Presentation of Financial Statements Short Answer Type Questions

Question 1.
Write a short note on the Statement of Changes in Equity (SOCE).
Answer:
Statement of Changes in Equity, often referred to as Statement of Retained Earnings in U.S. GAAP, details the change in owners’ equity over an accounting period by presenting the movement in reserves comprising the shareholders’ equity.

Movement in shareholders’ equity over an accounting period comprises the following elements:

  • Net profit or loss during the accounting period attributable to shareholders.
  • Increase or decrease in share capital reserves.
  • Dividend payments to shareholders.
  • Gains and losses are recognized directly in equity.
  • Effect of changes in accounting policies.
  • Effect of correction of prior period error.

Question 2.
Explain the various types of Equity.
Answer:
The presentation outlines the accounting requirements for the presentation of financial instruments, particularly the classification of such instruments into financial assets, financial liabilities, and equity instruments. The standard also provides guidance on the classification of related interest, dividends, gains/ losses, and when financial assets and financial liabilities or equity can be offset.

Financial liability or Equity: any liability that is:
1. A contractual obligation:

  • To deliver cash or another financial asset to another entity.
  • To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity.

2. A contract that will or may be settled in the entity’s own equity instruments and is
(i) A non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments.

(ii) A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include: instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments; puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments

Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Question 3.
Explain the concept of Administrative Expenses.
Answer:
Administrative expenses are part of the operating expenses along with selling expenses. Administrative expenses include expenses associated with the general administration of the business. Administrative expenses are the expenses that an organization incurs not directly tied to a specific function such as manufacturing, production or sales. These expenses are related to the organization as a whole as opposed to an individual department.

Examples include the salaries and fringe benefits of the company president, human resource personnel, accounting, information technology, the depreciation expense for equipment and space used in administration, as well as supplies, utilities, etc.

Question 4.
Explain the revenue as per IAS 18.
Answer:
Revenue is generally recognized as earned at the profit of sale because at that point four criteria will generally have been met:

  • The product or service has been provided to the buyer.
  • The buyer has recognized his liability to pay for the goods or services provided. The converse of this is that the seller has recognized that ownership of goods has passed from himself to the buyer.
  • The buyer has indicated his willingness to hand over cash or other assets in the statement of his liability.
  • The monetary value of the goods or services has been established.

Revenue does not include sales taxes, value-added taxes, or goods and service taxes which are only collected for third parties, because these do not represent an economic benefit flowing to the entity. The same is true for revenues collected by an agent on behalf of the principal. Revenue for the agent is only the commission received for acting as the agent.

Question 5.
Explain the Changes in Controlling Interest.
Answer:
Changes in a parent’s controlling interest in its subsidiary that do not result in a change of control are accounted for as equity transactions or transactions between shareholders. Previously, decreases in ownership interest were treated as either equity transactions or accounted for with gain/loss recognition on the income statement.

Acquisitions of additional non-controlling interests in a step acquisition, for example are no longer required to be accounted for using the purchase method. Previously, such acquisitions were accounted for under the purchase method. Eliminating the requirement to apply purchase accounting to these transactions reduces the parent’s costs by eliminating the need to value the assets and liabilities of the subsidiary on the dates that additional equity interests are acquired.

Question 6.
Explain the various components of Statement of Changes in Equity.
Answer:
Following are the main elements of statement of changes in equity:
1.Opening Balance:
This represents the balance of shareholders’ equity reserves at the start of the comparative reporting period as reflected in the prior period’s statement of financial position. The opening balance is unadjusted in respect to the correction of prior period errors rectified in the current period and the effect of changes in accounting policy implemented during the year. These are presented separately in the statement of changes in equity (see below).

2. Effect of Changes in Accounting Policies:
Since changes in accounting policies are applied retrospectively, an adjustment is required in stockholders’ reserves at the start of the comparative reporting period to restate the opening equity to the amount that would be arrived if the new accounting policy had always been applied.

3. Effect of Correction of Prior Period Error:
The effect of correction of prior period errors must be presented separately in the statement of changes in equity as an adjustment to opening reserves. The effect of the corrections may not be netted off against the opening balance of the equity reserves so that the amounts presented in current period statement might be easily reconciled and traced from prior period financial statements.

4. Restated Balance:
This represents the equity attributable to stockholders at the start of the comparative period after the adjustments in respect of changes in accounting policies and correction of prior period errors as explained above.

5. Changes in Share Capital:
Issue of further share capital during the period must be added in the statement of changes in equity whereas redemption of shares must be deducted therefrom. The effects of issue and redemption of shares must be presented separately for share capital reserve and share premium reserve.

6. Dividends:
Dividend payments issued or announced during the period must be deducted from shareholder equity as they represent distribution of wealth attributable to stockholders.

7. Income / Loss for the period:
This represents the profit or loss attributable to shareholders during the period as reported in the income statement.

8. Changes in Revaluation Reserve:
Revaluation gains and losses recognized during the period must be presented in the statement of changes in equity to the extent that they are recognized outside the income statement. Revaluation gains recognized in income statement due to reversal of previous impairment losses however shall not be presented separately in the statement of changes in equity as they would already be incorporated in the profit or loss for the period.

9. Other Gains & Losses:
Any other gains and losses not recognized in the income statement may be presented in the statement of changes in equity such as actuarial gains and losses arising from the application of IAS 19 Employee Benefit.

10. Closing Balance:
This represents the balance of shareholders’ equity reserves at the end of the reporting period as reflected in the statement of financial position.

Practical Problems

Question 1.
Give the presentation of financial statement of companies in accordance with the requirement of Company Act. 2013.

Question 2.
From the following details prepare others Comprehensive income for the year ended 31st March, 2018 of ABC Ltd.

Particulars Amount ( )
Gains on property revaluation 12,000
Losses on investment in Equity Instruments 22,000
Remeasurement losses on defined pension plans 600
Share of gain on property revaluation 1,000
Income tax related to items that will not be reclassified 5,000
Items that may be reclassified subsequently to profit or loss: 3,000
Exchange difference in translating foreign operations 600
Cash flow ledger 2,000
Income tax relating to items that may be reclassified 50,000
Profit for the year 39,000
Controlling interest (Owner) Amount ( )

Question 3.
From the following prepare, a statement of profit or loss for the year ended 31.3.2019 as per the Companies Act, 2013.
Revenue from operation – 12,00,000
Salaries and allowances – 1,40,000
Stationery – 30,000
Interest on long term loans – 50,000
Publicity – 80,000
Raw material consumed – 2,20,000
Discount allowed – 20,000
Depreciation – 20,000
Rent received – 80,000

Question 4.
From the following balances of Kumar Co. Ltd. as of 31.3.2016. Prepare a statement of P/L.
Interest on debentures – 32,400
Travelling expenses – 15,000
Delivery van expenses – 5,000
Bad debts – 6,000
Discount – 7,000
Purchases – 3,15,000
Opening stock – 75,000
Freight charges – 8,000
Depreciation – 25,000
Insurance – 5,000
Commission received – 7,500
Sales – 6,50,000
Share transfer fees – 5,000

Question 5.
From the following particulars XYZ Co., prepare a statement of P/L for the year ended 31st March 2018 as per Schedule III of Companies Act, 2013.
Particulars – Amount ()
Revenue from Operations – 39,000
Cost of material consumed – 24,500
Other income – 6,000
Changes in inventory – 2,500
Changes in WIP – 1,500
Finance Cost – 1,000
Employees Benefit – 2,000
Depreciation and amortisation – 3,000
Other Expenses – 500
Income Tax expenses – 1,200
Non-Controlling interest – 4,000

Question 6.
Prepare a statement of profit or loss under the Companies Act. 2013 from the following details of Kavya Ltd. for the year ended 31.3.2019.
Sales – 16,00,000
Purchase of raw materials – 7,00,000
Commission received – 3,00,000
Carriage inwards – 1,00,000
Returns outwards – 40,000
Opening stock of raw materials – 1,80,000
Closing stock of raw materials – 1,00,000
Rent received – 40,000
Salaries to employees – 2,00, 000
PF contribution to employees – 50,000
Interest on bank loan – 30,000
Interest on Debentures – 30,000
Sundry expenses – 10,000
Depreciation – 40,000
Income tax paid – 75,000
Excise duty – 50,000
Consumables – 80,000
Factory expenses – 60,000

Question 7.
You are given the following extracts of Ledger Balances taken from Shankar Ltd. for the year ending 31.3.2016 to prepare a statement of P/L.
Revenue from operations – 98,000
Other income – 2,000
Advertising – 5,250
Salaries – 27,000
Depreciation – 2,800
Insurance – 1,000
Interest on debentures – 1,000
Preliminary exp. written off – 1,000
Bad debts – 500
Discount – 500
Printing and stationery – 1,000
Cost of materials consumed – 25,000

Question 8.
Calculate revenue from sales of Vinay Electronics Limited.
Gross Sales – 49, 22,040
Sales return and allowances – 43,800
Solution:

Particulars Amount
Revenue from sales:
Gross Sales (Cash sales + Credit sales) 49, 22,040
Less: Sales returns and allowances 43,800
Net Sales 48,78,240

Question 9.
Give the proforma of the balance sheet in the format prescribed under the Company Act. 2013

Question 10.
From the following Trial Balance of MN Co. Ltd., as of 31.3.2018, prepare SOFP as per Ind. AS-1. (Schedule III Companies Act of 2013).

Question 11.
Prepare the Balance Sheet of Thimmegowda Company as at 31st March 2016, from the following information:
Particulars – Amount
Share Capital – 40,000
Reserves and Surplus – 37,110
Long-term borrowings – 10,000
Trade payables – 19,630
Short-term provisions – 26,000
Tangible assets – 30,000
Investments – 2,000
Inventories – 89,000
Trade receivables – 7,400
Cash and bank balances – 3,140
Short-term loans and advances – 1,200

Question 12.
Prepare Balance Sheet of ABC limited, from the following ledger balances as on 31/03/2016.
Particulars – Amount
Equity share capital – 5,00,000
Plant and machinery – 6,00,000
Preference share capital – 4,00,000
Freehold property – 3,00,000
Goodwill – 1,00,000
Debentures – 4,00,000
Sundry debtors – 1,40,000
Closing stock – 2,00,000
Bank overdraft – 60,000
Sundry creditors – 60,000
Cost of issue of shares – 40,000
Unclaimed dividend – 50,000
Advertisement suspense – 90,000