NIOS Class 12 Accountancy Chapter 16 Financial Statements: An Introduction

By Parimol Roy / NIOS Class 12 Accountancy

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NIOS Class 12 Accountancy Chapter 16 Financial Statements: An Introduction

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Financial Statements: An Introduction

Chapter: 16

Module – 3: Financial Statement

INTEXT QUESTIONS 16.1

I. Classify the following items of expenditure into capital expenditure, revenue expenditure and deferred revenue expenditure:

(i) Amount spent on purchase of machine.

Ans: Capital.

(ii) Expenditure incurred on repairs of building.

Ans: Revenue.

(iii) Heavy expenditure on advertisement to introduce a new product in the market.

Ans: Deferred Revenue.

(iv) Purchase of motor vehicle for business use.

Ans: Capital.

II. One important objective of financial statements is to ascertain the results of business operations.

List the other objectives of the financial statements:

(a) ____________________________________________________

(b) ____________________________________________________

(d) ____________________________________________________

Ans: (a) Ascertaining the financial position.

(b) Source of information.

(d) An index of the solvency of the concern.

INTEXT QUESTIONS 16.2

Fill in the blanks with suitable word/words :

1. Financial statements are generally of __________ types.

Ans: Two.

2. Income statement comprises of __________ A/c and __________ A/c.

Ans: Trading And Profit & Loss.

3. Trading Account is prepared to ascertain the __________ profit of the business.

Ans: Gross Profit.

4. The percentage of gross profit on sales reflects the degree of __________ of business.

Ans: Success.

II. Show the result in the following cases

(a) Sales – sales return = __________

Ans: Net Sales.

(b) Purchases – purchases return = __________

Ans: Net Purchases.

(c) Total of the credit column of trading account – total of the debit column of trading account = __________

Ans: Gross Profit.

(d) Cost of goods sold – total sales = __________

Ans: Gross Loss.

(e) Total of the debit column of trading account – total of the credit column of trading account = __________

Ans: Gross Loss.

INTEXT QUESTIONS 16.3

Write “Debit” if the items given below are to be placed in the debit side of the Trading A/c and “Credit” if they are placed in the credit side of the Trading Account.

(i) Closing stock.

Ans: Credit.

(ii) Carriage inward.

Ans: Debit.

(iii) Sales.

Ans: Credit.

(iv) Custom duty.

Ans: Debit.

INTEXT QUESTIONS 16.4

I. Following are the items of expenditure and income to be taken to Profit and Loss Account.

Write ‘E’ for expenses and ‘I’ for income against each item.

(i) Interest on Fixed Deposit.

Ans: I.

(ii) Advertisement.

Ans: E.

(iii) Insurance Premium.

Ans: E.

(iv) Discount allowed by creditors.

Ans: I.

(v) Carriage on sales.

Ans: E.

II. State whether the following statements are ‘true or false’.

(i) Profit and Loss Account is prepared to ascertain the Gross Profit of a business unit.

Ans: False.

(ii) Items of income are written on the credit side of Profit and Loss Account.

Ans: True.

(iii) Net Profit calculated by preparing Profit and Loss Account is transferred to Trading Account.

Ans: False.

(iv) Profit and Loss Account is prepared for an accounting year.

Ans: True.

INTEXT QUESTIONS 16.5

I. Write ‘debit’ if Profit and Loss Account is to be debited and ‘credit’ if Profit and Loss Account is to be credited for the following items :

(a) Legal charges.

Ans: Debit.

(b) Net Loss.

Ans: Debit.

(c) Rent Received.

Ans: Credit.

(d) Discount Allowed.

Ans: Debit.

(e) Salaries.

Ans: Debit.

II. (a) Name the financial statement which is prepared in addition to income statement.

Ans: Balance Sheet.

(b) Why it is prepared?

Ans: To Show The Financial Position Of The Concern.

(c) When it is prepared?

Ans: At The End Of An Accounting Year.

(d) Name its two elements.

Ans: Assets; Liabilities.

III. (a) Operating Profit = Net Sales – _______________

Ans: Operating Cost.

(b) Operating Profit = Net Profit + Non-Operating Expenses – __________

Ans: Non-Operating Income.

(c) If Net Sales = ₹ 2,00,000 and Operating cost = ₹ 1,50,000 then calculate Operating profit.

Ans: Formula: Operating Profit = Net Sales − Operating Cost

Given:

Net Sales = ₹ 2,00,000

Operating Cost = ₹ 1,50,000

Calculation:

Operating Profit = 2,00,000 − 1,50,000

Operating Profit = ₹ 50,000.

TERMINAL EXERCISE

1. State the meaning of financial statements.

Ans: Financial statements are the statements prepared at the end of an accounting period, usually one year, to determine the result of business activities and the financial position of the business. They include the Income Statement, such as Trading and Profit and Loss Account, and the Position Statement, i.e., the Balance Sheet.

2. Explain in brief the various objectives of financial statements.

Ans: Following are the objectives of preparing financial statements:

(i) Ascertaining the results of business operations: Every businessman wants to know the results of the business operations of his enterprise during a particular period in terms of profits earned or losses incurred. Income statement serves this purpose.

(ii) Ascertaining the financial position: Financial statements show the financial position of the business concern on a particular date which is generally the last date of the accounting period. Position statement i.e. Balance Sheet is prepared for this purpose.

(iii) Source of information: Financial statements constitute an important source of information regarding finance of a business unit which helps the finance manager to plan the financial activities of the business and making proper utilisation of the funds.

(iv) Helps in managerial decision making: The Manager can make comparative study of the profitability of the concern by comparing the results of the current year with the results of the previous years and make his/her managerial decisions accordingly.

(v) An index of solvency of the concern: Financial statements also show the short term as well as long term solvency of the concern. This helps the business enterprise in borrowing money from bank and other financial institutions and/or buying goods on credit.

3. Explain in brief the following terms with two examples of each :

(a) Revenue expenditure.

Ans: Revenue expenditure is an expenditure incurred in the course of normal business operations and its benefits are availed of during the same accounting year. Such expenditure helps in maintaining the earning capacity of the business and is charged to Trading and Profit and Loss Account. Examples of revenue expenditure are salaries and carriage.

(b) Revenue receipts.

Ans: Revenue receipts are receipts which arise during the normal course of business activities. These are of revenue nature and are treated as income of the business. Such receipts are recurring in nature and are credited to Trading and Profit and Loss Account. Examples of revenue receipts are sale of goods and rent received.

(c) Capital expenditure.

Ans: Capital expenditure refers to the expenditure incurred for acquiring fixed assets or assets which increase the earning capacity of the business. The benefit of such expenditure extends to a number of years and it is shown in the Balance Sheet. Examples of capital expenditure are purchase of machinery and purchase of building.

(d) Capital receipts.

Ans: Capital receipts are receipts which do not arise from the normal course of business. These are of capital nature and are not treated as income of the business. They are generally non-recurring and are shown in the Balance Sheet. Examples of capital receipts are sale of fixed assets and loans raised.

4. Distinguish between capital expenditure and revenue expenditure on the basis of :

(a) Earning capacity

(b) Placement in financial statements

(c) Occurrence of expenditure

Ans:

Basis	Capital Expenditure	Revenue Expenditure
(a) Earning capacity	It increases the earning capacity of the business.	It helps in maintaining the earning capacity of the business.
(b) Placement in financial statements	It is shown in the Balance Sheet as an asset.	It is shown in Trading and Profit & Loss Account.
(c) Occurrence of expenditure	It is non-recurring in nature.	It is recurring in nature.

5. Distinguish between capital receipts and revenue receipts.

Ans:

Basis	Capital Receipts	Revenue Receipts
(i) Source	These are receipts which do not arise during the normal course of business.	These are receipts which arise during the normal course of business.
(ii) Nature	These are of capital nature and hence are not treated as income of the business.	These are of revenue nature and hence are treated as income of the business.
(iii) Occurrence	These are non-recurring in nature and do not occur regularly.	These are recurring in nature and occur regularly in business.

6. How is cost of goods sold calculated?

Ans: Cost of goods sold is calculated to know the cost of goods that have been sold during a particular period. It is computed by adding opening stock, net purchases and all direct expenses, and then deducting closing stock.

Thus,

Cost of goods sold = Opening stock + Net purchases + Direct expenses – Closing stock.

7. What is Trading Account? Why is it prepared?

Ans: Trading Account is a statement prepared to ascertain the result of trading activities of a business enterprise. It shows whether the business has earned profit or incurred loss from buying and selling of goods during a particular accounting period. It is an important part of the income statement.

Trading Account is prepared to determine the gross profit or gross loss of the business by comparing net sales with the cost of goods sold. It includes all items relating to trading activities such as opening stock, purchases, direct expenses, sales, and closing stock. If the sales exceed the cost of goods sold, it results in gross profit, otherwise it results in gross loss. Thus, it helps in evaluating the efficiency of trading operations of the business.

8. How is Gross Profit calculated?

Ans: Gross Profit is calculated by deducting the cost of goods sold from net sales. When the total sales value exceeds the cost of goods sold, the difference is called Gross Profit. Thus,

Gross Profit = Net Sales – Cost of Goods Sold.

9. What is meant by Profit and Loss Account? Why is it prepared?

Ans: Profit and Loss Account is an account prepared to ascertain the net profit or net loss of a business during a particular accounting year. It is prepared after the Trading Account and forms part of the income statement.

This account includes all indirect expenses such as administrative, selling and financial expenses, and also records incomes from sources other than sales like interest, commission, discount, etc. It is prepared to find out the final result of business operations after considering all expenses and incomes. It also helps in judging whether the business is being run efficiently and assists in managerial decision making by comparing profits of different years.

10. When does Profit and Loss Account show Net Profit?

Ans: Profit and Loss Account shows net profit when the total of the credit side exceeds the total of the debit side. The credit side includes all incomes and gains of the business, while the debit side includes all indirect expenses and losses.

When the incomes are more than the expenses, the difference between the two sides is called net profit. This net profit is then transferred to the capital account of the business. It indicates that the business has earned profit after meeting all expenses during the accounting period.

11. What are direct expenses? Give two examples of such expenses.

Ans: Direct expenses are those expenses which can be directly attributed to the purchase or manufacturing of goods for sale. These expenses are incurred to bring the goods to the place of sale or to make them ready for sale and are shown on the debit side of the Trading Account.

These expenses form part of the cost of goods sold and directly affect the gross profit of the business. Examples of direct expenses include wages and carriage inward. Other examples may include freight, fuel, and factory expenses.

12. State the meaning of Balance Sheet.

Ans: Balance Sheet is a statement prepared on a particular date, generally at the end of the accounting year, to ascertain the financial position of the business. It shows the assets owned by the business and the liabilities owed by it on that date.

13. From the following balances of Sabana calculate Gross Profit or Gross Loss by subtracting cost of goods sold from sales for the year ended 31st December, 2014

Particulars	₹
Stock (1.1.2014)	26,500
Purchases	64,600
Sales	86,800
Purchases Returns	2,600
Sales Returns	1,800
Freight inward	750
Wages	1,850
Closing Stock	31,100

Ans:

Particulars	Amount (₹)
Opening Stock (1.1.2014)	26,500
Add: Net Purchases
Purchases	64,600
Less: Purchases Returns	(2,600)
Net Purchases	62,000
Add: Freight inward	750
Add: Wages	1,850
Total Cost of Goods Available for Sale	91,100
Less: Closing Stock	(31,100)
Cost of Goods Sold (COGS)	60,000
Sales	86,800
Less: Sales Returns	(1,800)
Net Sales	85,000
Gross Profit (Net Sales – COGS)	25,000

Gross Profit = ₹ 25,000

14. From the following balances extracted from the books of Seth Brothers. Pass journal entries to prepare a Trading Account and Profit & Loss Account for the year ended 31st March, 2014

Particulars (Dr.)	₹	Particulars (Cr.)	₹
Stock (1.4.2013)	20,000	Electric Power	5,000
Purchases	95,000	Wages	14,000
Return Inwards	2,000	Selling Commission	5,500
Carriage Inwards	1,850	Repair & Renewals	2,000
Carriage Outwards	1,200	General Expenses	8,000
Custom Duty	3,000	Insurance	2,200
Return Outwards	5,000	Stock (31.3.2014)	45,000
Sales	1,65,000	Discount Received	1,500

Ans:

Journal Entries

Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
31-03-2014	Trading A/c Dr. To Opening Stock A/c		20,000	20,000
31-03-2014	Trading A/c Dr. To Purchases A/c		95,000	95,000
31-03-2014	Return Outwards A/c Dr. To Trading A/c		5,000	5,000
31-03-2014	Trading A/c Dr. To Carriage Inwards A/c		1,850	1,850
31-03-2014	Trading A/c Dr. To Wages A/c		14,000	14,000
31-03-2014	Trading A/c Dr. To Custom Duty A/c		3,000	3,000
31-03-2014	Sales A/c Dr. To Trading A/c		1,65,000	1,65,000
31-03-2014	Trading A/c Dr. To Return Inwards A/c		2,000	2,000
31-03-2014	Closing Stock A/c Dr. To Trading A/c		45,000	45,000
31-03-2014	Trading A/c To Profit & Loss A/c (Gross Profit)		(Balancing fig.)

Trading A/C

Dr.	Amount (₹)	Cr.	Amount (₹)
To Opening Stock	20,000	By Sales	1,65,000
To Purchases	95,000	Less: Return Inwards	(2,000)
Less: Return Outwards	(5,000)	Net Sales	1,63,000
Net Purchases	90,000	By Closing Stock	45,000
To Carriage Inwards	1,850
To Wages	14,000
To Custom Duty	3,000
To Gross Profit c/d	79,150
Total	2,08,000	Total	2,08,000

Profit & Loss A/C

Dr. (Expenses)	Amount (₹)	Cr. (Incomes)	Amount (₹)
To Selling Commission	5,500	By Gross Profit b/d	79,150
To Carriage Outwards	1,200	By Discount Received	1,500
To Repair & Renewals	2,000
To General Expenses	8,000
To Insurance	2,200
To Electric Power	5,000
To Net Profit transferred to Capital A/c	56,750
Total		Total