Final Paper Submission on

FINANCIAL STATEMENTS OTHER

THAN COMPANY

Submitted By: Supervised By:

Satyanand Mr. Ashok Kumar Sharma

Roll No: 2041 Faculty of Principles of
Semester – 2nd Accounting and Audit
BBA.,LLB (Hons.) Chanakya National Law University
Batch: 2018-2023

CHANAKYA NATIONAL LAW UNIVERSITY

 DECLARATION
I hereby declare that the work reported in this project report entitled submitted at
Chanakya National Law University, Patna is an outcome of my work carried out
under the supervision of Mr. Ashok Kumar Sharma. I have duly acknowledged all the
sources from which the ideas and extracts have been taken. To the best of my
understanding, the project is free from any plagiarism issue.

Satyanand
Chanakya National Law University

1
 ACKNOWLEDGEMENT
I would like to thank my faculty Mr. Ashok Kumar Sharma whose guidance helped me a
lot with structuring my project.
I owe the present accomplishment of my project to my friends, who helped me
immensely with materials throughout the project and without whom I couldn’t have
completed it in the present way.
I would also like to extend my gratitude to my parents and all those unseen hands that
helped me out at every stage of my project.

THANK YOU,
NAME: Satyanand

COURSE: B.B.A., LL.B (Hons.)

ROLL NO: 2041
SEMESTER: 2nd

2
 TABLE OF CONTENTS
Page No:.

1. Hypothesis and Research Methodology 4

2. Introduction 5-8
3. Balance Sheet 9-11
4. Income Statement 12-17
5. Cash Flow Statement 18-22
6. Supplementary Notes 23-24
7. Conclusion 25-26
8. Bibliography 27

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 HYPOTHESIS
Financial Statements represent a formal record of the financial activities
of an entity. These are written reports that quantify the financial strength,
performance and liquidity of a company. Financial Statements reflect the
financial effects of business transactions and events on the entity.

The sole proprietorship is the simplest business form under which one can
operate a business. The sole proprietorship is not a legal entity. It simply
refers to a person who owns the business and is personally responsible for
its debts. A sole proprietorship can operate under the name of its owner or
it can do business under a fictitious name, such as Nancy's Nail Salon. The
fictitious name is simply a trade name--it does not create a legal entity
separate from the sole proprietor owner.

RESEARCH METHODOLOGY
I will use doctrinal sources of research to complete my project. I will go
through all germane text available, be it offline or online. I will refer books
on law torts by acclaimed authors, jurists and public figures. I will also seek
information from online sources in the form of articles, journals, news
pieces concerning recent events related to my research. I will also go
through relevant legal provisions which form a very crucial part in drawing a
conclusion on Tipu Sultan.

4
 Chapter One : Introduction
Financial statements are a collection of summary-level reports about an
organization's financial results, financial position, and cash flows. They are
useful for the following reasons:

● To determine the ability of a business to generate cash, and the

sources and uses of that cash.
● To determine whether a business has the capability to pay back its
debts.
● To track financial results on a trend line to spot any looming
profitability issues.
● To derive financial ratios from the statements that can indicate the
condition of the business.

To investigate the details of certain business transactions, as outlined in

the disclosures that accompany the statements.

The standard contents of a set of financial statements are:

● Balance sheet. Shows the entity's assets, liabilities, and stockholders'

equity as of the report date. It does not show information that covers
a span of time.

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 ● Income statement. Shows the results of the entity's operations and
financial activities for the reporting period. It includes revenues,
expenses, gains, and losses.
● Statement of cash flows. Shows changes in the entity's cash flows
during the reporting period.
● Supplementary notes. Includes explanations of various activities,
additional detail on some accounts, and other items as mandated by
the applicable accounting framework, such as GAAP or IFRS.

If a business plans to issue financial statements to outside users (such as

investors or lenders), the financial statements should be formatted in
accordance with one of the major accounting frameworks. These
frameworks allow for some leeway in how financial statements can be
structured, so statements issued by different firms even in the same
industry are likely to have somewhat different appearances. Financial
statements that are being issued to outside parties may be audited to verify
their accuracy and fairness of presentation. 1

If financial statements are issued strictly for internal use, there are no
guidelines, other than common usage, for how the statements are to be
presented.

1
EHLERS, RICARDO S.; BROOKS, STEPHEN P. (2008-07-30). "Adaptive Proposal Construction for
Reversible Jump MCMC". Scandinavian Journal of Statistics. 35 (4): 677–690.
doi:10.1111/j.1467-9469.2008.00606.x. ISSN 0303-6898.

6
At the most minimal level, a business is expected to issue an income
statement and balance sheet to document its monthly results and ending
financial condition. The full set of financial statements is expected when a
business is reporting the results for a full fiscal year, or when a publicly-
held business is reporting the results of its fiscal quarters.

Sole Proprietorship

The sole proprietorship is the simplest business form under which one can
operate a business. The sole proprietorship is not a legal entity. It simply
refers to a person who owns the business and is personally responsible for
its debts. A sole proprietorship can operate under the name of its owner or
it can do business under a fictitious name, such as Nancy's Nail Salon. The
fictitious name is simply a trade name--it does not create a legal entity
separate from the sole proprietor owner.

The sole proprietorship is a popular business form due to its simplicity,

ease of setup, and nominal cost. A sole proprietor need only register his or
her name and secure local licenses, and the sole proprietor is ready for
business. A distinct disadvantage, however, is that the owner of a sole
proprietorship remains personally liable for all the business's debts. So, if a
sole proprietor business runs into financial trouble, creditors can bring

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lawsuits against the business owner. If such suits are successful, the owner
will have to pay the business debts with his or her own money.

The owner of a sole proprietorship typically signs contracts in his or her

own name, because the sole proprietorship has no separate identity under
the law. The sole proprietor owner will typically have customers write
checks in the owner's name, even if the business uses a fictitious name.
Sole proprietor owners can, and often do, commingle personal and
business property and funds, something that partnerships, LLCs and
corporations cannot do. Sole proprietorships often have their bank
accounts in the name of the owner. Sole proprietors need not observe
formalities such as voting and meetings associated with the more complex
business forms. Sole proprietorships can bring lawsuits (and can be sued)
using the name of the sole proprietor owner. Many businesses begin as
sole proprietorships and graduate to more complex business forms as the
business develops.2

2
"Presentation of Financial Statements" Standard IAS 1, International Accounting Standards Board.
Accessed 24 June 2007.

8
 Chapter Two: Balance Sheet

The balance sheet is one of the three fundamental financial statements and
is key to both financial modeling and accounting. The balance sheet
displays the company’s total assets, and how these assets are financed,
through either debt or equity. It can also be referred to as a statement of
net worth, or a statement of financial position. The balance sheet is based
on the fundamental equation: Assets = Liabilities + Equity.

SAMPLE BALANCE SHEET OF A SOLE PROPRIETORSHIP

XYZ Business

Statement of financial position

as at 31st March 20xx

20xx 20xx

INR INR

Assets

Non-Current Assets

Property, Plant & Equipment

Goodwill

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Intangible Assets

0 0

Current Assets

Inventories

Trade Receivables

Cash and cash equivalents

0 0

Total Assets 0 0

Equity and Liabilities

Equity

Share Capital

Retained Earnings

Revaluation Reserve

Total Equity 0 0

Non-current liabilities

Long-term borrowings

Current Liabilities

Trade and other payables

10
Short-term borrowings

Current portion of long-term

borrowings

Current tax payable

Total current liabilities 0 0

Total liabilities 0 0

Total equity and liabilities 0 0

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 Chapter Three: Income Statement

An income statement is one of the three important financial statements

used for reporting a company's financial performance over a specific
accounting period, with the other two key statements being the balance
sheet and the statement of cash flows. Also known as the profit and loss
statement or the statement of revenue and expense, the income statement
primarily focuses on company’s revenues and expenses during a particular
period.3

Income statement is an important part of the company’s performance

reports that must be submitted to the Securities and Exchange Commission
(SEC). While a balance sheet provides the snapshot of company’s
financials as of a particular date (like, as on 30 September 2018), the
income statement reports income through a particular time period and its
heading indicates the duration which may read as “For the (fiscal)
year/quarter ended September 30, 2018,”

The income statement focuses on the four key items - revenue, expenses,
gains and losses. It does not cover receipts (money received by the
business) or the cash payments/disbursements (money paid by the

3
"PepsiCo Management's Discussion and Analysis"

12
business). It starts with the details of sales, and then works down to
compute the net income and eventually the earnings per share (EPS).
Essentially, it gives an account of how the net revenue realized by the
company gets transformed into net earnings (profit or loss). 4

The following are covered in the income statement, though its format may
vary depending upon the local regulatory requirements, the diversified
scope of the business and the associated operating activities:

Revenues and Gains:

1. Operating Revenue: Revenue realized through primary activities is
often referred to as operating revenue. For a company manufacturing
a product, or for a wholesaler, distributor or retailer involved in the
business of selling that product, the revenue from primary activities
refers to revenue achieved from sale of the product. Similarly, for a
company (or its franchisees) in the business of offering services,
revenue from primary activities refers to the revenue or fees earned
in exchange of offering those services.
2. Non-operating Revenue: Revenues realized through secondary, non-
core business activities are often referred to as non-operating
recurring revenues. These revenues are sourced from the earnings
which are outside of purchase and sale of goods and services, and

4
"The Framework for the Preparation and Presentation of Financial Statements" International Accounting
Standards Board. Accessed 24 June 2007.

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 may include income from interest earned on business capital lying in
the bank, rental income from business property, income from
strategic partnerships like royalty payment receipts or income from an
advertisement display placed on business property.

Gains: Also called as other income, gains indicate the net money made
from other activities, like sale of long-term assets. These include the net
income realized from one-time non-business activities, like a company
selling its old transportation van, unused land, or a subsidiary company.

Revenue should not be confused with receipts. Revenue is usually

accounted for in the period when sales are made or services are delivered.
Receipts are the cash received, and are accounted for when the money is
actually received. For instance, a customer may take goods/services from a
company on 28 September which will lead to the revenue being accounted
for in the month of September. Owing to his good reputation, the customer
may be given a 30-day payment window. It will give him time till 28 October
to make the payment which is when the receipts are accounted for.

Expenses and Losses:

1. Expenses linked to primary activities: All expenses incurred for
earning the normal operating revenue linked to the primary activity of
the business. They include cost of goods sold (COGS), selling,
general and administrative expenses (SG&A), depreciation or
amortization, and research and development (R&D)expenses. Typical

14
 items that make up the list are employee wages, sales commissions,
and expenses for utilities like electricity and transportation.
2. Expenses linked to secondary activities: All expenses linked to non-
core business activities, like interest paid on loan money.
3. Losses: All expenses that go towards loss-making sale of long-term
assets, one-time or any other unusual costs, or expenses towards
lawsuits.

While primary revenue and expenses offer insights into how well the
company’s core business is performing, the secondary revenue and
expenses account for the company’s involvement and its expertise in
managing the ad-hoc, non-core activities. Compared to the income from
sale of manufactured goods, a substantially high interest income from
money lying in the bank indicates that the business may not be utilizing the
available cash to its full potential by expanding the production capacity, or it
is facing challenges in increasing its market share amid competition.
Recurring rental income gained by hosting billboards at the company
factory situated along a highway indicates that the management is
capitalizing upon the available resources and assets for additional
profitability.

Income Statement Structure - From Revenues to Net Income

Mathematically, the Net Income is calculated based on the following:

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Net Income = (Revenue + Gains) – (Expenses + Losses)

SAMPLE INCOME STATEMENT

XYZ Business

Income Statement for the

year ended 31st December 2012

2012 2011

INR INR

Revenue

Cost of sales

Gross profit

Other income

Distribution costs

Administrative expenses

Finance cost

Profit before tax

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Income tax expense

Profit for the year

Earnings per share (INR):

Basic

Diluted

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 Chapter Four: Statement of Cash Flow

In financial accounting, a cash flow statement, also known as statement of

cash flows, is a financial statement that shows how changes in balance
sheet accounts and income affect cash and cash equivalents, and breaks
the analysis down to operating, investing, and financing activities.
Essentially, the cash flow statement is concerned with the flow of cash in
and out of the business. The statement captures both the current operating
results and the accompanying changes in the balance sheet. As an
analytical tool, the statement of cash flows is useful in determining the
short-term viability of a company, particularly its ability to pay bills.
International Accounting Standard 7 (IAS 7), is the International Accounting
Standard that deals with cash flow statements.5

People and groups interested in cash flow statements include:

● Accounting personnel, who need to know whether the organization

will be able to cover payroll and other immediate expenses
● Potential lenders or creditors, who want a clear picture of a
company's ability to repay
● Potential investors, who need to judge whether the company is
financially sound
● Potential employees or contractors, who need to know whether the
company will be able to afford compensation
● Shareholders of the business.

5
"Nico Resources Management's Discussion and Analysis

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The cash flow statement was previously known as the flow of funds
statement.] The cash flow statement reflects a firm's liquidity.

The statement of financial position is a snapshot of a firm's financial

resources and obligations at a single point in time, and the income
statement summarizes a firm's financial transactions over an interval of
time. These two financial statements reflect the accrual basis accounting
used by firms to match revenues with the expenses associated with
generating those revenues. The cash flow statement includes only inflows
and outflows of cash and cash equivalents; it excludes transactions that do
not directly affect cash receipts and payments. These non-cash
transactions include depreciation or write-offs on bad debts or credit losses
to name a few. The cash flow statement is a cash basis report on three
types of financial activities: operating activities, investing activities, and
financing activities. Non-cash activities are usually reported in footnotes.

The cash flow statement is intended to

1. provide information on a firm's liquidity and solvency and its

ability to change cash flows in future circumstances
2. provide additional information for evaluating changes in assets,
liabilities and equity
3. improve the comparability of different firms' operating
performance by eliminating the effects of different accounting
methods
4. indicate the amount, timing and probability of future cash flows

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The cash flow statement has been adopted as a standard financial
statement because it eliminates allocations, which might be derived from
different accounting methods, such as various timeframes for depreciating
fixed assets.6

SAMPLE CASH FLOW STATEMENT

XYZ Business
Statement of cash flows for
the year ended 31st December 2012

INR INR
Cash flows from operating
activities

Profit before taxation

Adjustments for:
Depreciati
on
Amortisati
on
Investmen
t income
Interest
expense
0
Increase
in trade

6
"IAS 27 — Separate Financial Statements (2011)"

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 receivable
s
Increase
in
inventorie
s
Increase
in short
term
borrowing
s
Increase
in trade
payables
Cash generated from
operations 0
Interest paid
Income tax paid
Net cash from operating
activities 0

Cash flows from investing

activities
Purchase of property, plant
and equipment

Purchase of intangible assets

Proceeds from sale of
equipment
Proceeds from sale of
intangible assets
Interest received
Net cash used in investing
activities 0

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Cash flows from financing
activities
Proceeds from issue of share
capital
Proceeds from long term
borrowings
Dividend paid
Net cash used in financing
activities 0

Net increase in cash and cash

equivalents 0
Cash & cash equivalents at
start of the period
Cash & cash equivalents at
end of the period 0

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 Chapter Five: Supplementary Notes

A supplementary record, also called an accounting supplemental record,

details information that isn’t normally recorded the accounting system. In
other words, it’s a document that lists extra details outside the scope of a
typical accounting record like the general ledger.

The data stored in these records typically consists of extra personal or

situational information that helps management perform their jobs.
Management often uses supplemental records for many different reasons.
Thus, the information and details recorded in these reports varies depending
on their usage. Some records have tons of details about clients, customers,
and accounts, while others have small amounts of detail about production
processes.7

For example, a production manager’s job is to control costs and make sure
the production processes are meeting the demands of the company. Many
controls are put in place to help the manager keep track of the employees,
workflow, purchases, and expenditures, but the manager might need more
information than what is traditionally recorded in the production schedules,
purchasing reports, receiving reports, and vendor invoices.

7
FASB, 2001. Improving Business Reporting: Insights into Enhancing Voluntary Disclosures

23
For instance, a manager might want to note the parts of the operations that
need to be changed in future batches or the jobs that must be run by specific
employees. These notes aren’t typically recorded in a standard accounting
system, but are helpful for management to make future decisions.

Likewise, an employee in charge of accounts receivable collections might

keep a supplementary record with notes about customer demeanor,
personality, and ability to pay future invoices. This extra information helps the
employee perform his or her job by giving additional warnings about controls
or customers that might need additional attention.

There really isn’t any limit to what kind or how much information can be stored
or recorded in these extra records. It’s simply something that employees use
to supplement the information in the actual accounting system.

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 Chapter Six: Conclusion
In a sole proprietorship, personal finances are more closely linked to
business operations than with any other type of business structure.
Business profit is taxed as personal earnings and business financing
depends on personal creditworthiness. Although the owner of a sole
proprietorship business does not have to prepare financial statements for
internal review by a board of directors, she can still use these documents
as a source of valuable feedback about her company's financial health.

Because sole proprietorships often use personal income to supplement

business revenue when operating capital is short, it is particularly important
to proactively recognize and address cash flow shortfalls. A detailed and
current cash flow projection will enable you to anticipate and plan for these
situations by organizing personal finances by keeping personal funds
sufficiently fluid or seeking additional financing when a shortfall is imminent.
In addition, a cash flow projection can tell you when your company has
enough liquid cash to enable you to withdraw sums for personal use.

A profit and loss statement provides information about how much your
company has earned during a specific period such as a month or a year. In
a sole proprietorship, most of the revenue and expenditure sums on your
cash flow projection will transfer directly to your personal tax form and
provide the basis for your income tax liabilities. In addition, a profit and loss
statement can help you to identify areas in which your business is

25
especially profitable or is spending too much money, providing information
that can help you to improve your business.

A balance sheet for a sole proprietorship provides a snapshot of the

company's net worth at a particular moment in time, listing and comparing
the value of assets such as cash on hand and equipment value with
liabilities such as debts and accounts payable. The assets and liabilities
represented by a sole proprietorship balance sheet are directly connected
to the personal net worth of the owner, who owns everything the business
owns and owes everything that it owes.

Considering your sole proprietorship financial statements in tandem can

provide you with an overview of your company's financial picture as well as
its relationship to your personal finances. If your profit and loss statements
show that your business is earning money, but your cash flow projection
shows that your business is short on cash, it is worth infusing additional
personal funds because your company is on the right track toward breaking
even and becoming profitable. If your balance sheet shows that your
company has assets, but your profit and loss statement shows that you are
losing money, this information can act as a wake-up call to rethink your
business model or use your assets more conservatively.

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Bibliography:

● Accounting Made Simple - Mike Piper

● Accounting All-in-One For Dummies - Kenneth W. Boyd and Lita
Epstein
● Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud
in Financial Reports - Howard Mark Schilit
● Financial Statements: A Step-by-step Guide to Understanding and
Creating Financial Reports - Thomas R. Ittelson
● Profit First: Transform Your Business from a Cash-Eating Monster to
a Money-Making Machine - Mike Michalowicz
● Warren Buffett Accounting Book: Reading Financial Statements for
Value Investing - Preston Pysh and Stig Brodersen

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