FINANCIAL STATEMENTS OF A COMPANY H.S. 2nd Year AHSEC ACCOUNTANCY NOTES Assam Higher Secondary PART-B UNIT -3




ACCOUNTANCY
B
UNIT -3

FINANCIAL STATEMENTS OF A COMPANY


1. What are Financial statements?
Ans: Financial statements are the end product of accounting records. It is prepared for the purpose of presenting a periodical review on the progress made by the organization. It also provides an overview of business profitability and financial position in both short run and long run. Financial statements also help to identify the strength and weakness of the business.

2. What are the objectives of financial statements?
Ans: Following are the objectives of financial statements:
a. To provide reliable financial information about economic resources and obligations of a business firm.
b. To provide other needed information about changes in such economic resources or obligation
c. To provide reliable information about changes in net resources arising out of business activities.
d. To provide financial information that assists in estimating the earning potential of business.
e. To disclose, to the extent possible, other information related to the financial statements that is relevant to the needs of the users of these statements.

3. What is the nature of financial statements?
Ans: Following are the nature of financial statements:
a. Financial statements are prepared as per accounting conventions and as per generally accepted accounting principles.
b. Financial statements are influenced by the personal judgments of the policy makers.
c. Financial statements are based on recorded facts.
d. Financial statements are prepared usually at the end of an accounting period.
e. Financial statements are summarized reports.

4. What are the importances of financial statements?
Ans: Following are the importance of financial statements:
a. Basis to judge short term solvency: Suppliers of goods and services and other short term creditors are interested in information which enables them  to determine whether amounts owing to them will be paid when due.
b. Basis for making investments: Information contained in the financial statements is used to judge the long term solvency, profitability, dividend payout as well as debt servicing capacity of the concern.
c. Basis for research work: Research scholars make use of financial statements for making analysis and interpretation of data to derive new findings.
d. Importance to the consumers: consumers use financial statements to safeguard their interest in regard to quality of products, price charged and to uphold the consumer movement.
e. Document for fund generation: Financial statements are used as the basis for generating fund from financial institutions.
5. What are the limitations of financial statements?
Ans: Following are the limitations of financial statements:
a. Financial statements are historical in nature.
b. Financial statements are only interim reports.
c. Financial statements are influenced by accounting concepts etc.
d. Financial statements are influenced by personal judgments.
e. Financial statements do not make use of standardized terminology.
f. Financial statements fail to disclose adequate information.

6. What are the difference between company’s balance sheet and partnership firm’s balance sheet?
Ans. Following are the difference between company’s balance sheet and partnership firm’s balance sheet:


7. What are contingent liabilities? Give some examples.
Ans: Contingent liabilities are those liabilities which may occur or may not be occur. These liabilities are shown in the balance sheet only in the form of note; their amount is not included in the total of balance sheet. These liabilities refer to the claims which are uncertain to arise.
Following are the examples of contingent liabilities:
a. Claim against the company not yet acknowledged as debt.
b. Arrears of cumulative dividend.
c. Liabilities for bills discounted.
d. Uncalled amount on partly paid up shares.
e. Penalty on incomplete contracts.

8. Who are the users of financial statements? Explain the information they require from financial statements.
Ans: Users of financial statements may be categorized into two parts:
A. Internal Users                B. External Users
A. Internal Users
i. Owners: Owners are interested to know the profitability and financial position of the company.
ii. Management: Management is interested in knowing the existing profits, earning per share, chances of survival, possibility of growth and diversification, cost information etc., from the financial statements so that it can chalk out suitable strategy for its entity.
iii. Employees: Employees are interested in job satisfaction, job security, bonus declarations, employee’s welfare scheme etc. of their unit. So they want information on profitability and future prospects of the company.

B. External Users
i. Creditors: Creditors are interested in knowing entity’s capability to repay the amount and interest as and when repayment becomes due. So, they are interested in finding out profitability, cash flows etc., of the entity.
ii. Potential Investors: The potential investors are keen to know the earning potential of the business and ensure the safety of their investment.
iii. Research Scholars: The financial statements being a mirror of the financial position of a firm are of immense value to the research scholar who wants to make a study into financial operations of a particular firm.
iv. Shareholders: Shareholders of the business are interested in the well being of the business. They are likely to know the earning capacity of the business and its prospects of future growth.
v. Taxation Authorities: Income tax authorities are interested in knowing the profits of the business so that tax can be imposed thereon.

*****