Intermediate Paper 1:AA | Topic: Ch11: Financial Statements of Companies | Session 1 | 12 June, 2024

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Financial statements include various elements like the balance sheet and profit and loss account, with specific guidelines on dividend declaration, balance sheet proforma, and financial statement requirements. Contracts, adjustments, reserves, and provisions are crucial for accurate accounting, and details on specific assets, liabilities, and earnings are essential for financial clarity.

Insights

Financial statements consist of various components like the balance sheet, profit and loss account, cash flow statement, and notes to accounts, each providing essential insights into a company's financial health and performance.
Detailed guidelines and regulations govern the preparation of financial statements, including maintaining books of accounts at the registered office, following specific accounting standards, and disclosing information such as dividend rules, balance sheet proformas, and adjustments for assets like land and machinery sales, ensuring accuracy and transparency in financial reporting.

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Recent questions

What are the components of financial statements?
Financial statements include balance sheet, profit and loss account.
What is the purpose of maintaining books of accounts?
Maintenance of books of accounts is mandatory for accurate financial records.
How are dividends calculated and declared?
Dividends are calculated based on profits and declared from current or past year profits.
What is the significance of deferred tax liability in financial statements?
Deferred tax liability arises when accounting income exceeds taxable income.
How are long-term and current liabilities classified in financial statements?
Long-term liabilities include borrowings, while current liabilities encompass short-term obligations.

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Summary

00:00

Essential Elements of Financial Statements for Companies

Financial statements consist of balance sheet, profit and loss account, cash flow statement, notes to accounts, explanatory notes, and statement of changes in equity.
The chapter on financial statements is divided into five parts: maintenance of books of accounts, final accounts, dividend, balance sheet, and statement of profit and loss account.
The balance sheet proforma includes equity and liabilities, non-current liabilities, current liabilities, assets, and current assets.
Maintenance of books of accounts is mandatory at the registered office, following the accrual basis and double-entry system of accounting.
Companies may keep financial statements electronically using software like Tally, ERP, or SAP.
Final accounts include the balance sheet, profit and loss account, cash flow statement, statement of changes in equity, and notes to accounts.
Requirements for financial statements include following Schedule 3, statutory requirements, accounting standards, and guidance notes from the Institute of Chartered Accountants of India.
Different divisions of financial statement proformas apply to specific types of companies, such as those under Accounting Standard 133 or Ind AS.
An aging schedule of trade receivables categorizes outstanding amounts by time period to help in making provisions for bad debts.
Dividends can be declared from current year profits or past year profits, with adjustments for interim dividends, depreciation, and government-provided funds, and conditions apply when using past year profits for dividends.

20:26

"Guidelines for Dividend Rates and Liabilities"

Dividend rate should not exceed 11%, with 11% being the maximum allowed.
The amount drawn from accumulated profits and reserves must be less than 10% of paid-up Capital plus free reserves.
There is a restriction on the amount that can be used, with the maximum withdrawal being 10%.
After withdrawal, the balance in reserves must be greater than 15% of the paid-up Capital.
The dividend rate must be less than the average declared dividend rate of the past three years.
The maximum amount that can be withdrawn is less than 10% of the paid-up Capital plus free reserves.
The balance in reserves after withdrawal must be greater than 15% of the paid-up Capital.
Defer tax liability arises when accounting income is greater than taxable income.
Long-term liabilities include long-term borrowings, defer tax liability, and long-term Provisions.
Current liabilities include short-term borrowings, trade payable, other current liabilities, and short-term Provisions.

40:31

Accounting Standards: Reporting, Calculations, and Adjustments

Separate disclosure of profit or losses from continuing and discontinuing operations is required under section 24.
Profit or loss from discontinuing operations and tax expenses should be reported separately.
Total profit or loss for the period is calculated by combining profits from continuing and discontinuing operations.
After determining profit or loss, earnings per share (EPS) calculations are done according to Accounting Standard 20.
Company's financial statements should not include salary for the proprietor.
Dividend rules, balance sheet, and proforma are key theoretical points to understand.
Changes in inventory impact the final account, with closing stock affecting the balance.
Dividend declaration involves considering past year profits, preference dividends, and free reserves.
Adjusted purchases are split into purchases and changes in inventory for accurate accounting.
Revaluation of assets like land at a higher value leads to adjustments in the balance sheet.

01:11:31

Accounting Adjustments and Dividend Declaration Clarified

Land shown as 220 on debit side and Revaluation Reserve 140 on credit side
Declaration of final dividend at 10% on 2nd April 2002 discussed
Explanation of adjusting and non-adjusting events as per Accounting Standard 4
Final dividend not recognized as a liability in balance sheet but noted in financial statements
Machinery sale for 4,000 with a cost of 10,000 and accumulated depreciation of 8,000
Calculation of profit from sale at 2,000 after deducting cost and accumulated depreciation
Adjustment process for sale of machinery involving reducing cost, accumulated depreciation, and profit
Depreciation of 760 recorded with corresponding entry in provision for depreciation
Clarification on provision for depreciation as a temporary account to maintain asset value
Guidance on preparing balance sheet, profit and loss account, and notes for exam clarity

01:51:57

Understanding Financial Statements and Inventory Adjustments

Opening balance (P) and net profit (Pel) determine the opening balance or closing balance based on the presence of nominal accounts and net profit separately.
Properly read the balance sheet and trial balance to understand the financial status.
Deduct depreciation provision from plant and machinery to adjust the values.
Closing stock adjustment affects the balance sheet asset side, with changes in inventory being crucial.
Opening inventory at 6 lakhs 80,000 and closing inventory at 8 lakhs 23,000 results in a negative change in inventory of 143,000.
Breakup of assets like land, plant and machinery, and furniture and fittings into gross block, accumulated depreciation, and net block is essential.
General reserve falls under reserve and surplus, while loans from State Financial Corporation are categorized under long-term borrowings.
Inventory adjustments are based on whether the profit and loss account is open or closed.
Specific details like the issuance of equity shares for non-cash consideration and overdue trade receivables must be noted in the financial statements.
Bank balance with a non-scheduled bank and hypothecation of plant and machinery for securing loans should be clearly mentioned.

02:22:38

"Financial obligations and assets in accounts"

Capital commitments are noted in the accounts, with an estimated amount of $150,000 remaining for a machinery purchase contract, highlighting future obligations.
Equity shares issued for considerations other than cash are recorded under Share Capital, while debts outstanding for over 6 months and asset costs are detailed separately in the notes to accounts.
Long-term borrowings are bifurcated, with $142,500 secured by hypothecation, and bank balances of $2,000 are categorized under cash and bank balances, with specific details on machinery erection contracts provided in a separate note.

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