INTRICACIES OF

BALANCE SHEET/
FINANCIAL STATEMENTS

By:
Prof: R.K.GUPTA
B.COM (Hons); CAIIB; AIB (London); LL.B(I)
 WHAT IS FINANCIAL STATEMENT ?
• Periodical Review of the status of Investment
and progress made by the Management.
• They contain facts recorded on the basis of
accounting conventions and exercise of
personal judgements.
• Integrity & Competence of Accountants, who
prepare them, have a bearing on the ultimate
results furnished by them.

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 NEED OF ANALYSIS OF
FINANCIAL STATEMENTS
• Parameters taken for the analysis must satisfy the
criteria of good lending.
• Safety of depositors’/ Investors’ money/funds.
• Requirement of Depositors:
– Yield on their deposit/investment
– Safety of funds/investment
– Liquidity of funds i.e. available at any point of time.
• PURPOSE though is not requirement of depositors but
it boost the depositors’ confidence in long run. To
maintain the confidence, the regulator in India i.e. RBI
issues guidelines to maintain CRR, SLR, Selective
credit Control, Awareness and advisory guidelines for
particular sectors like home loan, retail, SSI, SME or
Large Corporate sector.
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 Need for Ethics in Accounting
• No body except the promoters and/ or say
Executives Officers are involved directly in the
management of the company.
• The information must reach to all concerns
present and prospective stake holders so that
they may be aware of the present financial
position of the company solely for the purpose of
continuing or take out their investment to some
other better opportunity.

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 NEED FOR ETHICS IN ACCOUNTING-2
• Changes in world economy during last 3
decades:
– Unification of east and west Germany in 1990
– Transformation of East European “Iron curtain”
economies into open economies
– Disintegration of USSR
– Formation of World Trade Organization (WTO).
– Lowering the Bamboo curtain and gradual integration
of China’s economy with the rest of the world
– Formation of west European economic zone by 11
countries including Germany and France and
acceptance of Euro as their common currency.
–

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 NEED FOR ETHICS IN ACCOUNTING-3

– Adoption of New Economic Policy (NEP) of deregulation,

privatization and globalization by India in 1991.
– Opening up of almost all the world economies since 1990s.
– Most of the countries have adopted the policy of currency
convertibility on current account and many of them are now
moving in stages towards capital accounts convertibility
– After opening of economies of various countries, there is greater
movement of international investment by FIIs.
• Keeping in view the above developments, the interest of
shareholders and other investor stake holders across the
borders of the country have become of vital importance.
Hence if the accounts are prepared in accordance with
the high standard of ethics, it creates confidence in the
mind of the investors and the lenders as well.

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 High quality accounting standards
• High quality accounting standards consists
of a comprehensive set of neutral principle
that require consistent, comparable,
relevant and reliable information that is
useful for investors, lenders, creditors and
all others who make capital allocation
decisions

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Main source of financial information
• Published accounts of the company which should therefore be not
only transparent but reflect true and fair view of the financial health
of the company also.
This information is submitted in various forms like:
– Balance sheet & Profit & Loss Accounts as on 31st of March of
every year (u/s 210 (1) of Companies Act 1956 and if
deviations, then the reasons thereof should be furnished u/s
211(3b)
– Cash flow statement which is mandatory for the listed
companies in India under clause no 32 of Listing agreement
(SEBI-cir/08/2000 of 04.02.08) should be prepared in
accordance with AS 3 of ICAI (only cash)
– Fund Flow Statement is studied particularly in reference not only
to know the source and uses of fund but also to see whether
short term sources are used to finance long term uses, which is
technically known as diversion of fund (working capital).

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 Various forms for submission of
information -2
– Consolidated financial statements for the
listed companies in case there are
subsidiaries of such listed companies besides
their individual financial statements. ( SEBI—
SMRP/POLICY/CIR-44 OF 31.08.2001)
• Statutory Audit and filing of the statement is
mandatory( Clause 32 of listing agreement)
• Board’s Reports shall include a Directors’
responsibility statement confirming that the
accounts have been prepared in accordance with
the relevant accounting guidelines ( u/s 217 (2AA)
of companies Act
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 Various forms for submission of
information -3
– EPS (earning per share data) in accordance with AS
20 of ICAI on or after 01.04.2001. It is mandatory for
all listed companies.
– Directors responsibility statement - Material
information on issues covering all functions of the
company and how the interest of the stake holders
is protected by the company.
– Auditors Reports which confirms for following up of
the Indian General Accepted Accounting Principles
and Practices (GAAP)
• This does not mean that after audit of accounts the
management is relieved of its responsibility. The auditors
only certify on the basis of information supplied hence
safeguarding the assets of the company is the sole
responsibility of the management. (Satyam)

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 Meaning of True and Fair view of
Financial Statements
The financial statements are to be prepared
strictly in accordance with:
– Companies Act and other applicable laws of
the land.
– Generally Accepted Accounting Principles
and Practices (GAAP)
• UK and USA GAAP are more stricter as compare
to Indian standards on GAAP.
• The Indian companies which wants to raise capital
in foreign countries are to rewrite their accounts in
accordance with the international GAAP
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 MAJOR WEAKNESS OF FINANCIAL
STATEMENTS
• Lack of objectivity.
• Being influenced largely by the subjective
exercise of judgement.
– (SATYAM COMPUTERS, Verification Of Balances
And Cash On The Date Of Balance Sheet).
• LARGE DEPOSITS on HIGEHR RATE OF
INTEREST (Banking Companies),
– BANK DEPOSITS shown in PUBLIC DEPOSITS,
• FAKE BALANCE SHEET containing FAKE
SIGNATURES OF AUDITORS/DIRECTORS.
(certificate from auditors should be obtained
and kept on record)
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 BALANCE SHEET & TYPES OF
BALANCE SHEETS
• WHAT IS BALANCE SHEET
• It is a balance of all recorded transactions relating to
finance and should be prepared in accordance with
schedule VI of Companies Act 1956.
• There is no guidelines for firms other than companies.
• The assets and liabilities are shown in accordance with
the permanency of assets and liabilities.
• TYPE OF BALANCE SHEETS
– PROJECTED BALANCE SHEET
– ESTIMATED BALANCE SHEET
– PROVISIONAL BALANCE SHEET
– AUDITED BALANCE SHEET.

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 Formats of Balance Sheet
• The Companies Act provides for two formats of Balance
Sheet.
• One is the conventional 'T" format, wherein assets and
liabilities are grouped in descending order of their
liquidity.
• The other is the vertical format, which was introduced in
1979 on the basis of International Accounting Standards.
• So far as non-corporate entities are concerned, IBA, in
collaboration with Institute of Chartered Accountants of
India, evolved formats for Financial Statements which
were later on approved by RBI.

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 CLASSIFICATION OF ASSETS AND
LIABILITIES
• Fixed assets and Term Liabilities
• Current assets and Current Liabilities
• CAPITAL
– AUTHORIZED, ISSUED &PAID UP CAPITAL
– QUASHI CAPITAL-unsecured loans
– PREFERENTIAL CAPITAL (not repayable or to be converted
equity share capital)
• RESERVES:
– Capital Reserves/Perpetual Reserves
– Revaluation Reserves of Assets
– Share Premium
– Profit on sale of Assets
– Specific reserves for specific purpose
– Capital subsidy received from Central/State Government.
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 CLASSIFICATION OF ASSETS AND
LIABILITIES-2
• Revenue Reserves:
– General Reserves
– Reserve for Bad Debts
– Reserve for fall in value of investment
• Specific Reserve:
– Debenture Redemption Reserve
– Depreciation Reserves

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 TERM LIABILITY
• Debentures not payable during the year
• Redeemable preference share after 12 years or more
• Secured Loan
• Unsecured Loans
• Deposits from public payable after 12 months
• Provision for Gratuity.
• Share application Money
• CURRENT LIABILITY
• TL & Deposits repayable during the year
• Sundry creditors for goods and expenses
• Provisions for expenses

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 FIXED ASSETS/CURRENT ASSETS
• Fixed Assets
• Cash and Bank Balances
• Investment
• Current assets
– Stock, Sundry Debtors, Loans and
Advances
• Debtors below 6 months: Govt Debtors
• Debtors over 6 months: Govt Debtors
• Study of Debtors/Creditors List
• Bank Staff-involvement,

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 FIXED ASSETS/CURRENT ASSETS
• Large advances to Directors, partners,
Diversion of funds
Allied Concerns. MSVS Agro P Ltd Amroha SBI/OBC
• Debtors and Creditors not dealing in goods.
• Name of Beneficiary of Bank Guarantees in Sundry
Creditors—Dunroll Industries
• Valuation of Stock
• Position of Govt Dues i.e. custom, excise, trade tax or
any other tax.
• Stock obsolete
• Verification of Balances with Bank on that day. (Satyam
Computers)

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 INTANGIBLE ASSETS
• Good will
• Losses
• Patent
• Trade Mark
• Preliminary Expenses incurred not fully
written off

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NOTES TO BALANCE SHEET
• Contingent Liability
– Claims against a company not acknowledged as
debt.
– Arrears of fixed cumulative dividend on cumulative
preference shares.
– Uncalled liability on account of partly paid shares in
the investment portfolio
– Pending suit in court of law against the borrower or
vice-versa
• Change of method of depreciation
• Accounting standards applied or not
• Corporate Governance –Disclosures
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 DISCLOSURE
• Disclosure means a policy for unveiling the
information to one or more
persons/institution/society at large which
may be in the interest of the company/
stakeholders/lenders/creditors/ depositors.

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 Indian Accounting Standards
• The role of ICAI in framing the accounting standards.
– “Financial statements also show the results of stewardship of
management, or the accountability of management for the
resources entrusted to it. Those users and assessors of the
stewardship and accountability of management do so in order
that they may make economic decisions. These decisions may
include, for example, whether to hold or sell their investment in
the enterprises or whether to reappoint or replace the
management”
– Chairman/CEO and CFO take the responsibility by signing the
annual accounts of the company every year. Chairman/ CEO
and CFO signs the responsibility statements.
• Number of reporting accounting standards set up by ICAI
—(28) known as AS-1 TO AS-28

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 DETAILS OF AS 1 to AS 28
AS NO STANDARDS IN RESPECT OF

AS-1 Disclosure of Accounting practices

AS-2 Valuation of inventories

AS-3 Cash flow Statement

AS-4 Contingencies and events occurring after the balance date

AS-5 Net profit or Loss for the period and extraordinary, items and
changes in Accounting Policies
AS-6 Depreciation Accounting

AS-7 Construction Contracts

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 DETAILS OF AS 8 to AS 28
AS NO STANDARDS IN RESPECT OF

AS-8 Accounting for research and Development

AS-9 Revenue Recognition

AS-10 Accounting for Fixed Assets

AS-11 Accounting for the effects of changes in foreign exchange rates

AS-12 Accounting for Government Grants

AS-13 Accounting for Investments

AS-14 Accounting for amalgamations

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 DETAILS OF AS 15 to AS 28
AS NO STANDARDS IN RESPECT OF

AS-15 Accounting for Retirement Benefits in financial statements of

employees
AS-16 Borrowing Cost

AS-17 Segmental Reporting

AS-18 Related Party Disclosures

AS-19 Leases

AS-20 Earning Per Share

AS-21 Consolidated Financial Statements

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 DETAILS OF AS 22 to AS 28
AS NO STANDARDS IN RESPECT OF

AS-22 Accounting for Taxes on Income

AS-23 Accounting for investment in Associates in Consolidated
Financial Statements
AS-24 Discontinuing Operations
AS-25 Interim Financial Reporting
AS-26 Intangible Assets
AS-27 Financial Reporting of interest of joint ventures
AS-28 Impairment of Assets
Generally accounting reporting system in India matches with the international
standards of GAAP . Besides the above, ICAI issues several statements and
guidelines, notes and opinion with a view to ensuring uniformity in corporate
accounting and reporting practices
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 ACCOUNTING STANDARDS
SCENARIO IN INDIA
• After amendment in companies act 1956, amending
section 210 it is mandatory on the part of the companies
to adhere to the accounting standards set up by the
Institute of Chartered accountants of India which has
been described hereinabove from AS-1 to AS 28 any
deviation to the Indian GAAP, require cogent reasons
and proper clarifications
• Indian GAAP is though not as stricter as that of US
GAAP but still the accounting standards of Indian GAAP
are in accordance with the International Accounting
Standards Board (IASB)

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 PROFIT AND LOSS ACCOUNT

• Comparison be studied
– Capacity installed & utilized vis-à-vis sales and
purchases (value and quantity)
– Interest amount
– Electricity charges
– Labour expenses
– Other expenses
– Depreciation Charged
– Other income
– Repair of machineries expenses
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 LIMITATION OF
BALANCE SHEETS FAIRNESS
– unrealised Income as revenue or realisation
of book debts on last day increasing huge
cash balance on the day of B/S
– Maximum Receivable and Payables on the
last day by showing huge sales and
issuance of cheques but not paid in bank
books.( Average Sundry Creditors/
Debtors be taken into consideration)
– Increasing sales and increasing profits on
the last week/month/day

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 REMEDY OF THE LIMITATION

• Quality of Management
• Management efficiency
• Technology
• Marketing
• Growth perspective.
• Stock Market perceptions.
• RATIOS:
– Current Ratio: 1:1; 1.17:1, 1.33:1
– Debt Equity Ratio: 2:1,
– Leverage Ratio: 4:1
– DSCR : 1.5:1
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 REMEDY OF THE LIMITATION-2

• RATING OF BOROWER
– Why rating is down and up critical analysis
be done and recorded
• INTERNAL ACCRUALS
– To improve the current ratio or DER or meet
out the working capital margin. Accruals
should be examined keeping in view the
capacity, efficiency and marketing.

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 THANK YOU
For your kind attention

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