Understanding Financial Statements IIM Calcutta
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Questions and Answers

What is the net effect of Revenue, Expenses, Gains, and Losses for the period?

  • Assets
  • Net Income (correct)
  • Equity
  • Net Loss

    • When is Net Income positive?

  • When Revenue plus Gains is greater than Expenses plus Losses (correct)
  • When Gains are less than Losses
  • When Expenses are equal to Revenue
  • When Revenue is less than Expenses

    • What is the focus of a Profit and Loss Account or Income Statement?

  • Earnings activities (correct)
  • Financing activities
  • Operating and investing activities
  • Assets and liabilities

    • What is the formula for Retained Earnings?

    <p>Revenue - Expenses</p> Signup and view all the answers

    What is the purpose of a Single-Step Income Statement?

    <p>To show the operating results of the entity during the period</p> Signup and view all the answers

    What is Cost of Goods Sold?

    <p>The cost of producing goods sold to customers</p> Signup and view all the answers

    What is Gross Profit Margin?

    <p>The difference between revenue and cost of goods sold</p> Signup and view all the answers

    What is the TOP LINE ITEM in an Income Statement?

    <p>Revenue or Sales</p> Signup and view all the answers

    What is the primary purpose of financial statements?

    <p>To know the operating performance of the organization</p> Signup and view all the answers

    What is depreciation?

    <p>The systematic allocation of the original cost of an asset to the periods in which the asset provides benefit to the entity</p> Signup and view all the answers

    What are the two popular methods of depreciation?

    <p>Straight Line Method and Declining Balance Method</p> Signup and view all the answers

    What is the formula to calculate depreciation using the Straight Line Method?

    <p>Depreciation = Original book value * depreciation rate</p> Signup and view all the answers

    What is the purpose of a Balance Sheet?

    <p>To summarize the assets, liabilities, and owner's equity of an organization at a point of time</p> Signup and view all the answers

    What is the term for the value of an asset at the end of its service life?

    <p>Residual value</p> Signup and view all the answers

    Which Act recognizes only the Written Down Value Method of depreciation?

    <p>Income Tax Act, 1961</p> Signup and view all the answers

    What is the term for the number of years an asset is used?

    <p>Useful life</p> Signup and view all the answers

    What are the expenses incurred in the generation of revenues?

    <p>Operating expenses</p> Signup and view all the answers

    What is the formula for Operating Profit / Income?

    <p>Gross margin less operating expenses</p> Signup and view all the answers

    What is the term for debt servicing charges?

    <p>Interest expenses</p> Signup and view all the answers

    What is the formula for EBIT/PBIT?

    <p>Operating income plus other income and gains minus other expenses and losses</p> Signup and view all the answers

    What is the difference between Net Income and EBIT?

    <p>Interest expenses and income taxes</p> Signup and view all the answers

    What is the percentage of Gross Profit in the given income statement?

    <p>51.9%</p> Signup and view all the answers

    What would be the Net Income without the loss on disposal of plant assets?

    <p>146.5</p> Signup and view all the answers

    What is the Net Profit Margin in 2012?

    <p>7.1% of Sales</p> Signup and view all the answers

    What is the balance sheet classification of 'Salaries and wages payable'?

    <p>Current Liabilities (CL)</p> Signup and view all the answers

    Which of the following would not appear on a balance sheet?

    <p>Service Revenue</p> Signup and view all the answers

    What is the balance sheet classification of 'Goodwill'?

    <p>Intangible Assets (IA)</p> Signup and view all the answers

    What is the balance sheet classification of 'Debt Investments (short-term)'?

    <p>Current Assets (CA)</p> Signup and view all the answers

    What is the balance sheet classification of 'Mortgage Payable (due in 3 years)'?

    <p>Long-term Liabilities (LTL)</p> Signup and view all the answers

    What is the balance sheet classification of 'Unearned Service Revenue'?

    <p>Current Liabilities (CL)</p> Signup and view all the answers

    What type of industry is the company most likely to belong to based on the given balance sheet extract?

    <p>Service</p> Signup and view all the answers

    Which of the following is an income statement item?

    <p>Service Revenue</p> Signup and view all the answers

    What is the total value of Non-current Assets in the balance sheet as on/at March 2014?

    <p>7526.86</p> Signup and view all the answers

    What is the total value of Equity and Liabilities in the balance sheet as on/at March 2014?

    <p>13105.05</p> Signup and view all the answers

    What is the value of Intangible Assets Under Development in the balance sheet as on/at March 2014?

    <p>4.45</p> Signup and view all the answers

    What is the value of Short Term Loans and Advances in the balance sheet as on/at March 2014?

    <p>1273.29</p> Signup and view all the answers

    What is the definition of Net Income?

    <p>The change in equity that results from the operations of an entity during an accounting period</p> Signup and view all the answers

    What is the value of Trade Receivables in the balance sheet as on/at March 2014?

    <p>1237.47</p> Signup and view all the answers

    What is the value of Other Long Term Liabilities in the balance sheet as on/at March 2014?

    <p>371.94</p> Signup and view all the answers

    What is the value of Reserves and Surplus in the balance sheet as on/at March 2014?

    <p>884.83</p> Signup and view all the answers

    What is the value of Cash and Cash Equivalents in the balance sheet as on/at March 2014?

    <p>790.57</p> Signup and view all the answers

    What is the value of Tangible Assets in the balance sheet as on/at March 2014?

    <p>1946.05</p> Signup and view all the answers

    Study Notes

    Financial Statements

    • Financial statements are a summary of accounting transactions, presented to enable users to understand the operating performance of an organization and its impact on the overall value of the organization.
    • There are three main types of financial statements:
      • Balance Sheet
      • Profit & Loss Account (or Income Statement)
      • Cash Flow Statement

    Depreciation

    • Depreciation is the gradual conversion of cost into expense.
    • It is a cost consumed by an entity during an accounting period.
    • Definition: The systematic allocation of the original cost of an asset to the periods in which the asset provides benefit to the entity.
    • Judgments required:
      • Service life of asset
      • Residual value at the end of its service life
      • Net cost = original cost - residual value
      • Method of depreciation used to allocate cost over useful life of asset
    • Two popular methods of depreciation:
      • Straight Line Method (SLM)
      • Written Down Value Method (WDV)

    Balance Sheet

    • A balance sheet summarizes Assets, Liabilities, and Owner's Equity at a point in time.
    • It is also known as a Statement of Financial Position.
    • Examples of balance sheet classification:
      • Current assets (CA)
      • Long-term investments (LTI)
      • Property, plant, and equipment (PPE)
      • Intangible assets (IA)
      • Stockholders' equity (SE)

    Net Income

    • Net Income is the change in equity that results from the operations of an entity during an accounting period.
    • It is the net effect of Revenue, Expenses, Gains, and Losses for the period.
    • Net Income is positive when (Revenue + Gains) is greater than (Expenses + Losses), increasing the equity of the owners.
    • Net Income is negative when (Revenue + Gains) is less than (Expenses + Losses), decreasing the equity of the owners.

    Profit & Loss Account (or Income Statement)

    • It shows the operating results of the entity during the period.
    • It is a flow report that focuses on earnings activities (or operating activities).
    • Assets = Liabilities + Owner(s) Equity.
    • Owner(s) Equity = Contributed Capital + Retained Earnings.
    • Retained earnings = Revenue - Expenses.
    • Profit & Loss Account can be presented in a single-step or multiple-step format.

    Multiple-Step Income Statement

    • Revenue or Sales is the top-line item.
    • Cost Of Goods Sold is the cost the company incurred to purchase and convert material into finished products sold to customers.
    • Gross Profit/Margin is the difference between revenues and cost of goods sold.
    • Operating Expenses are expenses of an operating nature, incurred in the generation of revenues.
    • Operating Profit/Income is gross margin less operating expenses.
    • EBIT/PBIT is operating income plus other income & gains minus other expenses & losses.
    • Interest expenses are debt servicing charges.
    • Income Taxes are tax as per books of accounts.
    • EAT/PAT is the net income or profit after tax.

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    Understanding Financial Statements PDF

    Description

    Learn about financial statements, including balance sheets, profit and loss accounts, and cash flow statements, to understand a company's operating performance and overall value.

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