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NCERT Class 12 Accountancy Textbook Chapter 3 With Answer PDF Free Download
Chapter 3: Financial Statements Of A Company
3.1 Meaning of Financial Statements
Financial statements are the basic and formal annual reports through which the corporate
management communicates financial information to its owners and various other external parties
which include investors, tax authorities, government, employees, etc.
These refer to the balance sheet (position statement) at the end of the accounting period, the statement of profit and loss of a company, and the cash flow statement.
3.2 Nature of Financial Statements
The chronologically recorded facts about events expressed in monetary terms for a defined period of time are the basis for the preparation of periodical financial statements which reveal the financial position on a date and the financial results obtained during a period.
The American Institute of Certified Public Accountants states the nature of financial statements as, “the statements prepared for the purpose of presenting a periodical review of the report on progress by the management and deal with the status of investment in the business and
the results achieved during the period under review. They reflect a combination of recorded facts, accounting principles, and personal judgments”.
3.3 Objectives of Financial Statements
Financial statements are the basic sources of information for the shareholders and other external parties for understanding the profitability and financial position of any business concern.
They provide information about the results of the business concern during a specified period of time in terms of assets and liabilities, which provide the basis for making decisions.
3.4 Types of Financial Statements
The financial statements generally include two statements: a balance sheet and a statement of profit and loss which are required for external reporting and also for internal needs of the management like planning, decision-making, and control.
Apart from these, there is also a need to know about movements of funds and changes in the financial position of the company. For this purpose, a cash flow statement is prepared.
3.5 Uses and Importance of Financial Statements
The users of financial statements include management, investors, shareholders, creditors, government, bankers, employees, and the public at large.
Financial statements provide the necessary information about the performance of the management to these parties interested in the organization and help in taking appropriate economic decisions.
It may be noted that the financial statements constitute an integral part of the annual report of the company in addition to the directors’ report, auditors report, corporate governance report, and management discussion and analysis.
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NCERT Solutions Class 12 Accountancy Chapter 3 Financial Statements Of A Company
1. State the meaning of financial statements?
Financial statements are the end products of an accounting process, it provides a true picture of the performance of the company over a time period and such a statement is used by different users of accounting information. These statements are prepared annually
2. What are the limitations of financial statements?
1. Financial statements reflect historical data i.e reflects the original price of the items or the price at which items were acquired.
It fails to highlight the current price of items as per the market and also inflated prices due to rising inflation in the market. Hence data and information are historical in nature.
2. Financial statements do not portray the qualitative aspects of any transaction, the aspects such as size, color, quality, and capabilities. Only quantitative data which can be expressed in monetary value are considered
3. Financial statement is biased in nature as it is dependent on human interference.
4. It becomes difficult to assess the performance of another company
5. It will be difficult to forecast as the statement is prepared based on historical data.
3. List any three objectives of financial statements?
The objectives of preparing financial statements are:
1. A financial statement provides timely and reliable information on the economic status of a company on a periodical basis. It also makes information available to external users or stakeholders who do not have direct access to the information.
2. A financial statement helps in revealing the true financial position of a company. It contains information related to liquidity, profitability, financial viability, and solvency of an organization.
3. A financial statement is helpful in evaluating the earning capacity of a firm.
4. State the importance of financial statements to
Following are the importance of financial statements:
1. Shareholders: For a shareholder, a financial statement is helpful in determining the viability and profit-making capacity of a business.
It provides businesses with sufficient data to analyze their financial health and performance of the business.
2. Creditors: A financial statement is essential for a creditor to understand the credit worthiness of the business along with liquidity. It helps them to decide whether further investments can be done for this business.
3. Government: A financial statement helps the government in determining GDP, national income, industrial growth, etc. which leads to the formulation of various policies and addressing problems like poverty and unemployment, etc.
4. Investors: For Investors who have invested or those planning to invest, a financial statement is necessary. A financial statement helps determine the prospects and viability of new investments.
Financial Statements Of A Company NCERT Textbook With Solutions PDF Free Download