Financial Statements Overview

The three main financial statements are the Balance Sheet, the Statement of Profit & Loss, and the Cash Flow Statement.

Financial statements provide essential indicators of a business's financial health, enabling informed economic decisions.

Profitability is the ability of a business to generate profit after covering all business expenses during a specified accounting period.

<p>Liquidity signifies a business's ability to meet its current obligations without disrupting normal operations.</p> Signup and view all the answers

<p>Bad debts reduce the profits as they are recorded as an expense in the Profit and Loss Account.</p> Signup and view all the answers

<p>Solvency refers to a business's ability to pay all its debts if it were to be liquidated, indicating that its assets exceed its liabilities.</p> Signup and view all the answers

<p>It is necessary to provide for doubtful debts to reflect expected losses, as not all credit sales may be collected within the same year.</p> Signup and view all the answers

<p>Income tax is recorded as an expense in the Profit and Loss Account for the current year’s tax obligation.</p> Signup and view all the answers

<p>Proper presentation of financial statements ensures that shareholders and users can easily understand and utilize the information for decision-making.</p> Signup and view all the answers

<p>The Statement of Profit &amp; Loss shows the revenue generated and expenses incurred, helping assess the profitability of the business.</p> Signup and view all the answers

<p>Tax liability is determined based on book profits calculated as per the Income Tax Act, rather than the net profit reported by the business.</p> Signup and view all the answers

<p>The provision for tax is shown as a current liability in the balance sheet.</p> Signup and view all the answers

<p>The Cash Flow Statement tracks the movement of cash in various business activities, indicating net cash available for operations.</p> Signup and view all the answers

<p>When the actual tax is paid, it is set off against the provision for tax previously created.</p> Signup and view all the answers

<p>The accounting principle of prudence justifies the creation of provisions for expected losses.</p> Signup and view all the answers

<p>Recording bad debts leads to a deduction from the accounts receivable balance on the balance sheet.</p> Signup and view all the answers

<p>The Cost of Goods Sold is calculated using the formula: Opening Stock + Purchases + Direct Expenses - Closing Stock.</p> Signup and view all the answers

<p>The Gross Profit was Rs. 42,000.</p> Signup and view all the answers

<p>The direct expenses include Direct Labour (Rs. 40,000), Carriage Inwards (Rs. 3,000), and Factory Fuel &amp; Lighting (Rs. 10,000).</p> Signup and view all the answers

<p>The total amount of Sales made during the fiscal year was Rs. 3,30,000.</p> Signup and view all the answers

<p>The closing stock is recorded at Rs. 65,000.</p> Signup and view all the answers

<p>Inventory valuation is important as it determines the cost price of inventory used in calculating Gross Profit.</p> Signup and view all the answers

<p>The total debit and credit amounts were both Rs. 3,95,000.</p> Signup and view all the answers

<p>The challenge is that the cost of inventory fluctuates, leading to varying cost prices during an operating cycle.</p> Signup and view all the answers

<p>The formula is REVENUE – EXPENSE = PROFIT/LOSS.</p> Signup and view all the answers

<p>Expenses and losses are debited in the P&amp;L account.</p> Signup and view all the answers

<p>The Trading Account shows gross profit or loss from core operations, while the Profit and Loss Account shows net income or loss from all activities.</p> Signup and view all the answers

<p>Incomes and expenses must relate to the current accounting period.</p> Signup and view all the answers

<p>They are taken from the trial balance.</p> Signup and view all the answers

<p>The purpose is to summarize all revenue and expenses recognized during the accounting period to reflect profit or loss.</p> Signup and view all the answers

<p>Incomes and gains should be credited in the P&amp;L account.</p> Signup and view all the answers

<p>A final account signifies the summary of all revenue and expenses, leading to the net effect of profit earned or loss incurred.</p> Signup and view all the answers

<p>Opening stock appears on the debit side because it is a part of the cost of sales for the current accounting year.</p> Signup and view all the answers

<p>False, 'Rent, rates, and taxes' are considered indirect expenses.</p> Signup and view all the answers

<p>It indicates a net profit, not a net loss.</p> Signup and view all the answers

<p>True, discount received is classified as indirect income.</p> Signup and view all the answers

<p>When an expense increases, it is debited.</p> Signup and view all the answers

<p>Interest income from investments is classified as non-operating income.</p> Signup and view all the answers

<p>Closing Stock appears on both the income statement and the balance sheet.</p> Signup and view all the answers

<p>Depreciation on machinery is considered an indirect expense.</p> Signup and view all the answers

<p>A contingent liability is a possible obligation that arises from past events, confirmed only by uncertain future events.</p> Signup and view all the answers

<p>A legal suit against an entity is a contingent liability because its existence as a financial obligation depends on the verdict of the case.</p> Signup and view all the answers

<p>Share capital represents the capital contributed by shareholders, while reserves are retained earnings that have not been distributed as dividends.</p> Signup and view all the answers

<p>Equity shares represent ownership in a company and are called residual capital because shareholders have claims on assets after all other obligations are met.</p> Signup and view all the answers

<p>Authorized capital is the maximum amount of share capital a company can issue, while issued capital is the portion of that authorized capital that has been made available for subscription.</p> Signup and view all the answers

<p>Preference shares provide shareholders with preferential rights to fixed dividends and repayment of capital upon liquidation.</p> Signup and view all the answers

<p>Equity shareholders' claims are prioritized last, after all creditor and preference shareholder claims are satisfied.</p> Signup and view all the answers

<p>A company may not raise all its authorized capital at once to strategically manage its financing needs and maintain cash reserves.</p> Signup and view all the answers