Introduction Financial Statements:

The term financial statement refers to the statements which the accountants prepare at the end of a period of time for a business enterprises. They are the: (1) Balance sheet. (2) Income Statement i.e. Profit and Loss Account. Financial statement are the collection of financial results based on the currents facts and figures. For financial planning and control financial statements have great importance. The following are the most common forms of financial statements: (1) (2) Manufacturing, Trading and Profit and Loss Account. Balance Sheets.

Vertical Format:
The vertical format of financial statement is most suitable fo financial analysis especially in case of ratio analsis, comparative analysis, common size analysis and trend analysis. It serves the purpose of other users such as potential investors or lenders, also. A Balance sheet is divided into 5 windows. The liabilities side consists of: (1) Owned Funds: Owned funds belongs to the proprietors. It mainly consists of share capital+ ReservesFictitious Assets. It indicates the owners stake in the business. (2) Borrowed Funds: Borrowed funds consists of long term borrowing both secured as well as unsecured outside sources. The repayment period of such funds are bryond one year from the date of the balance sheet. It consist of Debenture, Term loans from The assets side consists of: (1) Fixed Assets: Fixed Assets are also termed as long term assets and they act as a major sources of revenue to the business. It

consists of Land and Building, Plant and Machinery, Furniture and Fixture, Vehicle and also includes intangible assets such as goodwill patent, copyright, etc. (2) Investments: Long term investments are investments whose maturity period is beyond one year from the date of the balancesheet. In case of the long term investment the intention of the investors is to retain such securities for a longer period of time. Such investments may even be trade investments. Trade investments means an investments by a company in shares and /or debentures of another company for purpose of promoting the business or trade interests of the investing company. Long term investments may even be in government securities. (3) Working Capital: Working capital is the excess of current assets over current liabilities i.e. current assets less current liabilities. Investments in working capital gets converted into cash within a period less than a year. Current assetscan be further split-up into quick assets and non quick assets likewise current liabilities can be split-up into quick liabiities and non-quick liabilities.

PROFORMA OF VERTICAL BALANCE SHEET (DETAILED ITEMS)

(I) SOURCES OF FUNDS: (1) (a) Owners Funds: Capital: (i) Equity Share Capital (ii) Preference Share Capital Amount Subscribed/Called Up Less:Unpaid Calls Add: Forefeited Shares

(b)

Reseves and Surplus: (I) Capital Reseves (II) Capital Redemption Reserve (III) Securities Premium (IV) General Resreve (V) Profit and Loss A/c Cr Balance (Profit) (VI) Sinking Funds/ other Funds Less: Eamarked Investments. (c) Losses and Fictitious Assets: (i) Profit and Loss A/c Dr Balance (loss) (ii) Miscellaneous Expenditure Not Written Off: (1) Preliminary Expenses (2) Share Issue Expenses (3) Discount Issue Of Shares or Debenture (4) Deferred Revenue Expenditure (d) Net Reserves and Surplus (b-c) Own Funds Or Net Worth

(capital+reserves and surplus)-(Losses and Fictitious Assets) (2) Loan Funds: (a) Long Term Loans: (i) Debenture or Bonds (ii) Loans from Banks (Taken) (iii) Loans from Financial Institution (Taken) (iv) Public Deposists (b) Other Loans (i) Owned Funds (Long Term Loans+Other Loans) Total Funds Available Capital Employed (Own Funds+Ownd funds) (1+2) (II) APPLICATION OF FUNDS (1) Net Fixed Assets (a) Intangible (i) Goodwill (ii) Patents, Trademarks and Desings and copy Rights (b) Tangible (i) Land and Building (ii) Leasehold (iii) Plant and Machinery (iv) Furniture and Fixtures (v) Vehicle (A) Cost (B) Less:Depreciation (C) Net Tangible Assets

Total Fixed Assets (a+b) (Net Tangible Assets+Intangible Assets) (2) Long Term Investments: (i) Investment in Government Securities, Share, Debenture etc. Less: Sinking Fund/other Funds (ii) Investments in innovable Properties (iii) Investments in Capital of Partnership Firm (3) Working Capital: Quick Assets: (a) Cash and Bank (b) Dedtors (Net) (c) Bills Receivable (d) Loans and Advances (e) Accrued Income (f) Loose Tools (g) Short term or Marketable Investments Total quick or Liquid Assets(atog) (h) Inventories/Stock (i) Prepayments (Prepaid Expenses, Advances Tax, Advance Payment) (I) Current Assets (a to i) Less: Quick Liabilities (a) Creditors (b) Bills payable (c) Advance Received (d) Outstanding Expenses

(e) (f) (g) (h) (i)

Accrued Interest Provision For Tax Short Term Loan (taken) Unclaimed Dividend Proposed Dividend Total Quick Liabilities Add: (a to h) (j) Bank Overdraft (k) Income Received in advance (II) Current Liabilities (a to j) Net Current or Working Capital (A-B) Total Assets or Total fund Employed [Total fixed Assets +Long Term Investment+working capital] {1+2+3}

PROFIT & LOSS ACCOUNT/VERTICAL INCOME STATEMENT

The companies act has prescribed a standard form of balance sheet but none for the profit and loss account. However, the companies act does require that the information provided to be adequate to reflect a true and fair picture of the operation of the company for the accounting period.the companies act has also specified that the pofit and loss account must show specific information as required by bschedule IV.

The profit and loss account ,like balance sheet ,may be presented in the account form or the report form . typically, companies employ the report form.the report form statement may be a single-step statement or a multiple step statement. In a singlestep statement ,all the revenue items are recorded first ,then the expense items are shown it and finally the net profit is given.under table present a bsingle step profit and loss account for horizon limited for the year ending on march 31, 20X1

PROFORMA OF VERTICAL INCOME STATEMENT

particulars Gross sales Cash Credit sale Less: sales return Net sales (1-2) Less: cost of good sold a)opening stock add: b)purchases c)direct expenses d)direct wages e)depreciation on machinery f)depreciation on factory building less: g)closing stock gross profit xx xx xx xx xx xx xx xxx xxx Rs. Rs. xx xx Rs.

Xxx xxx xxx

Less : operating expense: Administrative exp Selling & distribution Finance expense Operating net profit Add: non operating income Less: non operating expense Net profit before tax Less: taxation Net profit after tax Add:opening balance of profit Less: appropriation (Profit transfer to B\S) TOTAL xx xx xx

xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

xxx

Distinguish between horizontal financial statement & vertical financial statement

Horizontal financial statement:
1.Horizontal financial statement are also termed as financial statement presented in a T form. 2.Traditionally all the financial statement were presented in the horizontal form

3.Horizontal financial statements follows the ledger account style of presentation of the accounting information with the left hand side indicating the expenses in profit and loss account and liabilities in a balance sheet and in the right hand side-is indicated the income in a profit and loss account and asset in the balance sheet. 4.In horizontal presentation of accountsmanufacturing account, trading account, profit and loss appropriation account are prepared alongwith the balance sheet.

5.Accounting information presented in a conventional horizontal form is very difficult for inter-firm and intra-firm analysis purpose. 6.Traditionally 2 to 3 decades back accounting information was presented in a horizontal form but with the passage of time this style has lost its importance.

7.Horizontal financial statement are very difficult to understand as well as to prepare it.

Vertical financial statement :

1.Vertical financial statement are presented in a vertical form top to down style 2.Vertical presentation of financial statement have been in existence seen past 2 to 3 a. Years 3.In a vertical form of presenting the accounting information it is in a statement form in the income statement sales is indicated at the top

and less all expenses the bottom line is the profit/loss and in a vertical balance sheet source of fund is indicated at the top and application of fund follows it 4.In vertical balance sheet of accounts there is only the income statement and balance sheet that is prepared

5.Vertical financial statement helps in easy inter firm intra firm analysis 6.Vertical financial statement is very popular in the present days and all company present report uses this style only for reporting its annual accounts

7.Vertical financial statement is very easy even for a layman to understand it

Examples:
Reserves and surplus Capital reserves Capital redemption reserves Share premium General reserves Foreign project reserves Sinking fund reserves Profit and loss A/C (credit balance)

Fictitious assets Preliminary expenses Share issue expenses Debenture issue expenses Discount on issue of shares Miscellaneous expenditure Profit and loss A/C (debit balance)

Loan funds Debentures Loan from bank Secured loan Unsecured loan Long term loan bonds

Fixed assets goodwill patent trademark copyright land building capital work in progress (wip) Machinery, etc.

Current assets Debtors Bills receivable Cash & bank Prepaid expenses Stock Income receivable

Current assets Creditors Bills payable Bank overdraft Outstanding expenses Income received taxation

Illustration Q I
LIABILITIES AMOUNT (A) Equity share capital Preference share capital General reserves P & L A/C 8% Debentures Bank loan Sundry creditors Provision for taxation Total 60000 Fixed Assets ASSETS AMOUNT (A) 50000

20000 10000 6000 10000 10000 3200 3000 1,22,200

Less: depreciation

6700 43,300

Investment Stock Debtors Bank Cash Total

49000 12000 10900 5000 2000 1,22,200

In the books of A ltd Vertical Balance Sheet as on 31st MARCH

Particulars I a) Amount Amount

2009
Amount

Sources of Funds
Shareholders funds Equity share capital Preference share capital Reserves & surplus General reserves Profit & loss A/C Loan fund Debentures Bank loan TOTAL 60000 20000 10000 6000 80000

16000 10000 10000

96000

b)

20000 1,16,000

II a) b) c)

Application of Funds
Fixed assets (-) depreciation Investment Working capital Current assets Stock Debtors Bank Cash (-) Current liabilities creditors Provision for taxation TOTAL 50000 6700 43300 49000

12000 10900 5000 2000 3200 3000

29900

6200

23700 1,16,000