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Framework For Preparation and Presentation of Financial Statements

This document outlines the framework for the preparation and presentation of financial statements. It discusses the components of financial statements including the balance sheet, statement of profit and loss, and cash flow statement. It also covers the users of financial statements, qualitative characteristics, fundamental accounting assumptions, and elements such as assets, liabilities, equity, income and expenses. The framework provides guidance on the historical cost, current cost, realizable value and present value methods for measurement of elements in financial statements. It also explains the concepts of capital maintenance and determination of profit.

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87 views

Framework For Preparation and Presentation of Financial Statements

This document outlines the framework for the preparation and presentation of financial statements. It discusses the components of financial statements including the balance sheet, statement of profit and loss, and cash flow statement. It also covers the users of financial statements, qualitative characteristics, fundamental accounting assumptions, and elements such as assets, liabilities, equity, income and expenses. The framework provides guidance on the historical cost, current cost, realizable value and present value methods for measurement of elements in financial statements. It also explains the concepts of capital maintenance and determination of profit.

Uploaded by

samartha umbare
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FRAMEWORK FOR PREPARATION AND PRESENTATION OF FINANCIAL

STATEMENTS

Problem Book Page Note Book Question Type


No No Page No.
1
2
3

Introductions
This framework provides the fundamental basis for development of new standards as also for review
of existing standards. This framework also explains components of financial statements, users of.
financial statements, qualitative characteristics of financial statements and elements of financial
statements. The framework also explains concepts of capital, capital maintenance and determination
of profit

Components of Financial Statements


1. Balance Sheet: portrays value of economic resources controlled by an enterprise. It also
provides information about liquidity and solvency of an enterprise which is useful in predicting the
ability of the enterprise to meet its financial commitments as they fall due.

2. Statement of Profit and Loss: Presents the result of operations of an enterprise for an
accounting period, i.e., it depicts the performance of an enterprise, in particular its profitability.

3. Cash Flow Statement: shows the way an enterprise has generated cash and the way they
have been used in an accounting period and helps in evaluating the investing,
financing and operating activities during the reporting period

4. Notes and other statements: Present supplementary information explaining different items
of financial statements.

Users of Financial Statements

Investors Analysis of performance, profitability, financialposition of company


Employees Knowledge of stability, continuity, growth
Suppliers, creditors Determination of credit worthiness
Customers Analysis of stability, profitability
Government Evaluation of entity’s performance and contributionto social objectives
Lenders Determine whether their loans, and the interest attaching to them, will
be paid when due
Public Determine contribution to the local economy and public at large

CA. JAY CHAWLA Framework of F. S


1
Fundamental Accounting Assumptions

Accrual: Transactions are recognized as and when they occur, without considering receipt /payment
of cash.
Going concern: Enterprise will continue in operation in foreseeable future and will not liquidate.
Consistency: Using same accounting policies for similar transactions in all accounting
periods

Elements of Financial Statements

Asset Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow of a resource embodying economic
benefits.
Equity Residual interest in the assets of an enterprise after deducting all its
liabilities
Income/gain Increase in economic benefits during the accounting period in the form of inflows
or enhancement of assets or decreases in liabilities that result in increase in equity
other than those relating to contributions from equity participants

Expense/loss Decrease in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrence of liabilities that result in decrease
in equity other than those relating to distributions to equity participants

Measurement of Elements in Financial Statements

Historical cost Acquisition price

Current Cost Assets are carried at the amount of cash or cash equivalent that would have to
be paid if the same oran equivalent asset is acquired currently. Liabilities are
carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently.
Realizable For assets, amount currently realizable on sale of the asset in an orderly
(Settlement) disposal. For liabilities, this is the undiscounted amount expected to be paid on
Value settlement of liability in the normal course of business.

Present Value Assets are carried at present value of future net cash flows generated by the
concerned assets in the normal course of business. Liabilities are carried at
present value of future net cash flows that are expected to be required to
settle the liability in the normal course of business.

Financial Capital Maintenance


 At historical cost: Opening and closing assets are stated at historical costs
 At current purchasing power: Restatement at closing prices using average priceindices
 Physical capital maintenance: Restatement at closing prices using specific priceindices

CA. JAY CHAWLA Framework of F. S


2
PROBLEM NO.1 - SM
Carrying amount of a machine is 40,000 (Historical cost less depreciation). The machine is expected
to generate ` 10,000 net cash inflow. The net realisable value (or net selling price) of the machine on
on current date is 35,000. The enterprise’s required earning rate is 10% per year.

PROBLEM NO.2 - SM
Mohan started a business on 1 April 20X1 with ` 12,00,000 represented by 60,000 units of 20 each
. During the financial year ending on 31 March, 20X2, he sold the entire stock for ` 30 each. order
to maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in
the year 20X1-X2 if Financial Capital is maintained at historical cost.

PROBLEM NO.3- SM
Balance Sheet of Anurag Trading Co. on 31st March, 20X1 is given below

Liabilities Amount (`) Assets Amount (`)


Capital 50,000 Property, Plant and Equipment 69,000
Profit and Loss A/c 22,000 Stock in Trade 36,000
10% Loan 43,000 Trade Receivables 10,000
Trade Payables 18,000 Deferred Expenditure 15,000
Bank 3,000
1,33,000 1,33,000
Additional Information
1. Remaining life of Property, Plant and Equipment is 5 years with even use. The net realisable value of
Property, Plant and Equipment as on 31st March, 20X2 was ` 64,000.
2. Firm’s sales and purchases for the year 20X1-X2 amounted to 5 lacs and 4.50 lacs respectively.
3. The cost and net realisable value of the stock were ` 34,000 and ` 38,000 respectively.
4. General Expenses for the year 20X1-X2 were `16,500.
5. Deferred Expenditure is normally amortised equally over 4 years starting from.
F.Y. 20X0-X1 i.e., `5,000 per year
6. Out of trade receivables worth `10,000, collection of `4,000 depends on successful re-design of
certain product already supplied to the customer
7. Closing trade payable is `10,000, which is likely to be settled at 95%.
8. There is pre-payment penalty of `2,000 for Bank loan outstanding
Prepare Profit & loss Account for the year ended 31st March, 20X2 by assuming itis not a Going.
Concern

CA. JAY CHAWLA Framework of F. S


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CA. JAY CHAWLA Framework of F. S
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