Chapter 5

Financial Statements and Disclosure of Information

5.1 Introduction
Every business organization has to submit its annual working results to
various agencies like Banks, Government Departments like Income Tax, VAT,
Professional Tax and others. For that every business organization prepares
Balance Sheet as at the year end date and profitability statement for the period
covered. There are various types of organizations and some of the organizations
are governed by the provisions of specific statutes. E.g. Co-operative Societies,
Trusts, Private and Public Limited Companies, Banking Organisations,
Insurance Companies etc. All these business organizations are covered by
different special statutes and they have to follow specific provisions of the
relevant act for the preparation and presentation of financial statements. For
companies, the provisions of Companies Act, 1956 specify detailed provisions
relating to preparation of Financial Statements and Audit thereof. All companies
have to statutorily comply with those provisions.

5.2 Financial Statements

As per the statutory provisions, every company shall keep at its
registered office proper books of accounts on accrual basis. Section 209 of
Companies Act 1956 specifies how the books of account are to be maintained.
Financial statements shall content all sums of money received and expended by
the company and matters in respect of which the receipt and expenditure take
place and all sales and purchases of goods and the assets and liabilities of the
company. In short, Profit and Loss Account and Balance Sheet are to be
prepared and submitted on yearly basis.
Every balance sheet of a company shall give a true and fair view of the
state of affairs of the company as at the end of the financial year and every
profit and loss account of a company shall give a true and fair view of the profit
or loss of the company for the financial year.
 Balance sheet and profit and loss account shall be prepared as per the
requirement of Part I and II of schedule VI of the Companies Act, 1956. There
are two types of preparation of these financial statements viz. horizontal and
vertical. Most of the companies present financial statements in vertical format.
As per the provisions of Section 211 (3A) of the Companies Act, 1956, every
profit and loss account and balance sheet of the company shall comply with the
accounting standards as prescribed.
While preparing and presenting financial statements of enterprises,
certain fundamental accounting assumptions should be taken into consideration.
Application of these accounting assumptions is not mandatory but adequate
disclosure should be given if these assumptions are not followed. Following are
generally accepted fundamental accounting assumptions –
1. Consistency
2. Accrual
3. Going concern

Accounting policy
According to accounting assumption of consistency same
accounting policies should be followed for similar transactions and these should
be followed consistently. Consideration in selection of accounting policies
1. Prudence
2. Substance over form
3. Materiality

Following is the format of Financial Statements as specified in Schedule VI of

the Companies Act.
Table-5.1 Format of Balance Sheet Part-I specified in Schedule VI
Part-I Balance Sheet
Name of the Company-___________.
Balance Sheet as at ______________.

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 (Rs. In ………….)
Figures as at Figures as at
the end of the end of
Particulars current Previous
reporting reporting
period period
1 2 3
I. Sources of Funds
1 Shareholders' funds
(a) Share capital
(b) Reserves and surplus
2 Loan Funds
(a) Secured Loans
(b) Unsecured Loans
Total
II. Application of Funds
1 Fixed assets
(a) Gross Block
(b) Less: Depreciation
(c) Net Block
(d) Capital work-in-progress
2 Investments
3 Current Assets, Loans and Advances
(a) Inventories
(b) Sundry Debtors
(c) Cash and Bank Balances
(d) Other Current Assets
(e) Loans and Advances
Less: Current Liabilities and provisions
(a) Liabilities
(b) Provisions
Net Current Assets
4 (a) Miscellaneous expenditure to the
extent not written off or adjusted
(b) Profit and Loss Account
Total

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Table 5.2 Format of Profit and Loss Account specified in Schedule VI
PART II - STATEMENT OF PROFI T AND LOSS
Name of the Company- ___________________________
Profit and loss statement for the year ended __________ . (Rs. In ….)
Figures Figures
Particulars
for the For the
current previous
reporting reporting
period period

I. Revenues from operations Xxx xxx

II. Cost of sales Xxx xxx
III. Gross profit (I - II) Xxx xxx
IV Operating expenses:
(1) Selling and marketing
expenses Xxx xxx
(2) Administrative expenses Xxx xxx
(3) Depreciation and amortization
of
assets Xxx xxx
(4) Foreign currency exchange
gains/(Iosses), net Xxx xxx
Total operating expense Xxx xxx
(1) Results from operating
V. activities
(III - IV) Xxx xxx
(2) Gain on sale of long-term
investments Xxx xxx
(3) Other income Xxx xxx
(4) Other expenses:
(i) Finance costs (xxx) (xxx)
(ii) Others (xxx) (xxx)
VI. Income before income tax Xxx xxx
VII Tax expense:
(1) Current income tax xxx
(2) Deferred income tax xxx
(3) Others xxx
VIII. Profit for the period (VI - VII) Xxx xxx
IX. Earnings per equity share:
(1) Basic Xxx xxx
(2) Diluted Xxx xxx
Table 5.3
PART III - CASH FLOW STATEMENT
Cash flow statement for the year ended ___________
Name of the company__________________________
Cash Flow Statement
For the Year Ending
Cash at Beginning of Year
Operations Activities
Cash receipts from customers
Cash paid for
Inventory purchases
General operating and administrative expenses
Wage expenses
Interest
Income taxes
Net Cash Flow from Operations
Investing Activities
Cash receipts from
Sale of property and equipment
Collection of principal on loans
Sale of investment securities
Cash paid for
Purchase of property and equipment
Making loans to other entities
Purchase of investment securities
Net Cash Flow from Investing Activities
Financing Activities
Cash receipts from
Issuance of stock
Borrowing

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 Cash paid for
Repurchase of stock (treasury stock)
Repayment of loans
Dividends
Net Cash Flow from Financing Activities
Net Increase in Cash
Cash at End of Year

Companies have to prepare financial statements in the above formats.

Cash flow statements are to be attached to the Financial Statements of Level –I
entities and does not apply to SMEs.

5.3 Information to be disclosed alongwith Financial Statements

As per the provisions of Section 211 (6) of Companies Act, any reference
to a balance sheet or profit and loss account shall include any notes thereon or
documents annexed thereto, giving information required by the act.
Such documents and explanations include Notes to Accounts and Accounting
Policies. Notes to accounts are the explanation of the management about the
items in the financial statement (Profit and Loss Account and Balance Sheet).
The management gives more explanation and information about the items of
profit and loss accounts and balance sheet and any other items, by way of
explanatory notes. Notes to accounts are integral part of financial statements.
Disclosure of all significant accounting policies in preparation of
financial statements is required for better and proper understanding of financial
statements. Hence, all significant accounting policies are disclosed at one place
because it is helpful to the reader of financial statements.

5.4 Conclusion
In case of companies, the provisions of Companies Act, 1956 play a vital
role in preparation of Financial Statements. The detailed provisions govern each
and every aspect of accounting and auditing. Accounting provisions specify the

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format of Balance Sheet and Profit and Loss Account in Schedule VI. Two
types of formats are given. Schedule XIV specifies in detail the depreciation
rates to be applied while preparing Financial Statements. Again two
depreciation methods are allowed and different rates are specified for both the
methods. Accounting Standards are also specified and it is also specifically
mentioned that deviation or non-compliance should be disclosed. Auditing
provisions include qualification and disqualification of auditors, procedure for
appointment and removal of auditors, duties and responsibilities of auditors etc.
CARO specifies the points to be specifically looked into and to be answered by
the auditors and it should form part of the Audit Report. In short, Companies
Act has taken due care of the accounting formalities to be completed by the
companies and every minute aspect of the same is also covered in various
sections of the said statute.

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