be clear and simple.

2. Relevance

The financial statements must contain only relevant information. Then only theusers can evaluate past, present and future events and can take wise decisions.

3. Reliability and Accuracy

Financial statement should disclose information in such a way that the users cancompare the current year's progress with that of previous year. Users must alsobe able to compare the financial performance of reporting company with that ofother companies.

4. Comparability

Financial statements should disclose information in such a way that the userscan compare the current year's progress with that of previous year. Users mustalso be able to compare the financial performance of reporting company withthat of other companies.

5. Completeness

The information contained in the financial statements should be complete in allrespects. This means all information should be shown in these statements. Itfurther means that the information shown in the financial statements should notmislead creditors, investors and other users.

6. Timeliness

The financial statements should be prepared within a reasonable time after theaccounting period is over. If the statements are not prepared and presented intime, they cannot be properly used. Besides, the firm cannot formulate plans forfuture.

Importance or Users of Financial StatementsThe chief function of financial statements is providing valuable information about

financial position and operating strength or weakness of the enterprise to various partiesinterested in the enterprise. The various interested parties are management, investors,creditors, banks, employees, government, customers, public, trade associations, stock

Introduction 5

exchanges, etc. They are the users of the financial statements are actually the vehicles throughwhich the financial information are transported to users of financial information. Thefollowing are the uses of financial statements to different parties are:

1. Importance for Management (Owners)

Financial statements supply valuable information to owners or management.They make use of financial statements for ascertaining the earning capacity,financial position, growth, etc. Management can take decisions and manage thebusiness efficiently on the basis of information provided by financial statement.

2. Importance for Investors

In the case of joint stock company, shareholders and long-term leaders (debentureholders) are the investors. Shareholders are the real owner of joint stockcompanies. Shareholders need information to decide whether to buy, hold orsell shares of the company. They also need information regarding financialposition, earning of the firm. Debenture holders need information to knowwhether the company has ability to repay the debt and to pay the interest. Theinformation required by investors will be provided by financial statements.

3. Importance for Trade Creditors or Suppliers

Trade creditors or suppliers need information to determine whether amountsowing to them will be paid when due. Financial statements help them to knowwhether the company has the capacity to pay the amount due to them in time.

4. Importance for Banks

The banks will ensure that their loans along with interest will be paid on duedates while granting loans. For this, they want to know about the financialposition and profit earning capacity of the borrowing company. Banks will getthe required information from the financial statements.

5. Importance for Customers

Customers need information to know whether the company will be able tocontinue supply of goods and services to them. For knowing this, financialstatements come to their help.

6. Importance for Employees

Employees require information to assess the profitability and stability of theenterprise. The profitability of the company affects the remuneration, bonus,retirement benefits, working conditions, etc. of the employees. Therefore, theemployees are also interested in the financial statements.


7. Importance for Government and their Agencies

Governments need information about the affairs of a company to formulate taxpolicies, export-import policies, annual budget, etc. Controlling agency like SEBIis interested in the financial statements of companies to exercise control overthem better. Similarly, tax authorities are also interested in income statementsof the taxpaying companies. The income statement provides the basis for assessingthe taxable income.

8. Importance for Public

Public also interested in financial statements of business enterprises. Financialstatements provide information to public to judge whether the enterprise hasfulfilled its social responsibility or not.

9. Importance for Trade Unions

Trade unions require information to initiate wage negotiations. This informationis provided by financial statements. Financial statements are also important forstock exchanges, research scholars, etc. Thus, financial statements are able tosatisfy the needs of all the parties interested in the business.

Limitations of Financial StatementThe following are all limitations of financial statements:

1. Dependence on historical costs: Transactions are initially recorded at their cost.This is a concern when reviewing the balance sheet, where the values of assetsand liabilities may change over time. Thus, the balance sheet could be misleadingif a large part of the amount presented is based on historical costs.

2. Inflationary effects: If the inflation rate is relatively high, the amounts associatedwith assets and liabilities in the balance sheet will appear inordinately low, sincethey are not being adjusted for inflation. This mostly applies to long-term assets.

3. Intangible assets not recorded: Many intangible assets are not recorded as assets.It is a particular problem for start-up companies that have created intellectualproperty, but which have so far generated minimal sales.

4. Based on specific time period: Any one period may vary from the normaloperating results of a business, perhaps due to a sudden spike in sales orseasonality effects. It is better to view a large number of consecutive financialstatements to gain a better view of ongoing results.

5. Not always comparable across companies: There financial statements are notalways comparable, because the entities use different accounting practices. Theseissues can be located by examining the disclosures that accompany the financialstatements.

Introduction 7

6. Subject to fraud: The management team of a company may deliberately skewthe results presented. This situation can arise when there is undue pressure toreport excellent results, such as when a bonus plan calls for payouts only if thereported sales level increases.

7. No discussion of non-financial issues: The financial statements do not addressnonfinancial issues, such as the environmental attentiveness of a company’soperations, or how well it works with the local community. A business reportingexcellent financial results might be a failure in these other areas.

Elements of Financial StatementsBasic Elements of Balance sheet are:

1. Assets

2. Liabilities

3. Equity

Assets

Anything tangible or intangible that can be owned or controlled to produce valueand that is held by a company to produce positive economic value is an asset.

Assets are sometimes defined as resources or things of value that are owned by acompany. Assets are classified in different types and they are as follows:

(a) Non-current assets

(b) Current assets

(c) Other assets

Non-current assets means fixed assets are those assets which are tangible or intangibleand relatively long-lived; that is used in order to produce goods, used in operation ofbusiness and not intended for sale. Examples of Non-current assets are land and building,Plant and Machinery, Furniture, Motor Vehicles, Goodwill, Technical Knowledge, BrandName, Copyright, Patents, Trademarks, Non-current investments, etc. These assetsincreases profit earning capacity of the business and are valued at cost less depreciationmethod.

Current Assets or Floating Assets: current assets are those assets which are convertiblein to cash through the normal course of business within a short span of time, say within oneyear. Current assets includes Short-term Investments, Inventories, Trade Receivables,Cash and Cash Equivalents, Short-term Loans and Advances, Other Current Assets (specifynature).

Other Assets are those assets which are Specify nature include Wasting assets, Nominalassets or fictitious assets, Liquid or Quick assets, etc.


Liabilities

Liabilities are obligations to outside parties arising from events that have alreadyhappened. In simple, liabilities are claims against the entities assets. Liabilities are broadlyclassified into three major categories. They are:

(a) Non-current liabilities

(b) Current liabilities

(c) Other liabilities

Non-current liabilities mean long-term liabilities are those obligations which aregoing to meet after one year or more. Examples are long-term borrowings, term loansfrom bank and financial institutions, debentures, mortgage loans, etc.

Current Liabilities or Short term Liabilities: Obligations which are going to meet ina short span of time (within one year of the date of balance sheet) are called short-termliabilities. Examples of such liabilities are short-term borrowings, trade payables includebills payables, short-term provisions, bank overdrafts, unearned revenues, outstandingexpenses, etc.

Other Liabilities or Contingent Liabilities: A contingency is an occurrence that mightarise in the future. These liabilities will become repayable only on the happening of someevent otherwise not. Since these liabilities are uncertain, they will not appear in balancesheet. However, they are shown as a foot note below the balance sheet. Examples areLiability against a suit pending in a court of law, Liability in respect of a guaranteegiven, Liability for bill discounts, etc.

Equity

Equity shares are those, which are not preference shares. In other words, these areshares, which do not enjoy any preferential right either in respect of payment of dividendor in respect of the repayment of capital at the time of the winding up of the company.These shares are known as equity shares as they are the ‘ownership shares’ conferring theownership of the company on the holders of these shares, i.e., the holders of these sharesare the real owners of the company.

Equity share refers to the stock or capital stock of a business entity which representsthe original capital paid into or invested in the business by its founders. It serves as asecurity for the creditors of a business since it cannot be withdrawn to the detriment of thecreditors.

Equity is what the business owes to its owners. Equity is derived by deducting totalliabilities from the total assets. It, therefore, represents the residual interest in the businessthat belongs to the owners.

Introduction 9

Equity is usually presented in the statement of financial position under the followingcategories:

(a) Share capital represents the amount invested by the owners in the entity.

(b) Retained Earnings comprises the total net profit or loss retained in the businessafter distribution to the owners in the form of dividends.

(c) Revaluation Reserve contains the net surplus of any upward revaluation ofproperty, plant and equipment recognised directly in equity.

Equity = Assets - Liabilities

Statement of Shareholders’ EquityThis statement shows the changes in the shareholders’ equity account. The first line

item is the beginning balance for common stock. The amount of newly issued commonstock is added to the beginning balance to get the ending balance. The same goes for thepreferred stocks. Listed next is the beginning balance to retained earnings which is alsolisted on the balance sheet. The net income listed on the income statement is added to thebeginning retained earnings balance and the amount of dividends paid out to shareholdersis subtracted to get the ending balance. The ending balance for common and preferredstock and the ending balance for retained earnings is added together to get the total of theshareholders' equity.

The basic elements of profit and loss statement are:

1. Income

2. Expenditure

Income

Income is money that an individual or business receives in exchange for providing agood or service or through investing capital..

Increases in economic benefits during the accounting period in the form of inflows orimprove of assets or decreases of liabilities that result in increases in equity, other thanthose relating to contributions from equity participants.

According to Eisner V. Macomber case, “The gain derived from capital, from labouror from both combined, provided it is under stood to include profit gained through a saleor conversion of capital asset.”

Income include sale of product, sale of services, other operating revenues, interestincome, dividend income, net gain/loss on sale of investments, other non-operatingincome, etc.


Expenditure

The incurring of a liability, the payment of cash, the transfer of property for thepurpose of acquiring an asset, service or setting a loss is called expenditure. The accrualbasis of accounting is assumed unless otherwise noted.

According to Kohler Dictionary for Accountants, “Any cost the benefits of whichmay extend beyond the current accounting period.”

Expenditure include cost of raw material consumed, cost of service, change ininventories of finished goods and work in progress, employees benefit expenses (wages,salaries, PF, etc.), finance cost (interest paid), depreciation and amortization, other expenses(rent paid, advertisement administrative, selling and distribution expenses).

Income Statement

A firm's revenues, gains, expenses and losses are listed on the income statement. Anincome statement or profit and loss statements is also known as Operating Statement.Revenue is money earned from a company's normal business operations. The expenses onthe income statement are the costs associated with earnings the revenue. When a companysells one of its assets, it can experience a capital gain or loss. Revenues minus expensesplans gains minus losses, equal net income or net loss.

Definition:

According to Kohler's Dictionary for Accountants, Income statement is "A summaryof revenues and expenses, including gains and losses from extraordinary items anddiscontinued operations, of an accounting unit, or group of such units and resulting in a netincome figure for a specified period of time".

According to Robert N. Anthony, an Income Statement as an according report thatsummarises the revenue items, the expenses items and the difference between then (netincome) for an accounting period".

According to IAS and IFRS, presentation of the income statement may be classifiedinto two methods:

(i) Classification of expenses by function

(ii) Classification of expenses by nature

Introduction 11

Presentation of the Income Statement

On the basis of Expenses On the basis of Simplification

Expenses Classi-fied by Functions

Expenses Classi-fied by nature

Single Step Multiple Step

Classification of Expenses by FunctionThe expenses disclosed in an income statement by their functions. An organisation

expenses predicated on activity of function. Under this method, expenses classified intocost of goods sold or cost os sales, operating expenses, non-operating expenses and taxpaid or provision for taxation. It is also called as Multiple step income statement.

Note : IAS - 1 Allows presentation of expenses which are classified by nature or function, but classification of expenses by function is not permitted in India because functional classification does not recognise extraordinary items part II and Schedule III of the Companies Act 2013 is been in clear explanation.

Classification of expenses by function is demonstrated in the following IncomeStatement of Panasonic Corporation.


Expenses Classified by Function:PANASONIC CORPORATION

Consolidated Statements or Profit or Loss and Consolidated Statements ofComprehensive Income (Loss) Years ended March 31, 2017 and 2016

Consolidated Statements of Profit or Loss (Millions of Yen) 2016 2017 Net sales ………………………………………………………………………… 7,626,306 7,343,707 Cost of sales …………………………………………………………………….. (5,367,667) (5,157,163) Gross profit …………………………………………………………………….. 2,258,639 2,186,544 Selling general and administrative expenses ……………………………….. (1,845,393) (1,842,928) Share of profit of investments accounted for using the equity method ….. 8,445 8,378 Other income (expenses) net …………………………………………………. (191,392) (75,210) Operating profit ………………………………………………………………... 230,299 276,784 Finance income ………………………………………………………………… 23,618 21,832 Finance expenses ………………………………………………………………. (26,388) (23,550) Profit before income taxes ……………………………………………………. 227,529 275,066 Income taxes …………………………………………………………………… [36,296) (102,624) Net profit ……………………………………………………………………….. 191,233 172,442 Net profit attributable to ……………………………………………………… Panasonic Corporation stockholders ………………………………………… 165,212 149,360 Non controlling interests ……………………………………………………… 26,021 23,082 Earnings per share attributable to Panasonic Corporation stockholders Yen Basic …………………………………………………………………………….. 71.30 64.33 Diluted ………………………………………………………………………….. 71 29 64.31

Consolidated Statements of Comprehensive Income (Loss) (Millions of Yen) 2016 2017 Net Profit ………………………………………………………………………... 191,233 172,442 Other comprehensive income (loss) net of tax Items that will not be reclassified to profit or loss Remeasurements of defined benefit plans …………………………………… (79,205) 73,513 Financial assets measured at fair value through other comprehensive income ……………………………………………………………………………

- 4,260

Subtotal ………………………………………………………………………….. (79,205) 77,773 Items that may be reclassified to profit or loss Exchange differences on translation of foreign operations ………………… (164,668) (61,304) Net changes in fair value of cash flow hedges ………………………………. (2,588) 964 Unrealized holding gains of available for sale securities …………………... 7,069 - Subtotal ………………………………………………………………………….. (160,187) (60,340) Total other comprehensive income (loss) …………………………………… (239,392) 17,433 Comprehensive income (loss) ………………………………………………… (48,159) 189,875 Comprehensive income (loss) attributable to : Panasonic Corporation stockholders …………………………………………. (54,61 7) 174,892 Non controlling interests ………………………………………………………. 6,458 14,983

Introduction 13

Classification of Expenses by NatureAn income statement by nature method is the one in which expenses are revealed

according to their nature such as cost of materials consumed, employees' benefit expenses,depreciation and other expenses. There is no reallocation of these expenses to differentfunctions of the entity.

It is also called as single step income statement. Classification of expenses by natureis corroborated in the following income statement of Arvind Company Limited.

EXPENSES CLASSIFIED BY NATURE

.................................................................................................... ............................................

Standalone Statement of Profit and Loss for the year ended March 31, 2017

` in Crores

Particulars Notes Year ended

March 31, 2017

Year ended March 31,

2016 Income Revenue from operations Sale of Products 19 5,611.09 5,130 77 Sale of Services 19 16.50 1597 Other Operating Income 19 328.09 21808 Revenue from operations 5,955.68 5,364 82 Other income 20 97-55 101 20 Total income (I) 6,053.23 5,466 02 Expenses Cost of raw materials and accessories consumed 21 2»385-33 2,07710 Purchase of stock in trade 22 247.14 11664 Changes in inventories of finished goods, work in-progress and stock-in-trade 23 (100.12) (5235) Project expenses 12.87 9.71 Employee benefits expense 24 777-52 65108 Finance costs 25 234.28 29216 Depreciation and amortization expense 26 181.98 14916 Impairment Loss 26 2.81 Other expenses 27 1,910.72 1-772 43 Total expenses (II) 5,652.53 5,015.93 Profit before exceptional items and tax (III) = (I – II) 400.70 450.09 Exceptional items (IV) 28 18.06 (1.37) Profit before tax (V) = (III – IV) 382.04 451.46 Tax expense Current tax 29 105.16 95.99 Deferred tax 29 6.60 34.83 Total tax expense (VI) 111.76 130.82 Profit for the year (VII) = (V – VI) 270.88 320.64 Other comprehensive income


Other comprehensive income A. Other comprehensive income not to be reclassified to profit or loss in

subsequent periods :

Re-measurement gains / (losses) on denned benefit plans 14 1.19 (5.42) Income tax effect 29 (0.41) 1.88 0.78 (3.54) Net gain / (loss) on FVOCI equity instruments 14 25.99 26.09 Income tax effect 29 – – Net other comprehensive income not to be reclassified to profit or loss in subsequent periods (A)

25.99 26.09

26.77 22.55 B. Other comprehensive income that may be reclassified to profit or loss

in subsequent periods :

Net gains / (loss) on hedging instruments in a cash flow hedge 14 35.46 21.70 Income tax effect 29 (12.27) (7.51) Net other comprehensive income that may be reclassified to profit or loss in subsequent periods (B)

23.19 14.19

Total other comprehensive income for the year, net of tax (VIII) = (A + B) 49.96 36.74 Total comprehensive income for the year, net of tax (VII + VIII) 320.84 357.38 Earning per equity share [nominal value per share ` 10/- (March 31, 2016 `

10/-)]

Basic 36 10.49 12.42 Diluted 36 10.48 12.41 Summary of significant accounting policies 3

The accompanying notes are an integral part of the financial statements

As per our report of even date For and on behalf of the board of directors of Arvind Limited

For Sorab S. Engineer & Co.Chartered AccountantsFirm Registration No. 110417W

CA. N. D. Anklesaria Sanjay S. Lalbhai Jayesh K. Shah R. V. BhimaniPartner Chairman & Directors* CompanyMembership No 10250 Managing Director Chief Financial Officer SecretaryAhmedabad DIN 00008329 DIN 00008349 AhmedabadMay 11 2017 Ahmedabad Ahmedabad May 11 2017

May 11 2017 May 11 2017

Balance SheetA Balance Sheet is an important financial statement, that depicts the financial condition

of a company as on a particular period. It is also known as position statement, statement ofEquity, Liabilities and Assets and Statement of Sources and Applications.

Introduction 15

DefinitionsAccording to H.G. Guthmann, "the Balance Sheet might be defined as the dual financial

picture of an enterprise, depicting, on the one hand, the properties that it utilised and onthe other hand the sources of these properties".

According to Francis R. Stead, "Balance Sheet is a screen picture of the financial positionof a going business at certain moment".

A Balance Sheet is a summary statement. It is Historic and static in nature.

Illustrated Balance Sheet of Arvind Co. Ltd. is as follows:

ARVIND LIMITED ANNUAL REPORT.................................................................................................... ..........................................

Standalone Balance Sheet as at March 31, 2017

` in Crores

Particulars Notes As at

March 31, 2017

As at March 31,

2016

As at April 01,

2015 ASSETS 1. Non-current assets a) Property, plant and equipment 5 2,877.90 2,815.07 2,601.50 b) Capital work-in-progress 5 58.32 74.08 75-42 c) Investment property 6 117.74 118.33 118.92 d) Intangible assets 7 80.36 14.86 9.40 e) Intangible assets under development 7 - 23.79 - f) Financial assets (i) Investments 8 1,264.92 1,147.71 814.00 (ii) Loans 8 2.45 2.76 3.81 (iii) Other financial assets 8 43-45 44.65 40-55 (g) Other non-current assets 9 60.04 53.29 86.57 Total non-current assets 4,505.18 4294.54 3,750.17 II. Current assets (a) Inventories 10 1,299.24 1,137.20 1,040.54 (b) Financial assets i) Trade receivables 8 490.03 453.84 484.97 ii) Cash and cash equivalents 8 4.31 14.83 17.69 iii) Bank balance other than (iii)above 8 8.97 8-58 27.29 iv) Loans 8 353.08 577.21 598.37 v) Others financial assets 8 161.61 159.60 116 06 (c) Current tax assets (net) 11 40.09 64.76 60.41 (d) Other current assets 9 290.99 279.11 298.66 (e) Assets classified as held for sale

12

2,648.32 –

2,695.13 –

2,643.99 139.07

Total current assets 2,648.32 2,695.13 2,783.06 Total Assets 7,153.50 6,989.67 6,533.23


EQUITY AND LIABILITIES

Equity

Equity share capital 13 258.36 258.24 258.24

Other equity 14 2,983.35 2,727.89 2,543.03

Total equity 3,241.71 2,986.13 2,801.27

LIABILITIES

1. Non-current liabilities

(a) Financial liabilities

(i) Borrowings 15 1,085.10 1,332.01 1,171.31

(ii) Other financial liabilities 15 1.01 1.81 1-53

(b) Long-term provisions 16 27.18 21.73 18.80

(c) Deferred tax liabilities (net) 29 68.34 49.06 8.60

(d) Government grants 17 30.78 25.24 12.80

Total non-current liabilities 1,212.41 1,429.85 1,213.04

II. Current liabilities

(a) Financial liabilities

(i) Borrowings 15 1,750.26 1,521-74 1,488.09

(ii) Trade payables 15 667.73 633.46 584.65

(iii) Other financial liabilities 15 211.96 380.83 350.65

(b) Other current liabilities 18 58.36 29-77 48.07

(c) Short-term provisions 16 6.38 4.51 562

(d) Government grants 17 4.69 3.38 2.84

(e) Liabilities directly associated with assets classified as held for sale

12 2,699.38 -

2,573.69 -

2,479.82 39.10

Total current liabilities 2,699.38 2,573.69 2,518.92

Total equity and liabilities 7,153.50 6,989.67 6,533-23

Summary of significant accounting policies 3

The accompanying notes are an integral part of the financial statements

As per our report of even date For and on behalf of the board of directors of Arvind Limited

For Sorab S. Engineer & Co.Chartered AccountantsFirm Registration No. 110417W

CA. N. D. Anklesaria Sanjay S. Lalbhai Jayesh K. Shah R. V. BhimaniPartner Chairman & Directors* CompanyMembership No 10250 Managing Director Chief Financial Officer SecretaryAhmedabad DIN 00008329 DIN 00008349 AhmedabadMay 11 2017 Ahmedabad Ahmedabad May 11 2017

May 11 2017 May 11 2017

Introduction 17

Financial StatementsSection 129 of the Indian Companies Act 2013, Schedule III:

"The Financial statements shall give a true and fair view of the state of affairs of theCompany or Companies, comply with the accounting standards notified under Section 133and shall be in the form or forms as may be provided for different class or classes ofcompanies in schedule III."

Provided that the item contained in such Financial Statements shall be in accordancewith the Accounting Standards.

Depending upon the turnover of the company, the figures appearing in the FinancialStatements may be rounded off as given below:

Turnover Rounding of f

(a) less than one hundred crore rupees To the nearest hundreds, thousands,lakhs or millions, or decimals thereof.

(b) one hundred crore rupees or more To the nearest lakhs, millions orcrores or decimals thereof.

Once a unit of measurement is used, it shall be used uniformly in the FinancialStatements.

This part of Schedule sets out the minimum requirements for disclosure on the faceof the Balance Sheet, and the Statement of Profit and Loss.

Part I – Balance Sheet

Name of the Company ............................

Balance Sheet as at ............................

(Rupees in ......................)

Particulars Note No.

Figures as at the end of

current reporting

period

Figures as at the end of the

previous reporting

period I. Equity and Liabilities (1) Shareholders’ funds (a) Share capital xxx xxx (b) Reserves and Surplus xxx xxx (c) Money received against share warrants xxx xxx (2) Share application money pending allotment xxx xxx (3) Non-current liabilities


(3) Non-current liabilities (a) Long-term borrowings xxx xxx (b) Deferred tax liabilities (Net) xxx xxx (c) Other Long term liabilities xxx xxx (d) Long-term provisions xxx xxx (4) Current liabilities (a) Short-term borrowings xxx xxx (b) Trade payables xxx xxx (c) Other current liabilities xxx xxx (d) Short-term provisions xxx xxx

Total xxxx xxxx II. Assets Non-current assets (1) (a) Fixed assets (i) Tangible assets xxx xxx (ii) Intangible assets xxx xxx (iii) Capital work-in-progress xxx xxx (iv) Intangible assets under development

xxx xxx

(b) Non-current investments xxx xxx (c) Deferred tax assets (net) xxx xxx (d) Long-term loans and advances xxx xxx (e) Other non-current assets xxx xxx (2) Current assets (a) Current investments xxx xxx (b) Inventories xxx xxx (c) Trade receivables xxx xxx (e) Short-term loans and advances xxx xxx (f) Other current assets xxx xxx

Total xxxx xxxx

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET1. An asset shall be classified as current when it satisfies any of the following criteria:

(a) it is expected to be realised in, or is intended for sale or consumption in, thecompany’s normal operating cycle;

(b) it is held primarily for the purpose of being traded;

(c) it is expected to be realised within twelve months after the reporting date; or

(d)(e)

Introduction 19

(d) it is cash or cash equivalent unless it is restricted from being exchanged or usedto settle a liability for at least twelve months after the reporting date. All otherassets shall be classified as non-current.

The normal operating cycle cannot be identified, it is assumed to have a duration oftwelve months.

2. A liability shall be classified as current when it satisfies any of the following criteria:

(a) it is expected to be settled in the company's normal operating cycle;

(b) it is held primarily for the purpose of being traded;

(c) it is due to be settled within twelve months after the reporting date: or

(d) the company does not have an unconditional right to defer settlement of theliability for at least twelve months after the reporting date. Terms of a liabilitythat could, at the option of the counterparty, result in its settlement by the issueof equity instruments do not affect its classification.

All other liabilities shall be classified as non-current.

A. Share Capital

For each class of share capital (different classes of preference shares to be treatedseparately):

(a) the number and amount of shares authorised;

(b) the number of shares issued, subscribed and fully paid, and subscribed but notfully paid;

(c) par value per share:

(d) shares in the company held by each shareholder holding more than 5 per cent,shares specifying the number of shares held;

(e) calls unpaid (showing aggregate value of calls unpaid by directors and officers);

(f) forfeited shares (amount originally paid-up).

B. Reserves and Surplus

(i) Reserves and Surplus shall be classified as:

(a) Capital Reserves;

(b) Capital Redemption Reserve;

(c) Securities Premium Reserve;

(d) Debenture Redemption Reserve;

(e) Revaluation Reserve;


(f) Share Options Outstanding Account;

(g) Other Reserves (specify the nature and purpose of each reserve and theamount in respect thereof):

(h) Surplus, i.e., balance in Statement of Profit and Loss disclosing

(ii) Debit balance of statement of profit and loss shall be shown as a negative figureunder the head “Surplus”. Similarly, the balance of “Reserves and Surplus”,after adjusting negative balance of surplus, if any, shall be shown under thehead “Reserves and Surplus” even if the resulting figure is in the negative.

C. Long-term Borrowings

(i) Long-term borrowings shall be classified as:

(a) Bonds/debentures;

(b) Term loans:

(A) from banks.

(B) from other parties.

(c) Deferred payment liabilities;

(d) Deposits;

(e) Loans and advances from related parties:

(f) Long term maturities of finance lease obligations;

(g) Other loans and advances (specify nature).

D. Other Long-term Liabilities

Other Long-term Liabilities shall be classified as:

(a) Trade payables;

(b) Others.

E. Long-term Provisions

The amounts shall be classified as:

(a) Provision for employee benefits;

(b) Others (specify nature).

F. Short-term Borrowings

(i) Short-term borrowings shall be classified as:

(a) Loans repayable on demand;

(A) from banks.

(B) from other parties.

Introduction 21

(b) Loans and advances from related parties;

(c) Deposits;

(d) Other loans and advances (specify nature).

G. Other Current Liabilities


(a) Current maturities of long-term debt;

(b) Current maturities of finance lease obligations;

(c) Interest accrued but not due on borrowings;

(d) Interest accrued and due on borrowings;

(e) Income received in advance;

(f) Unpaid dividends.

H. Short-term Provisions


(a) Provision for employee benefits, Provision for Tax;

(b) Others (specify nature).

I. Tangible Assets

(i) Classification shall be given as:

(a) Land;

(b) Buildings;

(c) Plant and Equipment;

(d) Furniture and Fixtures;

(e) Vehicles;

(f) Office equipment;

(g) Others (specify nature).

J. Intangible Assets

(i) Classification shall be given as:

(a) Goodwill;

(b) Brands/trademarks;

(c) Computer software;


(d) Mastheads and publishing titles;

(e) Mining rights;

(f) Copyrights, and patents and other intellectual property rights, services andoperating rights;

(g) Recipes, formulae, models, designs and prototypes;

(h) Licences and franchise;

(i) Others (specify nature).

K. Non-current Investments

(i) Non-current investments shall be classified as trade investments and otherinvestments and further classified as:

(a) Investment Property;

(b) Investments in Equity Instruments:

(c) Investments in Preference Shares;

(d) Investments in Government or Trust Securities;

(e) Investments in Debentures or Bonds;

(f) Investments in Mutual Funds;

(g) Investments in Partnership Firms;

(h) Other Non-current Investments (specify nature).

L. Long-term Loans and advances

(i) Long-term loans and advances shall be classified as:

(a) Capital Advances;

(b) Security Deposits;

(c) Loans and advances to related parties (giving details thereof);

(d) Other loans and advances (specify nature).

(ii) The above shall also be separately sub-classified as:

(a) Secured, considered good:

(b) Unsecured, considered good;

(c) Doubtful.

M. Other Non-current Assets

Other non-current assets shall be classified as:

(i) Long-term Trade Receivables (including trade receivables on deferred creditterms);

Introduction 23

(ii) Others (specify nature);

(iii) Long-term Trade Receivables, shall be sub-classified as:

(A) Secured, considered good;

(B) Unsecured, considered good;

(C) Doubtful.

N. Current Investments

(i) Current investments shall be classified as:

(a) Investments in Equity Instruments;

(b) Investment in Preference Shares;

(c) Investments in Government or Trust Securities;

(d) Investments in Debentures or Bonds;

(e) Investments in Mutual Funds;

(f) Investments in Partnership Firms;

(g) Other Investments (specify nature).

O. Inventories

(i) Inventories shall be classified as:

(a) Raw materials;

(b) Work-in-progress;

(c) Finished goods;

(d) Stock-in-trade (in respect of goods acquired for trading);

(e) Stores and spares;

(f) Loose tools;

(g) Others (specify nature).

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories

(iii) Mode of valuation shall be stated.

P. Trade Receivables

(i) Aggregate amount of Trade Receivables outstanding for a period exceeding sixmonths from the date they are due for payment should be separately stated.

(ii) Trade receivables shall be sub-classified as:

(a) Secured, considered good;


(c) Doubtful.


Q. Cash and Cash Equivalents

(i) Cash and cash equivalents shall be classified as:

(a) Balances with banks;

(b) Cheques, drafts on hand;

(c) Cash on hand;

(ii) Others (specify nature).

R. Short-term Loans and Advances

(i) Short-term loans and advances shall be classified as:

(a) Loans and advances to related parties (giving details thereof);

(b} Others (specify nature).

(ii) The above shall also be sub-classified as:

(a) Secured, considered good:


(c) Doubtful.

S. Other current Assets (specify nature)

This is an all-inclusive heading, which incorporates current assets that do not fit intoany other asset categories.

Introduction 25

T. Contingent Liabilities and Commitments (to the extent not provided for)Part II – Statement of Profit and Loss

Name of the Company .....................Profit and Loss Statement for the year ended ...................(Rupees in ...................)

Particulars Note No.

Figures as at the end of

current reporting

period

Figures as at the end of the

previous reporting

period 1 2 3 4 I Revenue from operations xxx xxx II Other Income xxx xxx III Total Revenue (I + II) xxx xxx IV Expenses :

Cost of materials consumed xxx xxx Purchase of Stock-in Trade xxx xxx Changes in inventories of finished goods

work-in-progress and Stock-in-Trade xxx xxx

Employees benefits expense Finance costs xxx xxx Depreciation and amortization expense xxx xxx Other expenses xxx xxx Total expenses xxx xxx

V Profit before exceptional and extraordinary items and tax (III – IV)

xxx xxx

VI Exceptional items xxx xxx VII Profit before extraordinary items and tax

(V – VI) xxx xxx

VIII Extraordinary items xxx xxx IX Profit before tax (VII – VIII) xxx xxx X Tax expense : (1) Current tax xxx xxx (2) Deferred tax xxx xxx

XI Profit (Loss) for the period from containing operations (VII – VIII)

xxx xxx

XII Profit (loss) from discontinuing operations xxx xxx XIII Tax expense of discontinuing operations XIV Profit (loss) from Discontinuing operations

(after tax) (XII – XIII) xxx xxx

XV Profit (Loss) for the period (XI – XIV) xxx xxx XVI Earnings per equity share

(1) Basic xxx xxx (2) Diluted xxx xxx


GENERAL INSTRUCTIONS FOR PREPARATION OF STATEMENT OFPROFIT AND LOSS

1. The provisions of this Part shall apply to the income and expenditure accountreferred to in sub-clause (ii) of clause (40) of section 2 in like manner as theyapply to a statement of profit and loss.

2. (A) In respect of a company other than a finance company revenue from operationsshall disclose separately in the notes revenue from—

(a) Sale of products;

(b) Sale of services;

(c) Other operating revenues:

Less:

(d) Excise duty.

(B) In respect of a finance company, revenue from operations shall includerevenue from—

(a) Interest; and

(b) Other financial services.

3. Finance Costs

Finance costs shall be classified as:

(a) Interest expense;

(b) Other borrowing costs;

(c) Applicable net gain/loss on foreign currency transactions and translation.

4. Other income

Other income shall be classified as:

(a) Interest Income (in case of a company other than a finance company);

(b) Dividend Income;

(c) Net gain/loss on sale of investments;

(d) Other non-operating income (net of expenses directly attributable to suchincome).

(i) (a) Employee Benefits Expense [showing separately

(i) salaries and wages;

(ii) contribution to provident and other funds;

(iii) expense on Employee Stock Option;

Introduction 27

(b) Depreciation and amortisation expense;(iv) Expenditure incurred on each of the following items, separately for

each item:(a) Consumption of stores and spare parts;(b) Power and fuel;(c) Rent;(d) Repairs to buildings;(e) Repairs to machinery;(f) Insurance;(g) Rates and taxes, excluding, taxes on income;(h) Miscellaneous expenses.

Illustration - 1Prepare income statement from the following data of X Company Ltd. for the year

ended 31.3.2017.Revenue from Operations ` 4,50,000; Cost of Materials Consumed ` 2,00,000; Finance

costs ` 20,000; Other expenses ` 40,000; Change in inventories of Finished goods and WIP` 12,000; Other Income ` 42,500; Employees Benefit expenses ` 72,500; Depreciation andAmortization expenses ` 24,000; Provision for Tax @ 35%.Solution:

X Co. Ltd.Income Statement for the year ended 31.3.2017

Particulars Amount ` I. Income Revenue from operations 4,50,000 Other Income 42,500

Total Revenue (I) 4,92,500 II. Expenses Cost of Materials consumed 2,00,000 Change in Inventories of Finished goods & WIP 12,000 Employees Benefit Expenses 72,500 Finance costs 20,000 Depreciation and Amortization expenses 24,000 Other Expenses 40,000

Total Expenses (II) 3,68,500 III. Profit Before Tax (I – II) 1,24,000 Less : Provision for Taxation (1,24,000 × 35%) 43,400 Profit After Tax 80,600


Illustration - 2From the following details, prepare Profit and Loss Statement of Radha Co. Ltd. for

the year ended 31.12.2017.Employees Benefit Expenses ̀ 2,00,000; Other Expenses ̀ 40,000; Purchase of Materials

` 3,00,000; Inventories as on 1.1.2017. Raw Materials ` 40,000; Finished goods ` 22,000 andWIP ` 23,000, Finance costs ` 13,800; Depreciation and Amortization Expenses ` 23,200;Inventories as on 31.12.2017. Raw Materials ` 35,000; Finished goods ` 45,000; Work inprogress ` 15,000; Revenue from Operations ` 9,50,000; Other income ` 25,000.Solution:

Radha Co. Ltd.Statement of Profit & Loss for the year ended 31.12.2017

Particulars RW Note No.

Amount `

I. Income Revenue from operations 9,50,000 Other Income 25,000

Total Revenue (I) 9,75,000 II. Expenses Cost of Materials consumed 1 3,05,000 Change in Inventories of Finished goods & WIP 2 – 15,000 Employees Benefit Expenses 2,00,000 Finance costs 13,800 Depreciation and Amortization expenses 23,200 Other Expenses 40,000

Total Expenses (II) 5,67,000 III. Profit Before Tax (I – II) 4,08,000 Less : Provision for Tax or Tax paid – Profit After Tax 4,08,000 Working Notes:1. Cost of Materials Consumed: `

Raw Materials (1.1.2017) 40,000Purchase of Raw Materials 3,00,000

3,40,000Less: Raw Materials (31.12.2017) 35,000

Cost of Materials Consumed 3,05,000

Introduction 29

2. Change in Inventories of FG and WIP `Finished goods (1.1.2017) 22,000Work-in-progress (1.1.217) 23,000

45,000Less: Finished goods (31.12.2017) (–) 45,000

Work-in-progress (31.12.2017) (–) 15,000

Change in Inventories of FG and WIP – 15,000

Illustration - 3Prepare income statement of Sunitha Co. Ltd. for the year ended 31.3.2018.Revenue from operations ` 4,00,000; Employees Benefit Expenses is 20% on Revenue

from operations.Cost of Materials Consumed is 30% on Revenue from operations, Change in Inventories

of Finished goods and WIP is 10% negative on Cost of Materials consumed.Other expenses is 5% on Employees Benefit Expenses plus 10% on cost of Materials

consumed.Other income ` 15,000; Interest on Loan Borrowed ` 17,000; Provision for Tax @ 30%

on Profit Before Tax.Solution:

Sunitha Ltd.Statement of Profit & Loss for the year ended 31.3.2018

Particulars RW Note No.

Amount `

I. Income Revenue from operations 4,00,000 Other Income 15,000

Total Revenue (I) 4,15,000 II. Expenses Cost of Materials consumed (4,00,000 × 30%) 1,20,000 Change in Inventories of Finished goods & WIP (1,20,000 × 10%) negative value

– 12,000

Employees Benefit Expenses (4,00,000 × 20%) 80,000 Finance costs 17,000 Other Expenses (5% on Employees Benefit Expenses + 10% on Cost of Materials Consumed)

80,000 × 5% = 4,000 1,20,000 × 10% = 12,000

16,000

Total Expenses (II) 2,21,000 III. Profit Before Tax (I – II) 1,94,000 Less : Provision for Tax or Tax paid 58,200 Profit After Tax 1,35,800


REVIEW QUESTIONSConceptual Type:

1. Give the meaning of Financial Statements.

2. Discuss the types of Financial Statements.

3. Explain classification of expenses by nature.

4. What is the meaning of Balance Sheet?

5. What is Equity?

6. What is Expense?

7. What is Income?

Analytical Type:

1. What are the objectives of Financial Statements?

2. Explain the nature of Financial Statements.

3. Explain Qualitative requirements of Financial Statements.

4. Discuss the importance of Financial Statements.

5. Explain the limitations of Financial Statements.

Objective Type:

Fill in the Blanks:

1. Financial Statements are the _______ documents of business.

2. Financial Statements present _______ and _______ view of the business.

3. Business transactions are recorded on certain _______

4. The Financial Statements are affected by the _______ of accountants.

5. Financial Statements are able to satisfy the need of all the _______ in the business.

6. Public also interested in _______ of business enterprises.

7. Classification of expenses by nature statement is also called as _______ incomestatement.

Multiple Choice Questions:

1. Definition of Financial Statements according to the Companies Act 2013 under Section_______

(a) 2(40) (b) 40(2)

(c) 20(4) (d) 24(2)

Introduction 31

2. Bank Overdraft includes under the head _______.

(a) Non-current Assets (b) Non-current Liabilities

(c) Short-term Borrowings (d) None of the above

3. The term Non-current Assets does not include _______.

(a) Land (b) Machinery

(c) Inventories (d) Buildings

4. Statement of Profit and Loss is also known as _______.

(a) Position Statement (b) Statement of Operations

(c) Statement of Sources and Applications (d) None of the above

5. The term Current Assets does include _______.

(a) Trade payables (b) Trade Receivables

(c) Short-term provisions (d) Bank Overdraft

6. Revenue from Operations means _______.

(a) Cost of Sales (b) Sales minus Operating Expenses

(c) Sale of Products and Services (d) None of the above

7. Debentures includes under the head _______.

(a) Short-term Borrowings (b) Long-term Borrowings

(c) Long-term Liabilities (d) Other Current Liabilities

Answers to Objective Questions

Fill in the Blanks:

1. Essential, 2. True and Fair, 3. Assumptions, 4. Personal Judgement, 5. Parties interested,6. Financial Statements, 7. Multiple step.

Multiple Choice:

1. (a), 2. (c), 3. (c), 4. (b), 5. (b), 6. (c), 7. (b)


PRACTICAL PROBLEMS1. From the following information, prepare income statement for the year ended

31.3.2017.

Revenue from Operations ` 37,500; Cost of Materials Consumed ` 1,80,000; Changein Inventories of FG & WIP ` 16,000; Finance Costs ` 12,500; Other Expenses ` 20,000;Employees Benefit Expenses ` 82,500; Other income ` 25,000; Depreciation ` 24,000;Provision for Tax @ 45%

(Ans: PBT ` 65,000, PAT ` 35,750)

2. From the following details, prepare income statement of Rajesh Co. Ltd. for the yearended 31.3.2017.

Employees Benefit Expenses ` 1,25,000; Other Expenses ` 35,000; Purchase of RawMaterials ` 6,00,000; Inventories as on 1.4.2016; Raw Materials ` 47,000; Finishedgoods ` 20,000; Work in progress ` 25,000; Finance Costs ` 1,42,000; Depreciation `22,800; Inventories as on 31.3.2017. Raw Materials ` 22,500; Finished goods ` 40,000;Work in progress ` 22,500; Revenue from Operations ` 11,25,000, Other income `14,000.

(Ans: Profit ` 3,35,000)

3. Prepare income statement of Sarath Company Ltd. for the year ended 31.3.2018.

Revenue from Operations ` 5,00,000

Employees Benefit Expenses is 18% on Revenue from operations

Cost of Materials consumed is 30% on Revenue from operations

Change in Inventories of FG and WIP is 10% of negative on Cost of MaterialsConsumed.

Other Expenses is 5% on Employees Benefit Expenses plus 10% on Cost of MaterialsConsumed.

Other Income ` 25,000; Finance Costs ` 46,000.

Provision for Tax @ 50% on Profit Before Tax.

(Ans: PAT ` 1,17,250)

4. Prepare Balance Sheet of Ramu Co. Ltd. as on 31.3.2017.

`

Share Capital 16,00,000

Debentures 6,00,000

Introduction 33

Long term Borrowings 4,00,000

Reserves & Surplus 4,44,000

Fixed Assets (Tangible) 17,90,000

Intangible Fixed Assets 60,000

Trade payables 3,30,000

Current Investments 1,80,000

Trade Receivables 5,00,000

Other Current Liabilities 20,000

Inventories 7,00,000

Cash and Cash equivalents 1,60,000

Other Current Assets 4,000

(Ans: Balance Sheet Total ` 33,94,000)

financial · financial statements serve as a horoscope of a business. this is so because they...

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