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FINANCIAL STATEMENTS OF LIMITED COMPANIES

Statement of Changes in Equity

Statement of changes in equity shows the movement in:

• Share Capital (issued share capital)
• Share Premium
• Nature of Reserves created
• Un-appropriated Profit / Loss
• Dividend Distributed

Share Premium

Share Premium is the amount received in excess of the face value of the share. Example: if a Rs. 10 share is sold for Rs, 12 then Rs. 2 is share premium. Share Premium can not be distributed among the share holders.
It can be utilized:

• To issue Bonus Shares
• To write off Preliminary Expenses
• To meet the difference of face value and cash received in case of shares issued at discount
• To meet the expenses of issue of shares
• For payment of premium on redemption of debentures.

Reserves

Capital Reserve and Fixed Asset Replacement Reserve are used for specific purpose. These are not distributed among share holders. General Reserve and undistributed profit` can be distributed among share holders. Revaluation Reserve is created when an asset is re-valued from cost to market value. Revaluation Reserve can not be distributed among the share holders. It can be utilized for:

• Setting off any loss on revaluation
• At the time of disposal of asset, the reserve relating to that asset is transferred to profit& loss account.

Cash Flow Statement

Cash Flow Statement shows the movement of cash resources during the year. It gives information about sources of income and account heads on which this amount is spent. It is an integral part of financial statements.

Notes to the Accounts

Notes to the accounts are the explanatory notes of all the items shown in the profit and loss account and the balance sheet. It is the requirement of the Companies Ordinance and the International Accounting Standards. Following are explained in Notes to the accounts:

• Nature of business of the company
• Accounting Policies of the company
• Details and explanation of items given in the Profit and Loss Account and Balance Sheet.

Debentures

Debentures are acknowledgement of debt, owed by the company to the public at large for a defined period of time, and has a mark up (profit) rate attached to it. Debentures are issued under the common seal (Stamp) of the company. Debenture is an instrument for obtaining loan from general public. Mark up is paid on Debentures which is generally equal to the market rate.

Term Finance Certificate

Term Finance Certificates are issued for a defined period. These are also issued to obtain loan from public at large. Both Debentures and Term Finance Certificates are usually issued by Public Companies.

Illustration

ABC Limited
Trial balance As on June 30, 2002
Particulars	Amount Dr. (Rs.)	Amount Cr. (Rs.)
Authorized Share Capital (Face value Rs. 10 each)		1,500,000
Paid up Capital		1,000,000
Share Premium		120,000
General Reserve		48,000
Accumulated profit brought forward		139,750
Opening Stock	336,720
Sales		4,715,370
Purchases	2,475,910
Return outward		121,220
Return inward	136,200
Carriage inward	6,340
Carriage outward	43,790
Wages	410,240
Salesmen Salaries	305,110
Admin. Wages & salaries	277,190
Plant And Machinery	610,000
Motor vehicle hire	84,770
Provision for Depreciation: Plant & Machinery		216,290
General Selling Expenses	27,130
General admin. expenses	47,990
Directors’ Remuneration	195,140
Rent received		37,150
Trade Debtors	1,623,570
Cash and Bank balances	179,250
Trade Creditors		304,570
Bills Payable		57,000
Total	6,759,350	6,759,350

Additional Information

• Closing stock is valued at Rs. 412,780.
• Accrue Auditors’ remuneration Rs. 71,000.
• Dividend is proposed @37.5% for the year.
• Depreciate plant & machinery @20% on cost.
• Of the motor hire, Rs. 55,000 is for selling purposes.
• Directors’ remuneration has been as follows:
  o Chairman 46,640 o Managing Director 51,500 o Finance Director 46,000 o Marketing Director 51,000 195,140

You are required to prepare profit & loss account as on June 30, 2002 and balance sheet for the reported period.

Solution

While presenting the financial Statements of the company, balance sheet is presented first and profit & loss account is presented later, but we cannot prepare balance sheet without preparing profit and loss account. So we will prepare profit and loss account first.

Balance Sheet

ABC Limited
Balance Sheet As At June 30, 2002
Particulars	Note
Fixed Assets at WDV	3-a	271,710
Current Assets Debtors Stock in Trade Cash & Bank Balance		1,623,570 412,780 179,250
		2,215,600
Current Liabilities Creditors Bills Payable Auditors Remuneration Payable Proposed Dividend		304,570 57,000 71,000 375,000
		807,570
Working Capital		1,783,030
Net Assets Employed		1,679,740
Financed By: Authorized Capital 50,000 Shares of Rs. 10 each		1,500,000
Paid Up Capital 30,000 Shares of Rs. 10 each Share Premium General Reserve Accumulated Profit and Loss Account		1,000,000 120,000 48,000 511,740
Total		1,679,740

Profit & Loss Account

ABC Limited
Profit and Loss Account For the Year Ending June 30, 20-2
Particulars	Note	Amount Rs.	Amount Rs.
Sales Less: Cost of Goods Sold	1 2		4,579,170 (2,695,210)
Gross Profit Add: other income (rent received) Less: Administrative Expenses 3 Less: Selling Expenses 4 Profit before tax Less: Tax for the year Profit after tax Add: Accumulated Profit b/f Less: Proposed Dividend @ 37.5%	3 4   5	692,090 482,030	1,883,960 37,150 (1,174,120) 746,990 0 746,990 139,750 886,740 375,000
Net Profit Carried Forward			511,740

Notes to the Accounts

Note # 1 Sale account

Sales

4,715,370 Less: Return in (136,200) Net Sales 4,579,170

Note # 2 Cost of goods sold

Opening Stock

336,720 Add: Purchases 2,475,910 Wages 410,240 Less: Returns out (121,220) Add: Carriage in 6,340 Less: Closing Stock (412,780) Total 2,695,210

Note # 3 Administrative Expenses

Wages & salaries

277,190 Motor Hire 29,770 General Expenses 47,990 > Directors Remuneration:
Chairman 46,640 Managing Director 51,500 Director Finance 46,000 144,140 Auditors Remuneration 71,000 Depreciation Plant & Machinery (Note # 3-a) 122,000 Total 692,090

Note # 3-Fixed Assets

	Cost	Rate	Opening	For the Yr.	Closing	WDV
Plant & Machinery	610,000	20%	216,290	122,000	338,290	271,710

Note # 4 Selling Expenses

Salesmen salaries

305,110 Carriage out 43,790 General Expenses 27,130 Motor Hire 55,000 Marketing Director’s Remuneration 51,000 Total 482,030

Note # 5 Proposed Dividends

37.5% of 1,000,000 (issued capital)

27,130

Related Content: MGT101 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of Financial Accounting

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