JustPractice
justpractice.in
Ch 10 · Financial Analysis · T.S. Grewal — Analysis of Financial Statements

Financial Statements
of a Company

75 MCQs 50 Flashcards T.S. Grewal Class 12 Updated May 2026
Start Practice Test Revise Flashcards
Chapter Overview

Chapter 10 is the entry point to Analysis of Financial Statements. It introduces the financial statements of a company as defined in Section 2(40) of the Companies Act, 2013 — the Balance Sheet, the Statement of Profit and Loss, the Cash Flow Statement (where applicable), the Statement of Changes in Equity (where applicable), and the explanatory notes. Section 129(1) requires these statements to give a true and fair view and to be prepared in the form prescribed by Schedule III.

The bulk of the chapter is the vertical Balance Sheet under Schedule III Part I. On the Equity & Liabilities side: 1. Shareholders' Funds; 2. Share Application Money Pending Allotment; 3. Non-current Liabilities; 4. Current Liabilities. On the Assets side: 1. Non-current Assets; 2. Current Assets. Each major head has prescribed sub-heads — Reserves and Surplus under Shareholders' Funds; Long-term Borrowings, Deferred Tax Liabilities, Long-term Provisions under Non-current Liabilities; Fixed Assets (Tangible, Intangible, CWIP), Non-current Investments, Long-term Loans and Advances under Non-current Assets; Inventories, Trade Receivables, Cash and Cash Equivalents under Current Assets. Schedule III also prescribes the Notes to Accounts — Share Capital, Reserves and Surplus, Long-term Borrowings, Trade Receivables, Inventories, Tangible and Intangible Fixed Assets, etc.

Schedule III Part II prescribes the Statement of P&L: Revenue from Operations, Other Income, Expenses (Cost of Materials Consumed, Purchases of Stock-in-Trade, Changes in Inventories, Employee Benefits Expense, Finance Costs, Depreciation and Amortisation, Other Expenses), Profit Before Tax, Tax Expense and Profit for the period. The chapter also covers the operating-cycle test (12 months OR operating cycle, whichever is longer) for current vs non-current classification, and the disclosure of contingent liabilities and capital commitments in the Notes (never on the face). The skills built here are used in Chapters 11–14 (Comparative & Common-Size Statements, Accounting Ratios, Cash Flow Statement).

What You'll Learn
Key Concepts
Need
Need for Financial Statements
Mandated by Sec 129 of the Cos Act 2013. Provide a true and fair view of position, performance and cash flows for stakeholders' decision-making.
Format
Schedule III Part I
Prescribes the vertical Balance Sheet — Equity & Liabilities (4 major heads) followed by Assets (2 major heads). Horizontal format is NOT permitted.
E&L
Equity & Liabilities heads
1. Shareholders' Funds (Share Capital + Reserves & Surplus); 2. Share Application Money Pending Allotment; 3. Non-current Liabilities; 4. Current Liabilities.
Assets
Assets heads
1. Non-current Assets (Fixed Assets, Investments, DTA, Long-term Loans, Other Non-current); 2. Current Assets (Inventories, Receivables, Cash & Equivs, Investments, Loans).
Notes
Notes to Accounts
Sub-classify each line — Share Capital reconciliation, Reserves and Surplus movement, Long-term Borrowings (Secured/Unsecured), Trade Receivables ageing, Inventories breakup.
P&L
Schedule III Part II
Revenue from Operations, Other Income, Expenses (COMC, Purchases SIT, Changes in Inventories, EBE, Finance Costs, Dep & Amort, Other Expenses), PBT, Tax, Profit for period.
Test
Operating cycle test
Current = realised/settled within 12 months OR within the operating cycle, whichever is LONGER. Default = 12 months if cycle is unidentifiable.
Disclosure
Contingent liabilities
Bills discounted not yet matured, guarantees given, disputed tax demands, claims not acknowledged as debt. NEVER on the face — only disclosed in Notes.
Format
Vertical vs Horizontal
Vertical (single-column waterfall) is mandated for companies — easier to read, supports comparative and common-size analysis. Horizontal T-form is permitted only for partnership firms and proprietorships.
Sample MCQs
Q1. On the Equity & Liabilities side of a company's Balance Sheet, the FIRST major head shown is:
A. Non-current Liabilities
B. Current Liabilities
C. Shareholders' Funds
D. Share Application Money Pending Allotment
Schedule III orders the Equity & Liabilities side as: 1. Shareholders' Funds; 2. Share Application Money Pending Allotment; 3. Non-current Liabilities; 4. Current Liabilities. Shareholders' Funds therefore comes FIRST.
Q2. Compute Current Liabilities — Trade Payables Rs.1,20,000; Short-term Borrowings Rs.80,000; Outstanding Salaries Rs.20,000; Long-term Loan from Bank Rs.4,00,000; Provision for Tax Rs.40,000 (payable within 6 months).
A. Rs.6,60,000 (sum of every liability shown above the current line)
B. Rs.2,20,000 (excluding the short-term provision for tax)
C. Rs.3,00,000 (after also adding the long-term loan instalment)
D. Rs.2,60,000 (= 1,20,000 + 80,000 + 20,000 + 40,000)
Current Liabilities = Trade Payables 1,20,000 + Short-term Borrowings 80,000 + Other Current Liabilities (Outstanding Salaries) 20,000 + Short-term Provisions (Provision for Tax) 40,000 = Rs.2,60,000. Long-term Loan from Bank is a Non-current Liability.
Q3. A construction company has an operating cycle of 18 months. A trade receivable expected to be realised in 14 months from the reporting date will be shown under:
A. Long-term Loans and Advances under Non-current Assets, since 14 months exceeds 12 months
B. Other Non-current Assets, since the realisation period is greater than the standard 12-month cut-off
C. Trade Receivables under Current Assets, because 14 months is within the 18-month operating cycle
D. Current Investments under Current Assets, classified by management as held for trading
Schedule III uses 'twelve months OR operating cycle, whichever is LONGER'. Here the operating cycle (18 months) is longer than 12 months. A receivable due in 14 months is within the operating cycle and is therefore a CURRENT asset (Trade Receivable).
Frequently Asked Questions
Why are financial statements of a company prepared?
Section 129(1) of the Companies Act, 2013 requires every company to prepare financial statements that give a true and fair view of its state of affairs at the end of the financial year. The objective is to communicate the financial position (Balance Sheet), financial performance (Statement of P&L) and cash flows (Cash Flow Statement) to investors, lenders, employees, regulators and other users so they can make informed economic decisions. They also serve as the legal record of stewardship by the directors.
What is Schedule III of the Companies Act, 2013?
Schedule III prescribes the form and content of company financial statements. Part I lays down the vertical format of the Balance Sheet — Equity and Liabilities first (Shareholders' Funds, Share Application Money Pending Allotment, Non-current Liabilities, Current Liabilities) followed by Assets (Non-current and Current). Part II lays down the format of the Statement of Profit and Loss — Revenue from Operations, Other Income, Expenses (with prescribed categories), Profit Before Tax, Tax Expense and Profit for the period. The horizontal T-form is no longer permitted for companies.
What goes in the Notes to Accounts?
Notes to Accounts are an integral part of the financial statements. They sub-classify each line item — for example, the Note on Share Capital shows Authorised, Issued, Subscribed (fully and not fully paid), Called-up and Paid-up Capital with a reconciliation; the Note on Reserves and Surplus splits each reserve and reconciles opening to closing; the Note on Long-term Borrowings splits by source and security; the Note on Trade Receivables shows the over-six-months ageing; the Note on Inventories breaks into raw materials, WIP, finished goods, stock-in-trade, stores and loose tools. Significant accounting policies, contingent liabilities and commitments are also disclosed in the Notes.
How are Current and Non-current items classified under Schedule III?
Schedule III uses the operating cycle test. An asset (or liability) is classified as CURRENT if it is expected to be realised (or settled) within twelve months from the reporting date OR within the company's normal operating cycle, whichever is LONGER. If the operating cycle cannot be identified, it is taken as twelve months by default. So a construction company with an 18-month operating cycle would treat a receivable due in 14 months as a current trade receivable, even though 14 months exceeds the standard twelve-month cut-off.
What does the Statement of Profit and Loss show?
The Statement of P&L is a flow statement showing the company's financial performance over the year. Schedule III Part II prescribes the order: I. Revenue from Operations, II. Other Income, III. Total Revenue, IV. Expenses (Cost of Materials Consumed, Purchases of Stock-in-Trade, Changes in Inventories of FG/WIP/SIT, Employee Benefits Expense, Finance Costs, Depreciation and Amortisation Expense, Other Expenses), V. Profit Before Exceptional Items and Tax, VI. Exceptional Items, VII. Profit Before Tax, VIII. Tax Expense (Current + Deferred), IX. Profit or Loss for the period.
What are contingent liabilities and where are they disclosed?
A contingent liability (AS-29 / Ind AS 37) is either a possible obligation whose existence depends on a future uncertain event, OR a present obligation whose outflow is not probable or cannot be reliably measured. Common examples are bills discounted with the bank but not yet matured, guarantees given on behalf of subsidiaries, disputed income-tax demands and claims against the company not acknowledged as debt. Per Schedule III, contingent liabilities are NOT recognised on the face of the Balance Sheet — they are DISCLOSED in the Notes to Accounts, along with capital commitments.