FINANCIAL MANAGEMENT AND CONTROL: AN OVERVIEW

11

REVIEW QUESTIONS
1. Financial management primarily aims at maximizing the shareholders’ wealth, which can well be achieved
through efficient and effective handling of the various facets of management, referred to as the Six Ms of
Financial Management. Discuss.
2. Explain the various events and developments that have facilitated the evolution of financial management as
a distinct discipline.
3. Financial Management comprises the following three main and vital functions:
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(i) Investment Decisions

(ii) Financing Decisions
(iii) Dividend Decisions
Explain, by citing suitable illustrative examples in each case.
4. Internal auditors should discharge their roles and responsibilities by functioning as ‘a part of’ the departments
and sections, and ‘not apart from’ them. Discuss.
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 Chapter 2
Financial Statements

LEARNING OBJECTIVES

After reading this chapter you should be able to understand

• The three components of Financial Statements, viz.
(i) Balance Sheet
(ii) Profit and Loss Account
(iii) Sources and Application (Uses) of Funds Statement
• Basic Concepts and Conventions pertaining to ‘Balance Sheet’, and ‘Profit and Loss Account’ or ‘Income
Statement’
• Format of Balance Sheet, as provided in the Indian Companies Act
• An overview of the inherent purpose of interpretation of Balance Sheet:
(i) Intra-Firm Comparison
(ii) Inter-Firm Comparison

Success is neither magical nor mysterious.

Success is the natural consequence of consistently
applying the basic fundamentals.
– Jim Rohn

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 14 FINANCIAL MANAGEMENT: THEORY AND PRACTICE

INTRODUCTION
It is very much imperative and deligatory on the part of all companies in India that they must have an appropriate
financial recording and reporting system. These financial recordings are done through Financial Statements.
So, it is extremely important to maintain proper Balance Sheets; Profit and Loss Account; Income Statements;
and Sources and Application of Funds which all happen to be the Financial Statements and the most authentic
sources to draw realistic conclusions about the true financial position of a company.

COMPONENTS OF FINANCIAL STATEMENTS

Financial Statements comprise the following:
• Balance Sheet
• Profit and Loss Account
• Profit and Loss Appropriation Account (these two statements appear together, one after the other, in the
Annual Reports of most of the companies)
• Sources and Application (Uses) of Funds Statement

Balance Sheet
Let us first examine the meaning of the term ‘Balance Sheet’. The Balance Sheet is the statement of assets
and liabilities of a company, as on a given date. But then, as it is as on a given date, it is a ‘snap shot’, a static
picture of the financial position of a company, just as on that very day. It is not a movie picture, recording all
the happenings taking place during the entire year.
In a photograph session, we all try to be at our best. Thus, it is natural that all the companies also endeavour
hard so as to present the best possible financial position of the company as on the date of the Balance Sheet.
Some of the companies even try to present a little better position than the actual one. This is generally known
as ‘Window Dressing’, or ‘Creative Accounting’, as some call it.
It is said that – The balance sheet conceals more than what it reveals. Therefore, always remember that
whenever you start reading a balance sheet, you must read the following documents along with it, so as to be
able to draw realistic conclusions.
The necessary documents are as follows:
(i) Schedules (giving further details and break-ups of the various items shown in the balance sheet).
(ii) Notes (giving some explanations or revealing some material facts as a note).
(iii) Auditor’s Report is a document required to ensure that it is a clean report, certifying to the effect that the
financial statements of the company have been prepared from the books of accounts, properly kept, in
accordance with the Generally Accepted Accounting Principles (GAAP), and above all, that these present
a true and fair view of the company. In case there are some qualifying remarks in the report, we must
look for the explanations given by the management, as also to find out as to how far these explanations
are convincing.
The qualifying remarks of the auditors, given in the Annual Report of Kallam Spinning Mills
Limited for the year 2002-3, will amply clarify the point. The statutory auditors, in their report, at
item No. 15, appearing on page 20, have made the qualifying remarks reading as: ‘In our opinion, the
company does not have a regular internal audit system’. (They have also taken extra care to print these
qualifying remarks in bold letters, as they are invariably supposed to present such remarks conspicuously
and prominently). The Management of the Company, on their part, have given the explanations, justifying
their action and stand, in item No. (ix), page 5 of the report, reading as: ‘The Board is of the opinion that
the operation of the Company is being run by professionals, whose activities are internally checked by their
higher officials in the management hierarchy and it didn’t have any materiality affecting the operations
of the Company.’

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