Financial Statements – I

Questions for Practice (Short Answers)

1. What are the objectives of preparing financial statements?

The main objectives are:

To ascertain financial performance: To determine the Profit earned or Loss incurred during a specific accounting period.
To ascertain financial position: To know the value of assets owned and liabilities owed by the business on a specific date.
To provide information: To supply relevant financial data to various stakeholders (owners, investors, creditors, government) for decision-making.

2. What is the purpose of preparing Trading and Profit & Loss Account?

• Trading Account: To ascertain the Gross Profit or Gross Loss resulting from the buying and selling of goods/services.
• Profit & Loss Account: To ascertain the Net Profit or Net Loss after considering all indirect expenses and incomes.

3. Explain the concept of Cost of Goods Sold (COGS).

Cost of Goods Sold represents the direct costs attributable to the production of the goods sold by a company. It includes the cost of materials and direct labor.

Formula:
$$ \text{COGS} = \text{Opening Stock} + \text{Net Purchases} + \text{Direct Expenses} – \text{Closing Stock} $$
Alternatively: $$ \text{COGS} = \text{Net Sales} – \text{Gross Profit} $$

4. What is a Balance Sheet? What are its characteristics?

A Balance Sheet is a statement of the assets, liabilities, and capital of a business at a specific point in time. It shows the financial position of the entity. [Image of balance sheet format]

Characteristics:
• It is a statement, not an account.
• It is prepared on a specific date (usually the last day of the accounting year).
• The total of Assets side must always equal the total of Liabilities + Capital side.
• It reflects the accounting equation: $ \text{Assets} = \text{Liabilities} + \text{Capital} $.

5. Distinguish between Capital and Revenue Expenditure. Classify the items.

Basis	Capital Expenditure	Revenue Expenditure
Purpose	Acquisition/improvement of fixed assets.	Maintenance of assets / Day-to-day running.
Benefit Period	Long term (more than 1 year).	Short term (consumed within 1 year).
Effect on Profit	Does not reduce profit immediately (depreciated over time).	Reduces profit of the current year entirely.

Classification of Items:

Item	Nature	Reason
(a) Repairs/whitewashing on old building purchased	Capital	Incurred to make the asset usable (part of acquisition cost).
(b) New exit in cinema hall (Govt order)	Revenue	Does not increase capacity; mandatory compliance for operation.
(c) Registration fees for building purchase	Capital	Essential legal cost to acquire title of the asset.
(d) Maintenance of tea garden (pre-production)	Capital	Incurred during development phase before revenue generation begins.
(e) Depreciation on plant	Revenue	Non-cash operating expense charged annually.
(f) Erecting platform for machine	Capital	Installation cost necessary to make the machine operational.
(g) Advertising (benefit for 4 years)	Deferred Revenue	Heavy expenditure with long-term benefit, written off over years.

6. What is an Operating Profit?

Operating Profit is the profit earned from the normal core business operations of an enterprise. It is calculated by deducting operating expenses (Cost of goods sold, administrative, and selling expenses) from Net Sales. It excludes non-operating incomes (like interest received) and non-operating expenses (like loss on sale of assets).

Formula: $$ \text{Operating Profit} = \text{Net Profit} + \text{Non-Operating Exp.} – \text{Non-Operating Income} $$

Financial Statements – I

Long Answer Questions

1. What are financial statements? What information do they provide?

Definition: Financial statements are the final accounts prepared at the end of an accounting period. They are the summarized reports of accounting transactions that reflect the operating results and the financial status of the business.

Information Provided:

Financial Performance (Profitability): Through the Trading and Profit & Loss Account, they reveal the Gross Profit and Net Profit/Loss earned during the period.
Financial Position (Solvency): Through the Balance Sheet, they show the value of economic resources (Assets) controlled by the entity and the claims against those resources (Liabilities and Equity) on a specific date.
Cash Flows: They provide information about the sources and uses of cash (Cash Flow Statement), indicating liquidity.
Decision Making Data: They provide vital data for future planning, forecasting, and comparative analysis.

2. What are closing entries? Give four examples of closing entries.

Definition: Closing Entries are journal entries passed at the end of the accounting period to transfer the balances of nominal accounts (expenses and revenues) to the Trading and Profit & Loss Account. This process “closes” these temporary accounts so they start with a zero balance in the next year.

Examples:

Transaction Type	Journal Entry
1. Closing Purchases A/c (Transfer to Trading A/c)	Trading A/c …Dr. To Purchases A/c
2. Closing Sales A/c (Transfer to Trading A/c)	Sales A/c …Dr. To Trading A/c
3. Closing Indirect Expenses (e.g., Salaries, Rent)	Profit & Loss A/c …Dr. To Salaries A/c To Rent A/c
4. Closing Gross Profit (Transfer to P&L A/c)	Trading A/c …Dr. To Profit & Loss A/c

3. Discuss the need of preparing a Balance Sheet.

A Balance Sheet is indispensable for the following reasons:

Ascertaining True Financial Position: It provides a snapshot of what the business owns (Assets) and what it owes (Liabilities) at a specific point in time.
Checking Accuracy: It serves as a final check on the arithmetical accuracy of the books, as the total of assets must equal total liabilities plus capital.
Information for Stakeholders: Creditors use it to assess liquidity (ability to pay short-term debts), and investors use it to assess solvency (long-term stability).
Basis for Opening Entries: The closing balances of assets and liabilities in the Balance Sheet become the opening balances for the next accounting year.
Ratio Analysis: It provides the data needed to calculate key ratios like Current Ratio and Debt-Equity Ratio.

4. What is Grouping and Marshalling? Explain ways to marshal a Balance Sheet.

Grouping: Putting items of a similar nature under a common heading (e.g., putting ‘Cash’, ‘Bank’, and ‘Debtors’ under the group “Current Assets”).

Marshalling: The arrangement of assets and liabilities in the Balance Sheet in a specific logical order.

There are two ways to marshal a Balance Sheet:

1. Order of Liquidity	2. Order of Permanence
Assets are arranged based on how quickly they can be converted into cash. Liabilities are arranged by how urgently they must be paid.	Assets are arranged based on how long they are intended to be kept in the business. Liabilities are arranged by permanence.
Usage: Sole Proprietorships & Partnerships.	Usage: Joint Stock Companies.
Asset Order: 1. Cash in Hand (Most liquid) 2. Cash at Bank 3. Debtors … Last: Goodwill (Least liquid)	Asset Order: 1. Goodwill (Most permanent) 2. Land & Building 3. Plant & Machinery … Last: Cash in Hand

Financial Statements – I

Numerical Solutions 1 – 5

Q1 Simmi and Vimmi Ltd. (Gross Profit)

Formula: $Gross\ Profit = Net\ Sales – Cost\ of\ Goods\ Sold (COGS)$
$COGS = Opening\ Stock + Net\ Purchases + Direct\ Expenses – Closing\ Stock$

Step 1: Calculate COGS
= 15,00,000 (Op. Stock) + 15,00,000 (Purchases) + 80,000 (Direct Exp) – 2,50,000 (Cl. Stock)
= 30,80,000 – 2,50,000
= ₹ 28,30,000

Step 2: Calculate Gross Profit
= 40,00,000 (Net Sales) – 28,30,000 (COGS)
= ₹ 11,70,000

Q2 M/s Ahuja and Nanda

Net Purchases = Cash Pur (3,00,000) + Credit Pur (7,50,000) – Returns (10,000) = 10,40,000
Net Sales = Cash Sales (4,00,000) + Credit Sales (12,00,000) – Returns (50,000) = 15,50,000
Direct Expenses = Wages = 1,00,000 (Salaries are indirect expenses, ignore here).

(a) Cost of Goods Available for Sale

= Opening Stock + Net Purchases + Direct Expenses
= 25,000 + 10,40,000 + 1,00,000
= ₹ 11,65,000

(b) Cost of Goods Sold (COGS)

= Cost of Goods Available for Sale – Closing Stock
= 11,65,000 – 30,000
= ₹ 11,35,000

(c) Gross Profit

= Net Sales – COGS
= 15,50,000 – 11,35,000
= ₹ 4,15,000

Q3 M/s Rajiv & Sons

1. Gross Profit Calculation:
COGS = Op. Stock (50,000) + Purchases (6,00,000) + Direct Exp (60,000) – Cl. Stock (70,000)
COGS = 7,10,000 – 70,000 = 6,40,000
GP = Sales (11,00,000) – COGS (6,40,000)
= ₹ 4,60,000

2. Operating Profit Calculation:
$Operating\ Profit = GP – Operating\ Expenses$
Operating Expenses = Administration (45,000) + Selling & Dist. (65,000) = 1,10,000
(Note: Loss due to fire is a Non-Operating Loss, so it is excluded).

Op. Profit = 4,60,000 – 1,10,000
= ₹ 3,50,000

Q4 M/s Arora & Sachdeva

Formula: $Net\ Profit = Operating\ Profit + Non\text{-}Operating\ Income – Non\text{-}Operating\ Expenses$

= 17,00,000 + 1,50,000 – 3,75,000
= 18,50,000 – 3,75,000
= ₹ 14,75,000

Q5 M/s Bhola & Sons (Journal & Extracts)

1. Closing Journal Entries

Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
Mar 31	Trading A/c …Dr. To Opening Stock A/c To Purchases A/c (Being transfer of balances to Trading A/c)		10,10,000	2,00,000 8,10,000
Mar 31	Sales A/c …Dr. Closing Stock A/c …Dr. To Trading A/c (Being transfer of sales and recording of closing stock)		10,10,000 3,00,000	13,10,000

2. Financial Statements (Extracts)

Trading Account for the year ended March 31, 2017
To Opening Stock	2,00,000	By Sales	10,10,000
To Purchases	8,10,000	By Closing Stock	3,00,000
To Gross Profit (Bal fig)	3,00,000
Total	13,10,000	Total	13,10,000

Balance Sheet as at March 31, 2017 (Extract)
Liabilities	₹	Assets	₹
…		Current Assets: Closing Stock	3,00,000

Financial Statements – I

Numerical Solutions 6 – 10

Q6 Final Accounts (Basic)

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	6,000	By Sales	73,500
To Purchases	58,500	By Closing Stock	22,400
To Wages	15,000
To Carriage Inwards	450
To Gross Profit c/d	15,950
Total	95,900	Total	95,900
To Sundry Expenses	600	By Gross Profit b/d	15,950
To Rent & Taxes	1,350
To Net Profit (Transfer to Capital)	14,000
Total	15,950	Total	15,950

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	1,400	Bank	4,500
Bills Payable	2,800	Sundry Debtors	21,600
Capital Add: Net Profit 14,000 Less: Drawings (2,700)	71,300	Closing Stock	22,400
		Machinery	27,000
Total	75,500	Total	75,500

Q7 M/s Ram

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Purchases	50,000	By Sales Less: Sales Return (1,000)	79,000
To Factory Wages	11,000
To Coal, Gas and Water	6,000
To Gross Profit c/d	12,000
Total	79,000	Total	79,000
To Salaries	9,000	By Gross Profit b/d	12,000
To Rent	4,000	By Apprenticeship Premium	5,000
To Discount	3,000
To Advertisement	500
To Net Profit (Transfer to Capital)	500
Total	17,000	Total	17,000

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Bank Overdraft	1,000	Petty Cash	500
Creditors	13,000	Debtors	12,000
Loan (Liab)	10,000	Loan (Asset)	6,000
Capital Add: Net Profit 500 Less: Drawings (1,000) Less: Income Tax (100)	19,400	Machinery	5,000
		Furniture	9,900
		Land and Building	10,000
Total	43,400	Total	43,400

Q8 Manju Chawla

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	10,000	By Sales (80,000) – SR (200)	79,800
To Purchases (40,000) – PR (600)	39,400	By Closing Stock	2,000
To Productive Wages	6,000
To Dock & Clearing Charges	4,000
To Royalty	4,000
To Gross Profit c/d	18,400
Total	81,800	Total	81,800
To Donation and Charity	600	By Gross Profit b/d	18,400
To Delivery Van Expenses	6,000	By Misc. Incomes	6,000
To Lighting	500	By Rent from Tenants	2,000
To Bad Debts	600
To Net Profit (Transfer to Capital)	18,700
Total	26,400	Total	26,400

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	7,000	Cash	3,000
Sales Tax Collected	1,000	Debtors (Note 1)	6,700
Capital Add: Net Profit 18,700 Less: Drawings (2,000)	56,700	Closing Stock	2,000
		Investment	6,000
		Patents	4,000
		Land and Machinery	43,000
Total	64,700	Total	64,700

*Note 1: The question listed Debtors as “6,0000”. This is a typo. We have taken Debtors as 6,700 to match the provided Balance Sheet total of 64,700.

Q9 Mr. Deepak

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	40,000	By Sales (4,40,000) – SR (6,000)	4,34,000
To Purchases (1,60,000) – PR (8,000)	1,52,000	By Closing Stock	35,000
To Wages	84,000
To Carriage Inwards	7,200
To Lighting (Factory)	2,800
To Gross Profit c/d	1,83,000
Total	4,69,000	Total	4,69,000
To Insurance	3,000	By Gross Profit b/d	1,83,000
To General Expenses	29,000	By Discount Received	10,400
To Rent and Taxes	14,400
To Travelling Expenses	7,400
To Carriage Outwards	1,600
To Salaries	53,000
To Net Profit (Transfer to Capital)	85,000
Total	1,93,400	Total	1,93,400

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Bills Payable	3,600	Cash in Hand	12,600
Creditors	50,000	Bills Receivable	5,000
Capital Add: Net Profit 85,000 Less: Drawings (36,000)	2,99,000	Sundry Debtors	1,04,000
		Closing Stock	35,000
		Furniture	16,000
		Plant and Machinery	1,80,000
Total	3,52,600	Total	3,52,600

Q10 Final Accounts (Comprehensive)

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	57,600	By Sales (5,60,000) – SR (9,600)	5,50,400
To Purchases (3,52,000) – PR (12,000)	3,40,000	By Closing Stock	30,000
To Carriage Inwards	7,000
To Fuel and Power	24,800
To Wages and Salaries	28,800
To Gross Profit c/d	1,22,200
Total	5,80,400	Total	5,80,400
To Carriage Outwards	3,360	By Gross Profit b/d	1,22,200
To Bad Debts	9,950	By Interest on Investment	3,200
To Repairs	2,400	By Miscellaneous Receipts	160
To General Expenses	17,000
To Net Profit (Transfer to Capital)	92,850
Total	1,25,560	Total	1,25,560

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Sales Tax Collected	8,350	Cash in Hand	32,000
Creditors	48,000	Debtors	1,31,200
Loan	16,000	Closing Stock	30,000
Capital Add: Net Profit 92,850	4,40,850	Investment	32,000
		Land and Buildings	2,88,000
Total	5,13,200	Total	5,13,200

Financial Statements – I

Numerical Solutions 11 – 15

Q11 Mr. A. Lal

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	16,000	By Sales (1,12,000 – 4,600)	1,07,400
To Purchases (67,600 – 3,200)	64,400	By Closing Stock	15,000
To Carriage Inwards	1,400
To Gross Profit c/d	40,600
Total	1,22,400	Total	1,22,400
To General Expenses	2,400	By Gross Profit b/d	40,600
To Bad Debts	600	By Discount Received	1,400
To Interest on Bank OD	600	By Commission Received	1,800
To Insurance and Taxes	4,000
To Scooter Expenses	200
To Salaries	8,800
To Net Profit (Transfer to Capital)	27,200
Total	43,800	Total	43,800

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Bank Overdraft	10,000	Cash in Hand	4,000
Creditors	16,000	Debtors	6,000
Capital Add: Net Profit 27,200	77,200	Closing Stock	15,000
		Scooter	8,000
		Furniture	5,200
		Building	65,000
Total	1,03,200	Total	1,03,200

Q12 M/s Royal Traders

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	20,000	By Sales	2,45,000
To Purchases	1,90,000	By Closing Stock	8,000
To Carriage on Purchases	1,500	By Gross Loss c/d	13,500
To Wages	55,000
Total	2,66,500	Total	2,66,500
To Gross Loss b/d	13,500	By Net Loss (Transfer to Capital)	20,000
To Postage	300
To Sundry Expenses	1,700
To Rent	4,500
Total	20,000	Total	20,000

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Bills Payable	4,000	Cash	5,000
Creditors	10,000	Bank	10,000
Capital Less: Net Loss (20,000) Less: Drawings (9,000)	1,71,000	Debtors	27,000
		Closing Stock	8,000
		Furniture	35,000
		Machinery	1,00,000
Total	1,85,000	Total	1,85,000

Q13 M/s Neema Traders

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	9,000	By Sales (1,80,000 – 1,820)	1,78,180
To Purchases (1,64,000 – 1,910)	1,62,090	By Closing Stock	16,000
To Carriage Inwards	1,000
To Wages	3,300
To Gross Profit c/d	18,790*
Total	1,94,180	Total	1,94,180
To Insurance	1,610	By Gross Profit b/d	18,790
To Interest	1,100
To Bad Debts	250
To Postage	300
To Discount	1,000
To Salaries	3,000
To Net Profit (Transfer to Capital)	11,530*
Total	18,790	Total	18,790

*Note: The provided answer key (GP 17,850 and NP 10,590) differs from the calculation derived directly from the question data (GP 18,790 and NP 11,530). This suggests a possible misprint in the question figures. The solution above strictly follows the provided data.

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Bank Overdraft	4,720	Debtors	3,900
Bills Payable	2,520	Closing Stock	16,000
Creditors	8,000	Plant	16,930
Loan	8,000	Machinery	2,10,940
Capital Add: Net Profit 11,530	2,47,530	Buildings	23,000
Total	2,70,770	Total	2,70,770

Q14 M/s Nilu Sarees

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	10,000	By Sales	2,28,000
To Purchases	78,000	By Closing Stock	22,000
To Carriage Inwards	2,500
To Wages	11,000
To Gross Profit c/d	1,48,500*
Total	2,50,000	Total	2,50,000
To Salaries	30,000	By Gross Profit b/d	1,48,500
To Commission (Dr)	10,000	By Interest (Cr)	7,000
To Rent & Taxes	2,800	By Commission (Cr)	8,000
To Repairs	5,000
To Telephone Expenses	1,400
To Legal Charges	1,500
To Sundry Expenses	2,500
To Net Profit (Transfer to Capital)	1,10,300
Total	1,63,500	Total	1,63,500

*Note: The Net Profit (1,10,300) matches the answer key perfectly. However, the calculated GP (1,48,500) differs from the key (1,56,500), likely due to a classification difference in the book’s solution. The P&L logic shown above reconciles correctly to the Net Profit.

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Bills Payable	2,370	Cash in Hand	12,000
Creditors	28,000	Debtors	30,000
Capital Add: Net Profit 1,10,300 Less: Drawings (18,000)	1,62,300	Closing Stock	22,000
		Machinery	60,000
		Investments	90,000
**Difference/Suspense	21,330
Total	2,14,000	Total	2,14,000

**Note: The Trial Balance in the question is unbalanced by 21,330 (Debits > Credits). This difference is carried to the Balance Sheet to match the correct Asset Total of 2,14,000.

Q15 M/s Sports Equipments

Trading and Profit & Loss Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	50,000	By Sales (4,21,000) – SR (5,000)	4,16,000
To Purchases	3,50,000	By Closing Stock	2,500
To Carriage on Purchases	12,000	By Gross Loss c/d	1,500
To Wages	8,000
Total	4,20,000	Total	4,20,000
To Gross Loss b/d	1,500	By Commission	4,000
To Rent	15,000	By Net Loss (Transfer to Capital)	41,500
To Bad Debts	7,000
To Stationery	6,000
To Travelling Expenses	2,000
To Insurance	7,000
To Discount	5,000
To Office Expenses	2,000
Total	45,500	Total	45,500

Balance Sheet as at March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Bank Overdraft	28,000	Cash in Hand	32,000
Creditors	1,00,000	Debtors	1,40,000
Capital Less: Net Loss (41,500) Less: Drawings (24,000)	2,34,500	Closing Stock	2,500
		Furniture	1,28,000
		Plants	60,000
Total	3,62,500	Total	3,62,500