CBSE Class 12 — Notes, Chapters & Practice Quizzes

Chapter 3: Financial Statements of a Company

Summary

Financial statements are the basic and formal annual reports through which a company's management communicates financial information to its owners and to external parties such as investors, lenders, tax authorities and the government. They are the end products of the accounting process and include the balance sheet (position statement), the statement of profit and loss and the cash flow statement. Their nature combines recorded facts, accounting conventions, postulates such as the going-concern and money-measurement assumptions, and personal judgements about matters like depreciation and provisions. Every company registered under the Companies Act 2013 must prepare its balance sheet and statement of profit and loss in the format prescribed by Schedule III. The balance sheet is presented in a vertical form, classifying items into shareholders' funds, non-current and current liabilities, and non-current and current assets, with detailed disclosures given in the Notes to Accounts. The statement of profit and loss shows revenue from operations, other income, and expenses such as cost of materials consumed, employee benefits, finance costs and depreciation, leading to profit before and after tax and earnings per share. Financial statements help users assess profitability and financial position, but they are limited because they rely on historical cost, contain only aggregate and monetary information, involve personal bias, and are only interim reports.

Key terms

Important questions

Explore interactively