Module2

Introduction
A financial statement is a formal record of the financial activities and position of a business,
person, or other entity. Financial statements provide an overview of a company's performance
and financial condition over a period of time.
Financial Statement Analysis is an analytical process used by businesses and investors to
evaluate the performance of the business. In this process, businesses examine a few factors
like balance sheets, income statements, and cash flow reports and make a final informed
business decision.
The major financial statements include:
●​ Statement of Financial Position (Balance Sheet)
●​ Income Statement
●​ Cash Flow Statement

2. Objectives of Financial Statements

●​ To provide useful information to stakeholders for decision-making.
●​ To show the financial performance and financial position of a business.
●​ To comply with legal and regulatory requirements.
●​ To track the financial health and sustainability of the business.
The major financial statements include:
●​ Statement of Financial Position (Balance Sheet)
●​ Income Statement
●​ Cash Flow Statement
There are three major key components of the financial statement analysis method. These
include cash flow statements, balance sheets, and income statements. Let’s understand these
components briefly.
Balance Sheet: The balance sheet displays the assets, liabilities, and the shareholder’s equity
of a company. It evaluates the liquidity, financial stability, and capital structure of a company.
Income Statement: The income statement displays the expenses, revenue, and net income of
a company for a specific period. Companies can use their income statement to understand
operational efficiency and profitability.
Cash Flow Statement: The cash flow statement displays detailed information on the inflow
and outflow of cash within an organization. It helps in cash management and liquidity.

The Statement of Financial Position

What is a statement of financial position?
A statement of financial position outlines a glimpse into the financial circumstances of a
business over a specific time period. Typically, it’s used alongside income statements, cash
flow statements, and statements of shareholder equity.
The statement lists the assets, liabilities, and equity of a company. It records what the
business owns, what it owes, and the total net worth of the business.
Although balance sheets aren’t highly valuable for businesses to understand financial health
and performance, it’s only mandatory for publicly traded companies to create them.
The basic accounting equation:
Assets = Liabilities + Shareholder Equity.

Let’s break these down some more...

1. Assets

Under the assets column of a financial statement lies anything that the business owns,
whether that’s cash in the bank, inventory, property, or proprietary equipment. These assets
are subsequently categorized as either current or non-current assets.

Current assets
The first listing on the statement, current assets, refers to cash or cash equivalents, which can
be easily converted into cash within a year or less.

They consist of:

●​ Money owed by customers

●​ Inventory
●​ Repaid expenses (e.g., insurance, rent)
●​ Securities that can be traded, bought, or sold on the market

Non-current assets
Assets with values that take longer to actualize are considered non-current. Examples include
fixed assets (i.e., an office, factory building, or equipment), which won’t realize their full
value within a financial year.

Since these assets are long-term investments, their depreciation must be accounted for in the
statement of financial position.

2. Liabilities

Liabilities record what is owed by the business, such as salaries, taxes, and any debts.
Payments that a company owes to third parties—supply chain partners, lenders, or
others—must be noted as liabilities.
These are recorded in the second column beside the assets section, and are also categorised
by current and non-current liabilities:

Current liabilities

●​ Wages
●​ Accounts payable (repayments owed for credit purchases)
●​ Taxes
●​ Utility bills
●​ Rent
●​ Loans
●​ Accounts

Non-current liabilities
Also known as long-term liabilities, these refer to outstanding debts and payments that cannot
be settled within a year, such as:

●​ Long-term interest
●​ Lease liabilities
●​ Bonds payable
●​ Deferred tax and revenue

3. Equity

Finally, under shareholder equity, a business needs to record the amount of money funded by
company owners and shareholders in its creation and startup. Equity also accounts for all
revenue attributable to owners once liabilities have been paid.

Put more simply, equity equals assets minus liabilities. It’s the proportion of the business that
is owned outright. On the statement of financial position, equity is placed underneath
liabilities and can include:

●​ Common stock (ownership shares)

●​ Preferred stock (this gives stockholders priority over common stockholders)
●​ Retained earnings (net income left over once the company has paid out shareholder
dividends)
●​ Treasury stock (shares issued and reacquired by the company)
●​ Additional paid-in capital (amounts shareholders have paid more than the par value of
shares)

3. Classifying Assets and Claims

Assets can be classified as:
●​ Current Assets: Expected to be converted into cash or used up within one year​
(e.g., Cash, Accounts Receivable, Inventory)
 ●​ Non-Current Assets: Long-term in nature​
(e.g., Property, Plant, Equipment)
Claims (Liabilities and Equity):
●​ Current Liabilities: Obligations due within one year​
(e.g., Accounts Payable, Short-term loans)
●​ Non-Current Liabilities: Obligations due after one year​
(e.g., Long-term loans, Bonds payable)
●​ Equity: Owner's residual interest​
(e.g., Share capital, Retained earnings)

Example 1 – Preparing a Balance Sheet

Given Data of a business as on 31st March 2025:
Assets
●​ Cash: ₹15,000
●​ Accounts Receivable: ₹10,000
●​ Furniture: ₹5,000
Liabilities
●​ Accounts Payable: ₹8,000
Capital – ?

Example 2 – Missing Item

If:
●​ Total Assets = ₹50,000
●​ Capital = ₹30,000​
Find Liabilities.

Example 3 – Practice Question

Given:
●​ Cash: ₹12,000
●​ Stock: ₹8,000
●​ Machinery: ₹20,000
●​ Accounts Payable: ₹10,000​
Find Capital and prepare the Balance Sheet.

Problem 4
Given:
●​ Cash: ₹18,000
 ●​ Furniture: ₹7,000
●​ Stock: ₹10,000
●​ Accounts Payable: ₹9,000
Find: Capital and prepare the Balance Sheet.

Problem 5
Given:
●​ Total Assets: ₹60,000
●​ Liabilities: ₹25,000
Find: Capital.

Problem 6
Given:
●​ Cash: ₹8,000
●​ Machinery: ₹15,000
●​ Accounts Receivable: ₹6,000
●​ Accounts Payable: ₹5,000
●​ Bank Loan: ₹7,000
Find: Capital and prepare the Balance Sheet.

Problem 7

Given:

●​ Building: ₹50,000
●​ Furniture: ₹10,000
●​ Cash: ₹5,000
●​ Liabilities: ₹15,000

Find: Capital.

Problem 8

Given:

●​ Total Assets: ₹80,000

●​ Capital: ₹50,000

Find: Liabilities.
Problem 9
Davis and Company is a new business that was created by depositing
£20,000 in a bank account on 1 March. This amount was raised partly
from the owner (£6,000) and partly from borrowing (£14,000). Raising
funds in this way will give rise to a claim on the business by both the
owner (equity) and the lender (liability). If a statement of financial
position of Davis and Company is prepared following these transactions,
it will appear as follows how?

Practice Problems – Income Statement

Problem 10
A shop has:
●​ Sales Revenue = ₹50,000
●​ Cost of Goods Sold = ₹30,000
●​ Rent Expense = ₹5,000
●​ Salaries Expense = ₹7,000
Find: Net Profit.

Problem 11
A bakery has:
●​ Sales = ₹25,000
●​ Purchases = ₹15,000
●​ Wages = ₹3,000
●​ Rent = ₹2,000
Assume no opening or closing stock.​
Find: Net Profit.

Problem 12
A trader has:
●​ Sales Revenue = ₹80,000
●​ Cost of Goods Sold = ₹50,000
●​ Other Expenses = ₹10,000
Find: Net Profit.

Problem 13
A fruit seller has:
●​ Sales = ₹12,000
●​ Cost of Goods Sold = ₹8,000
●​ Transport Expense = ₹500
●​ Stall Rent = ₹1,000
Find: Net Profit.

Problem 14
A stationery shop has:
●​ Sales = ₹40,000
●​ Cost of Goods Sold = ₹20,000
●​ Salaries = ₹6,000
●​ Electricity = ₹2,000
●​ Misc. Expenses = ₹1,000
Find: Net Profit.

Problem 15
A shop’s data:
●​ Sales = ₹60,000
●​ Cost of Goods Sold = ₹35,000
●​ Rent = ₹6,000
●​ Electricity = ₹2,500
Find Net Profit.

Problem 16
A fruit seller:
●​ Sales = ₹18,000
●​ Cost of Goods Sold = ₹10,000
●​ Transport = ₹800
●​ Stall Rent = ₹1,200

Problem 17
A stationery shop:
 ●​ Sales = ₹55,000
●​ Purchases = ₹28,000
●​ Wages = ₹5,000
●​ Electricity = ₹3,000
●​ Rent = ₹4,000
(Assume no opening or closing stock.)

Problem 18
A bakery:
●​ Sales = ₹30,000
●​ Cost of Goods Sold = ₹20,000
●​ Salaries = ₹4,000
●​ Advertising = ₹1,000

Problem 19
A trader:
●​ Sales = ₹90,000
●​ Cost of Goods Sold = ₹60,000
●​ Rent = ₹8,000
●​ Misc. Expenses = ₹2,000

Problem 20
A vegetable vendor:
●​ Sales = ₹8,000
●​ Cost of Goods Sold = ₹5,000
●​ Transport = ₹500

Problem 21
A small café:
●​ Sales = ₹70,000
●​ Purchases = ₹35,000
●​ Wages = ₹12,000
●​ Rent = ₹6,000
 ●​ Utilities = ₹2,000
(No stock adjustments.)

Problem 22
A clothing shop:
●​ Sales = ₹45,000
●​ Cost of Goods Sold = ₹30,000
●​ Rent = ₹5,000
●​ Advertising = ₹2,000
●​ Salaries = ₹4,000

Problem 23
A shoe seller:
●​ Sales = ₹20,000
●​ Cost of Goods Sold = ₹12,000
●​ Shop Rent = ₹3,000
●​ Electricity = ₹1,000
●​ Misc. Expenses = ₹500

Problem 24
A watch shop:
●​ Sales = ₹75,000
●​ Cost of Goods Sold = ₹40,000
●​ Rent = ₹10,000
●​ Salaries = ₹15,000