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Notes

Framework for Preparation and Presentation of Financial Statements

 

Purpose: 1.

 

Rounded Rectangle: Purpose: 1.

CH-1

 

 

 

 

Framework is to:

 

Oval: Framework is to:

This Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The purpose of the

 

 

 

 

  1. Assist preparers of financial statements in applying Accounting Standards and in dealing with topics that have yet to form the subject of an Accounting Standard;
  2. Assist the Accounting Standards Board in the development of future Accounting Standards and in its review of existing Accounting Standards;
  3. Assist the Accounting Standards Board in promoting harmonization of regulations, accounting standards and procedures relating to the preparation and presentation of financial statements by
  4. Providing a basis for reducing the number of alternative accounting treatments permitted by Accounting Standards;
  5. Assist auditors in forming an opinion as to whether financial statements conform with Accounting Standards;
  6. Assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with Accounting Standards; and
  7. Provide those who are interested in the work of the Accounting Standards Board with information about its approach to the formulation of Accounting Standards.

 

2. This Framework is not an Accounting Standard and hence does not define standards for any particular measurement or disclosure issue. Nothing in this Framework overrides any specific Accounting Standard.

 

3. The Accounting Standards Board recognises that in a limited number of cases there may be a conflict between the Framework and an Accounting Standard. In those cases where there is a conflict, the requirements of the Accounting Standard prevail over those of the Framework. As, however, the Accounting Standards Board will be guided by the Framework in the development of future Standards and in its review of existing Standards, the number of cases of conflict between the Framework and Accounting Standards will diminish through time.

 

4. The Framework will be revised from time to time on the basis of the experience of the Accounting Standards Board of working with it.

 

The objectives of Financial Statements:

 

 

 
  Text Box: The objectives of Financial Statements:

 

 

 

  1. The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions.
  2. Financial statements prepared for this purpose meet the common needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions since (a) they largely portray the financial effects of past events, and (b) do not necessarily provide non-financial information.
  3. Financial statements also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it. Those users who wish to assess the stewardship or 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 enterprise or whether to reappoint or replace the management.

 

Measurement of the elements of Financial Statements:

 

Text Box: Measurement of the elements of Financial Statements:

 

 

 

Measurement is the process of determining the monetary amounts at which the elements of financial statements are to be recognised and carried in the balance sheet and statement of profit and loss. This involves the selection of the particular basis of measurement.

 

A number of different measurement bases are employed to different degrees and in varying combinations in financial statements. They include the following:

 

  1. Historical cost . Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.
  2. Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset were acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.
  3. Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values, that is, the undiscounted amounts of cash or cash equivalents expected to be required to settle the liabilities in the normal course of business.
  4. Present value. Assets are carried at the present value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

 

Questions for practice

 

 

 
  Rounded Rectangle: Questions for practice

 

 

 

Q-1 “One of the characteristics of financial statements is neutrality”- Do you agree with this statement?

A-1 Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained in financial statement must be neutral, that is free from bias. Financial Statements are not neutral if by the selection or presentation of information, the focus of analysis could shift from one area of business to another thereby arriving at a totally different conclusion on the business results.

 For example if the assets of a company primarily consist  of debtors and insurance claims and the financial statements do not specify that the  insurance claims have been lying unrealized for a number of years or that a few key debtors have not given balance confirmation certificates, an erroneous conclusion may be drawn on the liquidity of the company. Financial statements are said to depict the true and fair view of the business of the organization by virtue of neutrality.

 

Q-2 Balance Sheet of Anurag Trading Co. on 31st March, 2017 is given below:

Liabilities

Amount (Rs)

 

Assets

Amount (Rs)

 

Capital

50,000

Fixed Assets

69,000

Profit and Loss A/c

 

22,000

Stock in Trade

36,000

10% Loan

43,000

Trade Receivables

10,000

Trade Payables

18,000

Deferred Expenditure

15,000

 

 

Bank

3,000

 

1,33,000

 

1,33,000

 

Additional Information:

 

  1. Remaining life of fixed assets is 5 years with even use. The net realizable value of fixed assets as on 31st March, 2018 was Rs64,000.
  2. Firm’s sales and purchases for the year 2017-18 amounted to Rs5 lacs and Rs4.50 lacs respectively.
  3. The cost and net realizable value of the stock were Rs34,000 and Rs38,000 respectively.
  4. General Expenses for the year 2017-18 were Rs16,500.
  5. Deferred Expenditure is normally amortised equally over 4 years starting from F.Y. 2016-17 i.e. Rs5,000 per year.
  6. Out of debtors worth Rs10,000, collection of Rs4,000 depends on successful re-design of certain product already supplied to the customer.
  7. Closing trade payable is Rs10,000, which is likely to be settled at 95%.
  8. There is pre-payment penalty of Rs2,000 for Bank loan outstanding. Prepare Profit & loss Account for the year ended 31stMarch, 2018 by assuming it is not a Going Concern

 

A-Profit and Loss Account of Anurag Trading Co. for the year ended 31stMarch,2018

(Assuming business is not a going concern)

 

Rs

 

Rs

To Opening Stock

 

36,000

By Sales

5,00,000

To Purchases

4,50,000

By Trade payables

500

To Expenses

16,500

By Closing Stock

38,000

To Depreciation (69,000-64,000)

 

5,000

 

 

To Provision for doubtful debts

4,000

 

 

To Deferred expenditure

15,000

 

 

To Loan penalty

 

2,000

 

 

To Net Profit

10,000

 

 

 

5,38,500

 

5,38,500

 

 

Q-3 (a) Explain in brief, the alternative measurement bases, for determining the value at which an element can be recognized in the Balance Sheet or Statement of Profit and Loss.

(b)Mohan started a business on 1stApril 2017 with Rs12,00,000 represented by 60,000 units of Rs20 each. During the financial year ending on 31stMarch, 2018, he sold the entire stock for Rs30 each. In order to maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the year 2017-18 if Financial Capital is maintained at historical cost.

 

A- (a) The Framework for Recognition and Presentation of Financial statements recognizes four alternative measurement bases for the purpose of determining the value at which an element can be recognized in the balance sheet or statement of profit and loss.

These bases are:

(i)Historical Cost;

(ii)Current cost

(iii) Realizable(Settlement) Value and

(iv) Present Value.

 

A brief explanation of each measurement basis is as follows:

  1. 1.Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition. Liabilities are generally recorded at the amount of proceeds received in exchange for the obligation.
  2. 2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

 

  1. 3. Realizable(Settlement) Value: As per realizable value, assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the assets in an orderly disposal. Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash equivalents paid to satisfy the liabilities in the normal course of business.
  2. 4. Present Value: Under present value convention, assets are carried at present value of future net cash flows generated by the concerned assets in the normal course of business. Liabilities under this convention are carried at present value of future net cash flows that are expected to be required to settle the liability in the normal course of business.

 

(b)

Particulars

Financial Capital Maintenance at

Historical Cost    (Rs)

 

Closing

equity(Rs30 x 60,000 units)

 

18,00,000 represented by cash

 

Opening equity

 

60,000 units x Rs20 = 12,00,000

 

Permissible drawings to keep Capital intact

 

6,00,000 (18,00,000 –12,00,000)

 

 

Thus, in order to maintain the capital intact, Mohan can withdraw Rs6,00,000 as the maximum amount.

 

 

 

 

 

 

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