Financial Statements of a Company

Financial statements are the end products of accounting — the formal reports that show a company's performance and position. For a company, the Companies Act, 2013 requires them to be prepared in a prescribed format so that they are uniform and comparable. The main statements are the Balance Sheet (position on a date), the Statement of Profit and Loss (performance over a year), and the accompanying Notes to Accounts and Cash Flow Statement.

Their nature: they are based on recorded facts, accounting conventions, and personal judgements — so they are partly historical and partly estimated. They are expressed in money and prepared at least annually.

The uses / objectives are to serve the many users you met in Class 11:

• Management — to plan, control and take decisions.
• Shareholders / investors — to judge safety and return on their investment.
• Lenders & creditors — to assess the company's ability to repay.
• Government & tax authorities — for regulation and taxation.
• Employees and the public — for security and information.

But financial statements also have limitations: they ignore qualitative (non-money) factors, are affected by personal judgement and the historical-cost basis, may be window-dressed, and ignore price-level changes. Knowing both their power and their limits is the right mindset before reading the prescribed formats.

A company's Balance Sheet follows the vertical format of Schedule III, with two main parts: I. Equity and Liabilities and II. Assets. Each line refers to a note number for detail. The broad structure:

The total of Equity and Liabilities must equal the total of Assets. A few placement rules are heavily tested:

• Reserves & Surplus includes general reserve, securities premium, and the balance of the Statement of P&L (a debit/negative balance is shown as a negative figure).
• Calls-in-advance → Other current liabilities; Provision for tax / proposed dividend → Short-term provisions.
• Trade payables = creditors + bills payable; Trade receivables = debtors + bills receivable.
• Goodwill, patents → Intangible fixed assets.

Mastering where each item sits in this format is the single most examined skill of this chapter.

A company's performance is reported in the Statement of Profit and Loss, also in a vertical Schedule III format. It builds from total income down to net profit:

• I. Revenue from Operations — the main income (sales/services).
• II. Other Income — interest, dividend, gains, etc.
• III. Total Income (I + II).
• IV. Expenses — cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefit expenses, finance costs, depreciation & amortisation, and other expenses.
• V. Profit before Tax (Total Income − Total Expenses).
• VI. Tax and VII. Profit after Tax (profit for the period).

Some classifications to remember: finance costs include interest on borrowings and debentures; employee benefit expenses include salaries, wages, bonus and staff welfare; cost of materials consumed = opening stock of materials + purchases − closing stock; and changes in inventories of finished goods/WIP = opening − closing (a positive figure increases expense).

Each line is supported by a Note to Accounts giving the breakup. Together with the Balance Sheet, the Statement of Profit and Loss completes a company's financial reporting. These statements are then analysed — using comparative and common-size statements, ratios and cash flow — which is exactly where the remaining chapters go. For example, a company with Revenue from Operations Rs 50,00,000, Other Income Rs 2,00,000 and total Expenses Rs 40,00,000 has a Profit before Tax of Rs 12,00,000; after 30% tax (Rs 3,60,000) the Profit after Tax is Rs 8,40,000.