Financial Statements of Companies
What the exam asks
Statements follow Schedule III of the Companies Act, 2013 as adapted in the syllabus: a Statement of Profit and Loss, a Balance Sheet in vertical form, and notes on share capital and reserves and surplus.
Classification rules
Assets and liabilities are split into current and non-current. Current assets are cash and items convertible into cash within 12 months or in the operating cycle. Share capital, reserves and surplus, and long-term borrowings are non-current. Calls in advance are shown under other current liabilities.
Statement of Profit and Loss
Revenue from operations, other income, then expenses such as cost of materials, purchases, changes in inventories, employee benefits, finance costs and depreciation, then tax, then profit after tax. Finance cost includes interest on borrowings and debentures; interest on investments is other income.
Worked example
Revenue ₹20,00,000; other income ₹50,000; materials ₹8,00,000; employee benefits ₹4,00,000; depreciation ₹1,00,000; tax 30%. Total income ₹20,50,000 less expenses ₹13,00,000 gives profit before tax ₹7,50,000; tax ₹2,25,000; profit after tax ₹5,25,000.
Traps
Netting an expense against revenue; showing proposed dividend as a liability, when it is recognised only on approval; placing securities premium anywhere other than reserves and surplus; and listing contingent liabilities on the face of the balance sheet instead of in notes.