Financial Statements of a Company
Class 12 · Accountancy
3 ideas in Class 12 Accountancy, explained in plain words, with games and quizzes to practise.
Nature and Purpose of Financial Statements
Part of: Reading company statements
Financial statements are the balance sheet, the profit and loss statement, the cash flow statement and the notes that explain them. They record past facts under set rules, so they are historical and shaped by estimates like provisions. Owners, lenders, suppliers and tax officers all read them to judge safety and performance.
Why it matters. Every later analysis, from ratios to cash flows, drinks from these statements. Misreading what they can and cannot say leads to false trust in weak firms.
Key words
- Balance sheet
- : Photo of assets and dues on one date.
- Profit and loss
- : Film of income and costs over a year.
- Notes to accounts
- : Diary explaining summary figures.
- Historical nature
- : Records of past facts and rules.
Try it in two minutes
- Lay 4 cards: photo of wealth, film of profit, river of cash, diary of notes.
- Ask: which card shows a date, and which shows a whole year?
- Mark where guesses hide, like doubtful debts. Ask: whose judgment is that?
Try at home. Name the 4 parts of the full set and say in one line what each part shows.
Balance Sheet Major Heads
Part of: Reading company statements
Schedule III splits the balance sheet into two sides. Equity and liabilities hold shareholder funds, non-current liabilities and current liabilities, while assets hold non-current and current assets. An item is current when it turns to cash or falls due within the operating cycle or twelve months. For example, funds of 400000 with dues of 150000 and 50000 give total liabilities of 600000.
Why it matters. Wrong heads misstate safety: a long loan shown as current fakes a crisis, and stock shown as fixed hides liquidity. Correct heads keep analysis honest.
Formulas
- Total liabilities = Shareholder funds + Non-current + Current
- Total assets = Non-current assets + Current assets
- Balance sheet must balance both sides
Key words
- Shareholder funds
- : Capital plus reserves of owners.
- Non-current liabilities
- : Dues payable after twelve months.
- Current assets
- : Items turning to cash within a year.
- Operating cycle
- : Time from input to cash return.
Try it in two minutes
- Draw two boxes: what the firm owes, what the firm owns.
- Sort 8 slips: capital, long loan, supplier dues, machine, stock, debtors, cash.
- Ask of each: cash within a year or beyond?
- Add each side and check the two totals match.
Try at home. Shareholder funds 300000, non-current liabilities 100000, current liabilities 50000. Find total liabilities.
Profit and Loss Statement and Presentation Rules
Part of: Performance and presentation
The profit and loss statement starts with revenue from operations, adds other income, and subtracts grouped expenses like material cost, employee benefits, finance costs and depreciation. What remains is profit before tax, then tax, then profit after tax. Schedule III also fixes the order of balance sheet heads, with equity and liabilities before assets. For example, revenue of 850000 less expenses of 600000 leaves profit before tax of 250000.
Why it matters. Each line answers a different question: sales strength, cost control, debt burden and final surplus. Skipping lines hides whether profit came from business or from one-time extras.
Formulas
- Profit before tax = Total revenue - Total expenses
- Profit after tax = Profit before tax - Tax
- EPS = Profit for equity holders / Number of equity shares
Key words
- Revenue from operations
- : Income from main business acts.
- Finance costs
- : Interest on loans and debentures.
- Profit before tax
- : Surplus ahead of tax cut.
- Profit after tax
- : Final surplus for owners.
Try it in two minutes
- Stack 85 beads as revenue and 60 as expenses.
- Remove expenses pile by pile: material, staff, interest, wear.
- Read the leftover as profit before tax.
- Cut 30 percent as tax and read the final surplus.
Try at home. Revenue 900000, other income 100000, expenses 700000. Find profit before tax.
What your child will practise
- Balance Sheet Major Heads: Desert Puzzle (Clue Puzzle)
- Balance Sheet Major Heads: Desert Quick Fire (Quick Fire)
- Nature and Purpose of Financial Statements: Space Puzzle (Clue Puzzle)
- Nature and Purpose of Financial Statements: Space Quick Fire (Quick Fire)
- Profit and Loss Statement and Presentation Rules: Ocean Quick Fire (Quick Fire)
- Quiz: Balance Sheet Major Heads (8 questions)
- Quiz: Nature and Purpose of Financial Statements (8 questions)
- Quiz: Profit and Loss Statement and Presentation Rules (8 questions)