Final Accounts of Companies: Preparation of Statement of Profit & Loss and Balance Sheet (Basics) and Key Disclosures Questions

Question 1

What is a Balance Sheet?

Accepted Answer

A Balance Sheet is a statement showing a company’s assets, equity and liabilities as on a particular date.

Question 2

What does Statement of Profit & Loss show?

Accepted Answer

Statement of Profit & Loss shows income and expenses for a period to arrive at profit or loss.

Question 3

State one purpose of final accounts of a company.

Accepted Answer

One purpose of final accounts is to show the financial performance and financial position of the company to stakeholders.

Question 4

What are notes to accounts?

Accepted Answer

Notes to accounts are detailed disclosures and schedules that explain items and accounting policies supporting the financial statements.

Question 5

Define a provision.

Accepted Answer

A provision is a present obligation arising from past events for which an outflow of resources is probable and the amount can be estimated reliably.

Question 6

What is a contingent liability?

Accepted Answer

A contingent liability is a possible obligation that depends on the occurrence or non-occurrence of future uncertain events, generally disclosed in notes.

Question 7

Explain the basic structure of Statement of Profit & Loss (any three headings).

Accepted Answer

Basic headings in Statement of Profit & Loss (any three):

- **Revenue from operations**
- **Other income**
- **Expenses** (employee benefits, finance costs, depreciation, other expenses)
- **Profit before tax (PBT)** and **Tax expense** → **Profit after tax (PAT)**

Thus, it summarises income and expenses to arrive at PAT.

Question 8

Explain the basic structure of the company Balance Sheet (any three items under each side).

Accepted Answer

Balance Sheet structure:

**Equity & Liabilities** (any three):
- **Share capital**
- **Reserves & surplus**
- **Borrowings/Trade payables**

**Assets** (any three):
- **PPE (fixed assets)**
- **Inventories**
- **Trade receivables/Cash**

It shows financial position on a specific date.

Question 9

Differentiate between provision and contingent liability (any three points).

Accepted Answer

Provision vs contingent liability:

| Basis | **Provision** | **Contingent liability** |
|---|---|---|
| Obligation | present obligation | possible obligation |
| Outflow | **probable** | **possible/uncertain** |
| Accounting | recognised in accounts | disclosed in notes (generally) |

Thus, provisions affect profit; contingencies mainly appear as disclosures.

Question 10

Explain why notes to accounts are important (any three points).

Accepted Answer

Notes to accounts are important because they:

- provide **break-ups** of aggregated items (reserves, borrowings).
- disclose **accounting policies** (depreciation, inventory valuation).
- report **commitments/contingencies** and other required disclosures.

This improves transparency and comparability of financial statements.

Question 11

What is Schedule III (concept) and why is it important in company final accounts?

Accepted Answer

**Schedule III** (concept) refers to the prescribed **format and disclosure** requirements for presenting company financial statements.

Importance (any three):
- Ensures **uniform presentation** across companies.
- Improves **comparability** for users.
- Promotes **transparency** through minimum disclosures.

| Benefit | Result |
|---|---|
| Uniform format | easy comparison |
| Disclosures | better understanding |

Question 12

Differentiate between dividend and debenture interest (any three points).

Accepted Answer

Dividend vs debenture interest:

| Basis | **Dividend** | **Debenture interest** |
|---|---|---|
| Nature | **appropriation** of profit | **expense/charge** against profit |
| Payment | only if profits & declared | paid as per contract (fixed) |
| Recipient | shareholders (owners) | debentureholders (creditors) |

Hence, interest reduces profit before tax, while dividend is paid out of profit after tax/appropriation.

Question 13

Explain share capital and reserves & surplus disclosures in company Balance Sheet (exam-style).

Accepted Answer

### Share capital disclosures
Companies disclose:
- **authorised, issued, subscribed and paid-up** share capital,
- number of shares and face value,
- movements during the year (issue/buy-back).

### Reserves & surplus disclosures
Reserves & surplus generally include:
- **securities premium**, general reserve,
- retained earnings (surplus), and other reserves.

| Item | **Typical disclosure** |
|---|---|
| Share capital | number, face value, movement |
| Reserves | opening balance, additions, closing |

### Conclusion
Proper disclosures help users understand capital structure and accumulated profits of the company.

Question 14

Explain classification of assets and liabilities into current and non-current with examples (use a table).

Accepted Answer

### Meaning
Classification helps present liquidity and maturity information.

| Category | **Meaning** | Examples |
|---|---|---|
| **Current asset** | expected to be realised within 12 months/operating cycle | inventory, receivables, cash |
| **Non-current asset** | held for long-term use | PPE, long-term investments |
| **Current liability** | payable within 12 months/operating cycle | trade payables, short-term borrowings |
| **Non-current liability** | payable after 12 months | long-term loans, debentures |

### Conclusion
This classification improves clarity of short-term solvency and long-term structure.

Question 15

Prepare an exam-style outline for final accounts of a company showing the relationship between P&L and Balance Sheet (flow).

Accepted Answer

Final accounts link performance to position.

### Outline
1) Prepare **Statement of Profit & Loss**:
- Revenue + Other income – Expenses = **PBT**
- PBT – Tax = **PAT**

2) Appropriation/retention:
- PAT may be transferred to **reserves** and balance retained as **surplus**.

3) Prepare **Balance Sheet**:
- Surplus/reserves appear under **Shareholders’ funds**.

Flow (draw/write):
Income & Expenses → PBT → Tax → PAT → Reserves/Surplus → Balance Sheet (Equity)

### Conclusion
Thus, profit earned during the year changes reserves/surplus and affects the closing Balance Sheet.

Final Accounts of Companies: Preparation of Statement of Profit & Loss and Balance Sheet (Basics) and Key Disclosures

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