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What is financial statement? Also, mention the objectives of financial statement. (b) Differentiate between…

(a) What is financial statement? Also, mention the objectives of financial statement.

(b) Differentiate between account receivable and note receivable

Solution

(a) A financial statement is the formal end-product of the financial accounting process — a set of statements, chiefly the income statement, the balance sheet and the cash flow statement, through which the recorded and summarized financial transactions of a business are presented to its users.

The three main statements: the income statement is prepared to ascertain the operating result (profit or loss) of a particular period, the balance sheet shows the financial position on a given date, and the cash flow statement shows the position of cash flow during the period.

Objectives:

  1. To ascertain operating results: to find out the profit earned or the loss suffered during a specific period, achieved by preparing the income statement.
  2. To depict the financial position: to show the financial status of the business on a particular date through a statement of assets and liabilities called the balance sheet.
  3. To show the cash position: to reveal the sources and applications of cash during the period, so that users can judge the liquidity of the business.
  4. To avail information to users: to make information available to all parties interested in the organization directly or indirectly — investors, creditors, employees, government and society — for their decisions.
  5. To help in determining tax liability: to provide the information that tax authorities need to assess the tax payable by the organization.
  6. To ensure accountability and disclosure: by the full disclosure convention, sufficient information must be provided (in the statements themselves or in the footnotes, which are an integral part of them) so that the statements are not misleading.

(b) The differences between accounts receivable and notes receivable are:

BasisAccounts receivableNotes receivable
1. MeaningAmount due from customers arising from the ordinary sale of goods or services on creditAmount due supported by a formal written promise (promissory note) to pay a definite sum on a definite date
2. Written instrumentNot supported by any formal written promise — only an invoice or entry in the booksAlways supported by a formal negotiable instrument signed by the maker
3. InterestNormally does not carry interestNormally carries interest at a stated rate
4. Duration and natureShort-term, informal, and generally settled within the credit periodMay be short or long term, formal, and legally more enforceable; also transferable to a third party

Thus, financial statements are the medium through which a business communicates its performance and position, and within them receivables are classified as accounts receivable or notes receivable depending on whether a formal written promise supports the debt.

Explore more questions

  1. 1.

    (a) What is double entry book-keeping system? Also write down the advantages and disadvantages of double entry book-keeping system.

    (b) What is accounting? Also, explain in details about the accounting cycle.

    Practice
  2. 2.

    The balance sheet of a company for two years are given below:

    Liabilities Year 1 Year 2
    Equity Share capital 900,000 1,000,000
    Share premium 90,000 100,000
    10% Debentures 100,000 50,000
    Provision for tax 20,000 30,000
    Provision for dividend 10,000 20,000
    Accounts payable 60,000 110,000
    Profit and loss a/c 30,000 160,000
    Total 1,210,000 1,470,000
    Assets
    Fixed assets 800,000 1,000,000
    Inventory 100,000 150,000
    Accounts receivable 190,000 150,000
    Prepaid expenses 20,000 30,000
    Cash 100,000 140,000
    Total 1,210,000 1,470,000

    Income Statement for the Year 2

    Particulars Rs.
    Sales revenue 11,00,000
    Less: Cost of goods sold 710,000
    Gross Profit 390,000
    Less: Operating expenses:
    Administrative expenses 157,000
    Depreciation 50,000
    Provision for tax 30,000
    Provision for dividend 20,000
    Interest paid 10,000
    Premium on redemption of debentures 5,000
    Total operating expenses 272,000
    Net income 118,000
    Add: Gain on sale of fixed assets 12,000
    Retained earning 130,000

    Required: Cash flow statement

    Long question Practice
  3. 3.

    The following are the transactions of a company:

    a. Started business with cash Rs. 400,000 and bank balance Rs. 50,000.

    b. Deposited into bank Rs.100,000

    c. Machinery costing Rs.100,000 was purchased payment made by a cheque.

    d. Purchased merchandise goods for Rs.60,000 on account.

    e. Sold merchandise goods on account for Rs.200,000.

    f. Received a cheque from debtor, Rs.190,000 after deduction of 5% discount. The cheque was banked immediately.

    g. Paid Rs.54,000 to creditor by issuing a cheque after deduction 10% discount.

    h. Rs.12,000 was paid for insurance premium.

    i. Paid wages and salary Rs.40,000 by issuing cheques.

    j. Paid Rs.30,000 for rent.

    Required:

    a. Journal entries

    b. T accounts (ledger) for sales, purchase, account receivable and account payable

    c. Triple column cash book

    d. Trial Balance

    Long question Practice
  4. 4.

    Write about the disclosures required for financial statement under Nepal Financial Reporting Standard (NFRS).

    Practice
  5. 5.

    (a) The bank statement of a company showed a balance of Rs. 52,000 on 30th Poush 2079. However the company balance showed a different balance of Rs. 48,000. On the investigation, the following differences were noticed:

    i. Company issued check of Rs.12,000 but during Poush only Rs.8,000 was presented to bank for payment

    ii. Deposit in transit Rs.6,000

    iii. EFT payment Rs.1,500

    iv. Customer’s cheque of Rs.3,000 was return with the bank statement marked NSF.

    v. Collection of notes and interest receivable was for Rs.8,000 and Rs.4,000 respectively

    vi. Bank charge Rs.500 for the service provided by the bank

    vii. A cheque of Rs.10,000 was deposited by the bank. However, the amount recorded by the company was Rs.11,000 in its statement.

    Required: Bank reconciliation statement

    (b) Differentiate between bond and debenture

    Long question Practice
  6. 6.

    (a) A Company purchased machinery on Poush 30, 2077 for Rs. 80,000 and spent Rs. 20,000 on its installation. The company charged depreciation at 15% using SLM every year. At the end of Ashwin 2079, the company sold the machinery for Rs. 90,000 and purchased new machinery for Rs. 140,000. The books are closed on 31st Chaitra every year.

    Required: Machinery account for 2077 to 2079

    (b) Differentiate between tangible and intangible assets.

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