Question

Financial Statements are prepared following the constituent accounting concepts principles procedures and also the legal environment in which the business organisation operate. These statements are the source of information on the basis of which conclusions are drawn about the profitability and financial position of a company so that their users can easily understand and use them in their economic decisions in a meaningful way.

From the above statements identify any two values that a company should observe while preparing its financial statements. Also, State under which major headings and sub-headings the following items will be presented in the Balance Sheet of a company as per Schedule III of the Companies Act 2013

(1) Capital Reserve
(2) Calls-in-Advance
(3) Loose Tools
(4) Bank overdraft

Answer 1

The values that must be observed by a company while preparing its financial statements are

1)these statements must be drawn following the defined accounting concepts, principles and methods, and

2) the financial statements should be drawn following the legal framework of the country of operations.

Items	Major Head	Sub – Head
Capital Reserve	Shareholder’s Fund	Reserve & Surplus
Calls – in - Advance	Current Liabilities	Other Current Liabilities
Loose Tools	Current Assets	Inventories
Bank Overdraft	Current Liabilities	Short-term Borrowings

Proprietary Ratio of M Ltd. 0.80: 1

Proprietary Ratio = `"Proprietor's Funds"/"Total Assets"`

Transactions	Effects
Obtained a loan from bank Rs 2,00,000 payable after 5 years	Decrease, The total assets would increase with the amount of loan raised and proprietor’s funds remains the same
Purchased machinery for cash Rs 75,000	No Change, Total Assets will increase and decrease by the same amount
Redeemed 5% Redeemable preference shares Rs 1,00,000	Decrease, Proprietor’s Funds and Total Assets both will decrease by the same amount but the percentage change would be more on Proprietor’s Fund already in ratio 0.80: 1
Issued equity shares to vendors of machinery purchased for Rs 4,00,000	Increase, Even though both Proprietor’s Funds and Total Assets both will increase by the same amount but the percentage change would be more in Proprietor’s Fund