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Financial Statements 1 Textbook With Solution PDF Free Download
Chapter 9: Financial Statements – 1
You have learned that financial accounting is a well-defined sequential activity that begins with Journal (Journalising), Ledger (Posting), and preparation of Trial Balance (Balancing and Summarisation at the first stage).
In the present chapter, we will take up the next step, namely, the preparation of financial statements, and discuss the types of information requirements of various stakeholders, the distinction between capital and revenue items and their importance, and the nature of financial statements, and the preparation thereof.
Stakeholders and their Information Requirements Recall from chapter I (Financial Accounting Part I) that the objective of business is to communicate meaningful information to various stakeholders in the business so that they can make informed decisions.
A stakeholder is any person associated with the business. The stakes of various stakeholders can be monetary or non-monetary. The stakes can be active or passive or can be direct or indirect.
The owner and persons advancing loans to the business would have a monetary stake. The government, consumer, or researcher will have a non-monetary stake in the business.
The stakeholders are also called users who are normally classified as internal and external depending upon whether they are inside the business or outside the business.
All users have different objectives for joining a business and consequently different types of information requirements from it.
In nutshell, the various users have diverse financial information requirements from the business.
The distinction between Capital and Revenue A very important distinction in accounting is between capital and revenue items.
The distinction has important implications for making the trading and profit and loss account and balance sheet.
The revenue items form part of the trading and profit and loss account, the capital items help in the preparation of a balance sheet.
Expenditure Whenever payment and/or incurrence of an outlay are made for a purpose other than the settlement of existing liability, it is called expenditure.
The expenditures are incurred with the viewpoint they would give benefits to the business.
The benefit of expenditure may extend up to one accounting year or more than one year. If the benefit of expenditure extends up to one accounting period, it is termed as revenue expenditure.
Normally, they are incurred for the day-to-day conduct of the business. An example can be the payment of salaries, rent, etc.
The salaries paid in the current period will not benefit the business in the next accounting period, as the workers have put in their efforts in the current accounting period.
They will have to be paid their salaries in the next accounting period as well if they are made to work.
If the benefit of expenditure extends more than one accounting period, it is termed capital expenditure.
An example can be paid to acquire furniture for use in the business. Furniture acquired in the current accounting period will give benefits for many accounting periods to come.
The usual examples of capital expenditure can be payment to acquire fixed assets and/or to make additions/ extensions in the fixed assets.
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NCERT Solutions Class 11 Accountancy Chapter 9 Financial Statements
1. What are the objectives of preparing financial statements?
Financial statements are prepared with the following objective:
1. Determine the financial position of a business.
2. Ascertain the financial performance of the business.
3. To measure the changes in the financial position of a business.
4. To compare the financial performance of business both intra-farm and inter-farm wise.
2. What is the purpose of preparing a trading and profit and loss accounts?
A trading account is prepared for the following purpose:
1. To determine the gross profit or loss in a financial year or period.
2. Determine the ratio of gross profit to sales.
3. To determine ratio of direct expense to sales.
The profit and Loss account is prepared for the following purpose:
1. Determining net profit or loss incurred by the business
2. To comply with statutory requirements such as the Company act or Partnership Act
3. Explain the concept of the cost of goods sold.
Costs incurred in the production of goods that are sold by a company is known as Cost of Goods Sold or COGS
No goods left out: In this case, all goods are sold out. Hence, it can be calculated as:
Cost of goods sold = Purchases + Direct Expenses
Presence of closing stock: There can be some stock that is yet to get sold at the end of the accounting period. At that time it can be calculated as:
Cost of goods sold = Purchases + Direct Expenses – Closing Stock
Presence of an Opening stock: Stock that is carried forward at the beginning of the accounting period from the previous accounting period is considered as opening stock and is calculated as:
Cost of goods sold = Opening Stock + Purchases + Direct Expenses – Closing Stock
4. What is a balance sheet? What are its characteristics?
A statement prepared to determine the assets and values of a business on a particular date is known as the Balance Sheet. Debits represent the assets while credits signify the liabilities.
It has the following characteristics:
1. Reflects financial position of a business.
2. It is dependent on other statements such as trading and P & L account.
3. It is prepared at the end of an accounting period.
4. The balance of both sides should tally.
NCERT Class 11 Accountancy Textbook Chapter 9 Financial Statements 1 With Answer PDF Free Download