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Read MoreExplain the nature of the financial stat | Class 12 Accountancy - Company Accounts and Analysis of Financial Statements Chapter Financial Statements of a Company, Financial Statements of a Company NCERT Solutions
Q1.
Explain the nature of the financial statements.
Financial statements are the summarised reports of recorded-facts and are
prepared following the accounting concepts, conventions and requirements of
Law. The American Institute of Certified Public Accountants states the nature of financial statements as, “the statements prepared for the purpose of presenting a periodical review of report on progress by the management and deal with the
status of investment in the business and the results achieved during the period
under review. The following points explain the nature of financial statements.
(i) Recorded Facts :Financial statements are prepared on the basis of facts in the form of cost data recorded in accounting books. The original cost or historical cost is the basis of recording transactions. The figures of various accounts such as cash in hand, cash at bank, bills receivable, sundry debtors, fixed assets, etc are taken as per the figures recorded in the accounting books. The assets purchased at different times and at different prices are put together and shown at costs. As these are not based on market prices, the financial statements do not show current financial condition of the concern.
(ii) Accounting Conventions: Certain accounting conventions are followed while
preparing financial statements. The convention of valuing inventory at cost or
market price, whichever is lower, is followed. The valuing of assets at cost less
depreciation principle for balance sheet purposes is followed. • The convention of materiality is followed in dealing with small items like penci’s, pens, postage
stamps, etc. In this way the use of accounting conventions makes financial statements comparable, simple and realistic.
(iii) Based on Concepts: Financial statements are prepared on certain basic
assumptions (prerequisites) known as Concepts such as going concern concept,
money measurement concept, realisation concept, etc. Going concern concept
assumes that the enterprise is treated as a going concern and exists for a longer
period of time. So the assets are shown on historical cost basis. Money measurement concept assumes that the value of money will remain the same in
different periods. While, preparing profit and loss account the revenue is included in the sales of the year in which the sale was undertaken even though the sale price may be received over a number of years. The assumption is known as realisation concept.
(iv) Personal Judgements: Under more than one circumstance, facts and figures
presented through financial statements are based on personal opinion, estimates and judgements. The depreciation is provided taking into consideration the useful economic life of fixed assets. Provisions for doubtful debts are made on estimates and personal judgments. In valuing inventory, cost or market value, whichever is less is being followed.
Study Tips for Answering NCERT Questions:
NCERT questions are designed to test your understanding of the concepts and theories discussed in the chapter. Here are some tips to help you answer NCERT questions effectively:
- Read the question carefully and focus on the core concept being asked.
- Reference examples and data from the chapter when answering questions about Financial Statements of a Company.
- Review previous year question papers to get an idea of how such questions may be framed in exams.
- Practice answering questions within the time limit to improve your speed and accuracy.
- Discuss your answers with your teachers or peers to get feedback and improve your understanding.
Important Questions & Answers
Why is this answer important for exams?
This question is important because it tests key concepts from the NCERT syllabus and is frequently asked in CBSE exams.
Which NCERT concept is used in this question?
This question is based on core NCERT concepts explained in the chapter and should be revised thoroughly before exams.
What common mistakes should be avoided in this question?
Students often lose marks by skipping steps, writing incomplete explanations, or misunderstanding keywords used in the question.
What is the correct answer to: Explain the nature of the financial statements.?
Financial statements are the summarised reports of recorded-facts and are
prepared following the accounting concepts, conventions and requirements of
Law. The American Institute of Certified Public Accountants states t...
How do you solve Explain the nature of the financial statements. step by step?
Step-by-step explanation:
• Financial statements are the summarised reports of recorded-facts and are
• prepared following the accounting concepts, conventions and requirements of
• Law
• The American Institute of Certified Public Accountants states the nature of financial statements as, “the statements prepared for the purpose of presenting a periodical review of report on progress by the management and deal with the
• status of investment in the business and the results achieved during the period
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