The balance sheet reports the firm's financial position at a point in time.

The balance sheet consists of three elements: 1 . Assets are the resources controlled by the firm. 2. Liabilities are amounts owed to lenders and other creditors. 3. Owners' equity is the residual interest in the net assets of an entity that remains after deducting its liabilities. Transactions are measured so that the fundamental accounting equation holds: Assets = liabilities + owners' equity The statement of Profit and Loss reports on the financial performance of the firm over a period of time. The elements of the income statement include revenues, expenses, and gains and losses. Revenues are inflows from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Expenses are outflows from delivering or producing goods or services that constitute the entity's ongoing major or central operations. Other income includes gains that may or may not arise in the ordinary course of business. The statement of cash flows reports the company's cash receipts and payments. These cash flows are classified as follows: Cash flow from Operating Activities include the cash effects of transactions that involve the normal business of the firm. Cash flow from Investing activities are those resulting from the acquisition or sale of property, plant, and equipment; of a subsidiary or segment; of securities; and of investments in other firms. Cash flow from Financing activities are those resulting from issuance or retirement of the firm's debt and equity securities and include dividends paid to stockholders. Financial statement notes include disclosures that provide further details about the information summarized in the financial statements. Notes allow users to improve their assessments of the amount, timing, and uncertainty of the estimates reported in the financial statements. Notes: Discuss the basis of presentation such as the fiscal period covered by the statements and the inclusion of consolidated entities. Provide information about accounting policies, methods, assumptions, and estimates used by management. Provide additional information on items such as business acquisitions or disposals, legal actions, employee benefit plans, contingencies and commitments, transactions with related parties, and segments of the firm.

For all companies, a report by its Board of directors is to be attached to every balance sheet. The contents of the report are specified in Section 217 of the Companies Act, reproduced below.

217. Boards report. (1) There shall be attached to every balance-sheet laid before a company in general meeting, a report by its Board of directors, with respect to (a) the state of the companys affairs; (b) the amounts, if any, which it proposes to carry to any reserves 1[***] in such balance-sheet 2[***] (c) the amount, if any, which it recommends should be paid by way of dividend; 3[(d) material changes and commitments, if any; affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance-sheet relates and the date of report;] 4[(e) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed.] (2) The Boards report shall, so far as is material for the appreciation of the state of the companys affairs by its members and will not in the Boards opinion be harmful to the business of the company or of any of its subsidiaries, deal with any changes which have occurred during the financial year (a) in the nature of the companys business; (b) in the companys subsidiaries or in the nature of the business carried on by them; and (c) generally in the classes of business in which the company has an interest. 5[(2A) (a) The Boards report shall also include a statement showing the name of every employee of the company who (i) if employed throughout the financial year, was in receipt of remuneration for that year which, in the aggregate, was not less than 6[such sum as may be prescribed]; or (ii) if employed for a part of the financial year, was in receipt of remuneration for any part, of that year, at a rate which, in the aggregate was not less 7[such sum per month as may be prescribed8; or]

9[(iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, on the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than two per cent, of the equity shares of the company.] (b) The statement referred to in clause (a) shall also indicate, (i) whether any such employee is a relative of any director or manager of the company and if so, the name of such director, and (ii) such other particulars as may be prescribed. Explanation.Remuneration has the meaning assigned to it in the explanation to section 198.] 10[(2AA) The Boards report shall also include a Directors Responsibility Statement, indicating therein, (i) that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; (ii) that the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period; (iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (iv) that the directors had prepared the annual accounts on a going concern basis.] 11[(2B) The Boards report shall also specify the reasons for the failure, if any, to complete the buy-back within the time specified in sub-section (4) of section 77A.] (3) The Board shall also be bound to give the fullest information and explanations in its report aforesaid, or in cases falling under the proviso tosection 222, in an addendum to that report, on every reservation, qualification or adverse remark contained in the auditors report. (4) The Boards report and any addendum thereto shall be signed by its chairman if he is authorised in that behalf by the Board; and where he is not so authorised, shall be signed by such number of directors as are required to sign the balance-sheet and the profit and loss account of the company by virtue of sub-sections (1) and (2) of section 215.

(5) If any person, being a director of a company, fails to take all reasonable steps to comply with the provisions of sub-sections (1) to (3), or being the chairman, signs the Boards report otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to 12[twenty thousand rupees], or with both: Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully: Provided further that in any proceedings against a person in respect of an offence under sub-section (1), it shall be a defence to prove 13[***] that a competent and reliable person was charged with the duty of seeing that the provisions of that sub-section were complied with and was in a position to discharge that duty. (6) If any person, not being a director, having been charged by the Board of directors with the duty of seeing that the provisions of sub-sections (1) to (3) are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to 12[twenty thousand rupees], or with both: Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.
For companies listed on the Stock exchange pursuant to Clause 49 of the listing agreement, A Mangement Discussion and Analysis, Corportae Governance Report, Managing Director and Auditors certificate regarding compliance of conditions of Corporate Governance are to be given in the annual report. Management's discussion and analysis (MD&A)] is one of the most useful sections of the annual report. In this section, management discusses a variety of issues, including the nature of the business, past performance, and future outlook. Analysts must be aware that some parts of management's commentary may be unaudited. An audit is an independent review of an entity's financial statements. Chartered Accountants within the meaning of the Chartered Accountants Act,1949 conduct audits and examine the financial reports and supporting records. The objective of an audit is to enable the auditor to provide an opinion on the true and fair view of the financial statements. The independent chartered accountant is appointed by the company at each annual general meeting to hold office from the conclusion of the meeting until the conclusion of the next annual general meeting. The auditor examines the company's accounting and internal control systems, confirms assets and liabilities, and generally tries to determine that there are no material errors in the financial statements. The auditor's report is an important source of information.

The audit is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position of the company. The Directors occupy a fiduciary position in relation to the shareholders and in auditing the accounts maintained by the Directors the auditor acts in the interest of the shareholders who are in the position of beneficiaries. The powers and duties of auditors as specified in Section 227 of the Companies Act are reproduced below: 227. Powers and duties of auditors.

(1) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. 1[1A) Without prejudice to the provisions of sub-section (1), the auditor shall inquire (a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interest of the company or its members; (b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; (c) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account; (f) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance-sheet is correct, regular and not misleading.] (2) The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance-sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance-sheet or profit and loss account which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view

(i) in the case of the balance-sheet, of the state of the companys affairs as at the end of its financial years; and (ii) in the case of the profit and loss account, of the profit or loss for its financial year. (3) The auditors report shall also state (a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit; (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him; 2[(bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the companys auditor has been awarded to him as enquired by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditors report;] (c) whether the companys balance-sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns; 3[(d) whether, in his opinion, the profit and loss account and balance-sheet comply with the accounting standards referred to in sub-section (3C) ofsection 211;] 4[(e) in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company; (f) whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274.] 5[(g) whether the cess payable under section 441A has been paid and if not, the details of amount of cess not so paid.]. (4) Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a), (b), 6[(bb)] 7[(c) and (d)] of sub-section (3) is answered in the negative or with a qualification, the auditors report shall state the reason for the answer. 8[(4A) The Central Government may, by general or special order, direct that, in the case of such class or description of companies as may be specified in the order, the auditors report shall also include a statement on such matters as may be specified therein: Provided that before making any such order the Central Government may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), in regard to the class or description of companies and other ancillary matters proposed to be specified therein unless the Government decides that such consultation is not necessary or expedient in the circumstances of the case.] 9[(5) The accounts of a company shall not be deemed as not having been, and the auditors report shall not state that those accounts have not been

properly drawn up on the ground merely that the company had not disclosed certain matters if (a) those matters are such as the company is not required to disclose by virtue of any provisions contained in this or any other Act, and (b) those provisions are specified in the balance-sheet and profit and loss account of the company.] In addition the above, Companies (Auditors Report) Order, 2003 requires the auditors to specifically comment on certain matters. The order is reproduced below:

In exercise of the powers conferred by sub-section (4A) of section 227 of the Companies Act, 1956 (1 of 1956), read with the Notification of the Government of India in the Department of Company Affairs, number G.S.R. 443(E), dated 18th October, 1972, as amended from time to time and in supersession of order number G.S.R. 909(E), dated 7th September, 1988, published in the Gazette of India, part II, section 3, sub-section (i), except as respects things done or omitted to be done before the supersession, and after consultation with the Institute of Chartered Accountants of India [constituted under the Chartered Accountants Act, 1949 (38 of 1949)], in regard to class of companies to which this order applies and other ancillary matters, the Central Government hereby makes the following Order, namely:- 1. Short title, application and commencement 1. This order may be called the Companies (Auditors Report) Order, 2003. 2. It shall apply to every company including a foreign company as defined in section 591 of the Act, except the following : i. ii. iii. iv. a Banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); an insurance company as defined in clause (21) of section 2 of the Act; a company licensed to operate under section 25 of the Act; and a private limited company with a paid-up capital and reserves not more than fifty lakh rupees and does not have loan outstanding exceeding Rupees Twenty Five lakhs from any bank or financial institution and does not have a turnover exceeding five crores rupees at any point of time during the financial year 3. It shall come into force on the 1st day of July, 2003. 2. Definitions In this Order, unless the context otherwise requires: a. "Act" means the Companies Act, 1956 (1 of 1956); b. "chit fund company", "nidhi company" or "mutual benefit company" means a company engaged in the business of managing, conducting or supervising as a foreman or agent of any transaction or arrangement

by which it enters into an agreement with a number of subscribers that every one of them shall subscribe to a certain sum of installments for a definite period and that each subscriber, in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement, shall be entitled to a prize amount, and includes companies whose principal business is accepting fixed deposits from, and lending money to members. 3. Auditors report to contain matters specified in paragraphs 4 and 5 Every report made by the auditor under section 227 of Act, on the accounts of every company examined by him to which this Order applies for every financial year ending on any day on or after the commencement of this Order, shall contain the matters specified in paragraphs 4 and 5. 4. Matters to be included in the Auditors Report The auditors report on the account of a company to which this Order applies shall include a statement on the following matters, namely: i. (a) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;

(b) whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account; (c) if a substantial part of fixed assets have been disposed of during the year, whether it has affected the going concern; ii. (a) whether physical verification of inventory has been conducted at reasonable intervals by the management;

(b) are the procedures of physical verification of inventory followed by the management reasonable and adequate in relation to the size of the company and the nature of its business. If not, the inadequacies in such procedures should be reported; (c) whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account; iii. (a) has the company granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 301 of the Act. If so, give the number of parties and amount involved in the transactions; and

(b) whether the rate of interest and other terms and conditions of loans given by the company, secured or unsecured, are prima facie prejudicial to the interest of the company; and (c) whether receipt of the principal amount and interest are also regular; and

(d) if overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery/payment of the principal and interest; (e) has the company taken any loans, secured or unsecured from companies, firms or other parties covered in the register maintained under section 301 of the Act. If so, give the number of parties and amount involved in the transactions; and (f) whether the rate of interest and other terms and conditions of loans taken by the company, secured or unsecured, are prima facie prejudicial to the interest of the company; and (g) whether payment of the principal amount and interest are also regular; and iv. is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a continuing failure to correct major weaknesses in internal control system; (a) whether particulars of contracts or arrangements referred to in section 301 of the Act have been entered in the register required to be maintained under that section; and (b) whether transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time; (This information is required only in case of transactions exceeding the value of five lakh rupees in respect of any party and in any one financial year) vi. in case the company has accepted deposits from the public, whether the directives issued by the Reserve Bank of India and the provisions of sections 58A, 58AA or any relevant provisions of the Act and the rules framed thereunder, where applicable, have been complied with. If not, the nature of contraventions should be stated; If an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any Court or any other Tribunal, whether the same has been complied with or not? in the case of listed companies and/or other companies having a paidup capital and reserves exceeding Rs. 50 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding five crores rupees for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business; where maintenance of cost records has been prescribed by the Central Government under clause (d) of sub-section (1) of section 209 of the Act, whether such accounts and records have been made and maintained; (a) is the company regular in depositing undisputed statutory dues including Provident Fund, Investor Education and Protection Fund,

v.

vii.

viii.

ix.

Employees State Insurance, Income-tax, Sales-tax, Wealth Tax, Service Tax, Custom Duty, Excise Duty, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor. (b) in case dues of income tax/sales tax/wealth tax/service tax/ customs duty/ excise duty/cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A mere representation to the Department shall not constitute the dispute). x. whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year; whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported; whether adequate documents and records are maintained in cases where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities; If not, the deficiencies to be pointed out; whether the provisions of any special statute applicable to chit fund have been duly complied with? In respect of nidhi/mutual benefit fund/societies; a. whether the net-owned funds to deposit liability ratio is more than 1:20 as on the date of balance sheet; b. whether the company has complied with the prudential norms on income recognition and provisioning against sub-standard / doubtful / loss assets; c. whether the company has adequate procedures for appraisal of credit proposals/requests, assessment of credit needs and repayment capacity of the borrowers; d. whether the repayment schedule of various loans granted by the nidhi is based on the repayment capacity of the borrower; xiv. if the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been maintained of the transactions and contracts and whether timely entries have been made therein; also whether the shares, securities, debentures and other investments have been held by the company, in its own name except to the extent of the exemption, if any, granted under section 49 of the Act; whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company; whether term loans were applied for the purpose for which the loans were obtained;

xi.

xii.

xiii.

xv.

xvi.

xvii. xviii.

whether the funds raised on short-term basis have been used for longterm investment; If yes, the nature and amount is to be indicated; whether the company has made any preferential allotment of shares to parties and companies covered in the Register maintained under section 301 of the Act and if so whether the price at which shares have been issued is prejudicial to the interest of the company; whether security or charges has been created in respect of debentures issued; whether the management has disclosed on the end use of money raised by public issues and the same has been verified; whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated. 5. Reasons to be stated for unfavourable or qualified answers Where, in the auditors report, the answer to any of the questions referred to in paragraph 4 is unfavourable or qualified, the auditors report shall also state the reasons for such unfavourable or qualified answer, as the case may be. Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.

xix. xx. xxi.

An unqualified opinion (also known as a clean opinion) indicates that the auditor believes the statements are free from material omissions and errors. If the statements make any exceptions to the accounting principles, the auditor may issue a qualified opinion and explain these exceptions in the audit report. The auditor can issue an adverse opinion if the statements are not presented fairly or are materially nonconforming with accounting standards. If the auditor is unable to express an opinion (e.g., in the case of a scope limitation), a disclaimer of opinion is issued. Besides the annual financial statements, an analyst should examine a company's quarterly or semiannual reports. These interim reports typically update the major financial statements and footnotes but are not necessarily audited.

Assets are the firm's economic resources. Examples of assets include: Cash and cash equivalents.

Accounts receivable. Accounts receivable often have an "allowance for bad debt expense" or "allowance for doubtful accounts" as a contra account.

Inventory. Financial assets such as marketable securities. Prepaid expenses. Items that will be expenses on future income statements.

Property, plant, and equipment. Includes a contra-asset account for accumulated depreciation.

Investment in affiliates. Deferred tax assets.

Intangible assets. Economic resources of the firm that do not have a physical form, such as patents, trademarks, licenses, and goodwill.

Liabilities are creditor claims on the company's resources. Examples of liabilities include:

Accounts payable and trade payables . Financial liabilities Unearned revenue. Items that will show up on future income statements as revenues . Income taxes payable. The taxes accrued during the past year but not yet paid . Long-term debt such as bonds payable . Deferred tax liabilities .
Owners' equity is the owners' residual claim on a firm's resources, which is the amount by which assets exceed liabilities. Owners' equity includes:

Capital. Par value of shares. Additional paid-in capital. Proceeds from share sales in excess of par value.

Retained earnings. Cumulative net income that has not been distributed as dividends.

Other comprehensive income. Changes resulting from foreign currency translation,

Revenue represents inflows of economic resources and includes: Sales. Revenue from the firm's day-to-day activities. Gains. Increases in assets from transactions incidental to the firm's day-today activities. Investment income such as interest and dividend income. Expenses are outflows of economic resources and include:

Cost of goods sold .

Selling, general, and administrative expenses. These include such expenses as advertising, management salaries, rent, and utilities. Depreciation and amortization. To reflect the "using up" of tangible and intangible assets. Tax expense . Interest expense . Losses. Decreases in assets from transactions incidental to the firm's day-today acuv1ttes.
The basic accounting equation is the relationship among the three balance sheet elements: assets = liabilities + owners' equity Owners' equity consists of capital contributed by the firm's owners and the cumulative earnings the firm has retained. With that in mind, we can state the expanded accounting equation: assets = liabilities + contributed capital + ending retained earnings Ending retained earnings for an accounting period are the result of adding that period's retained earnings (revenues minus expenses minus dividends) to beginning retained earnings. So the expanded accounting equation can also be stated as: assets = liabilities + contributed capital+ beginning retained earnings+ revenue- expenses- dividends Keeping the accounting equation in balance requires double-entry accounting, in which a transaction has to be recorded in at least two accounts. An increase in an asset account, for example, must be balanced by a decrease in another asset account or by an increase in a liability or owners' equity account.

Accruals Revenues and expenses are not always recorded at the same time that cash receipts

and payments are made. The principle of accrual accounting requires that revenue is recorded when the firm earns it and expenses are recorded as the firm incurs them, regardless of whether cash has actually been paid. Accruals fall into four categories: 1 . Unearned revenue. The firm receives cash before it provides a good or service to customers. Cash increases and unearned revenue, a liability, increases by the same amount. When the firm provides the good or service, revenue increases and the liability decreases. For example, a newspaper or magazine subscription is typically paid in advance. The publisher records the cash received and increases the unearned revenue liability account. The firm recognizes revenues and decreases the liability as it fulfills the subscription obligation. 2. Accrued revenue. The firm provides goods or services before it receives cash payment. Revenue increases and accounts receivable (an asset) increases. When the customer pays cash, accounts receivable decreases. A typical example would be a manufacturer that sells goods to retail stores "on account." The manufacturer records revenue when it delivers the goods but does not receive cash until after the retailers sell the goods to consumers. 3. Prepaid expenses. The firm pays cash ahead of time for an anticipated expense. Cash (an asset) decreases and prepaid expense (also an asset) increases. Prepaid expense decreases and expenses increase when the expense is actually incurred. For example, a retail store that rents space in a shopping mall will often pay its rent in advance. 4. Accrued expenses. The firm owes cash for expenses it has incurred. Expenses increase and a liability for accrued expenses increases as well. The liability decreases when the firm pays cash to satisfy it. Wages payable are a common example of an accrued expense, as companies typically pay their employees at a later date for work they performed in the prior week or month. Accruals require an accounting entry when the earliest event occurs (paying or receiving cash, providing a good or service, or incurring an expense) and require one or more offsetting entries as the exchange is completed. With unearned revenue and prepaid expenses, cash changes hands first and the revenue or expense is recorded later. With accrued revenue and accrued expenses, the revenue or expense is recorded first and cash is exchanged later. In all these cases, the effect of accrual accounting is to recognize revenues or expenses in the appropriate period.