Class 12 Accountancy Important Chapter 7 Financial Statements of a Company

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Class 12 Accountancy Important Chapter 7 Financial Statements of a Company

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Financial Statements of a Company

Chapter: 7

Part B: Company Accounts and Analysis of Financial Statements

IMPORTANT QUESTION AND ANSWER

Answer The Following Question:

1. What are financial statements?

Ans: Financial statements are formal annual reports prepared by a company to communicate financial information to its owners and external parties. They include the balance sheet, statement of profit and loss, and cash flow statement, reflecting the company’s financial position and performance for a specific period.

2. Name two main types of financial statements.

Ans: The two main types of financial statements are the balance sheet and the statement of profit and loss. In addition, companies also prepare the cash flow statement.

3. What is the purpose of the balance sheet?

Ans: The balance sheet shows all the assets, liabilities, and equity of a company as on a specific date, helping to depict the financial position or status of the business at that point in time.

4. What is the statement of profit and loss?

Ans: The statement of profit and loss shows the revenues earned and expenses incurred during a specific period, determining the operational results (profit or loss) of the business.

5. What is meant by ‘recorded facts’ in financial statements?

Ans: ‘Recorded facts’ refer to cost data and other factual information recorded in accounting books, which form the basis for preparing financial statements. Assets and liabilities are shown at historical cost, not market value.

6. Why are accounting conventions important in financial statements?

Ans: Accounting conventions ensure comparability, simplicity, and realism in financial statements by standardizing practices such as valuing inventory at cost or market price, whichever is lower.

7. Who are the main users of financial statements?

Ans: Main users include management, investors, shareholders, creditors, government, bankers, employees, and the public, all of whom use the information for various decision-making purposes.

8. What is a limitation of financial statements regarding asset valuation?

Ans: A limitation is that financial statements are prepared on the basis of historical cost, so assets may not reflect their current market value or realizable value, especially in a changing economic environment.

9. What does the ‘vertical format’ in balance sheet presentation mean?

Ans: The vertical format means the financial statements are presented in a columnar form, showing items sequentially from top to bottom as per the prescribed schedule in the Companies Act.

10. What is meant by ‘proposed dividend’ in company accounts?

Ans: Proposed dividend refers to the dividend recommended by the Board of Directors, which becomes a liability only after it is approved by the shareholders in the Annual General Meeting.

Fill in the Blanks: 

1. Financial statements are the end products of the __________ process.

Ans: Accounting.

2. The balance sheet shows all the assets owned by the concern, all the obligations or liabilities payable to outsiders or creditors, and claims of the __________ on a particular date.

Ans: Owners.

3. The statement of profit and loss is prepared for a specific period to determine the __________ results of an undertaking.

Ans: Operational.

4. Financial statements help various users in their __________ process.

Ans: Decision-making.

5. The basic objective of financial statements is to provide information required for __________ by management and other outsiders.

Ans: Decision-making.