Financial Statements of Companies
What the exam tests
Financial Statements of Companies tests the Statement of Profit and Loss and Balance Sheet in prescribed form, classification of revenue and expenses, reserves and surplus, and notes to accounts. Revenue from operations is shown separately from other income. Expenses are grouped by nature, including cost of materials, employee benefits, finance costs and depreciation. Tax is calculated on profit before tax; contingent liabilities are disclosed by note, not recognised as liabilities unless probable and measurable.
Worked example
Revenue from operations is Rs. 10,00,000; cost of goods sold Rs. 6,00,000; other income Rs. 50,000; operating and other expenses Rs. 1,50,000; tax rate 30%. Gross profit = Rs. 4,00,000. Profit before tax = Rs. 4,00,000 + Rs. 50,000 - Rs. 1,50,000 = Rs. 3,00,000. Tax = 30% = Rs. 90,000. Profit after tax = Rs. 2,10,000. The tax is not deducted from revenue; it is presented after profit before tax. Other income is not merged with revenue from operations.
Traps
Do not include capital receipts in revenue. Do not net finance costs against interest income unless the prescribed presentation allows it. Do not show proposed dividend as a liability after the relevant standard changed the treatment. Do not ignore closing inventory adjustments in cost of goods sold. Contingent liabilities belong in notes, not in the balance sheet total.