Page 30 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 2: Understanding Corporate Financial Statements

Financial statements also provide useful information to the shareholders of a company Notes
concerning the company's financial position on a particular day, its performance and

growth, its progress or regress, its future, etc.
Financial statements record only those facts, which are possible to be expressed in fi nancial
terms.
Non-monetary events, howsoever important they may be, are not recorded. Therefore,
financial statements do not provide all the information about the fi rm.

2.6 Keywords

Balance Sheet: The balance sheet provides an insight into the financial status of a company at a
particular time.
Marshalling of Assets and Liabilities: Order of presenting the assets and liabilities in the balance
sheet is called marshalling of assets and liabilities.
Retained Earnings Statement: A retained earnings statement explains the changes in a company’s
retained earnings over the reporting period.
Trading Account: This account is prepared to determine the amount of gross profit or gross loss

on sales.
2.7 Review Questions

1. Analyse why U.S. airline companies use a “by nature” income statement format.

2. What do you mean by Trading Account? Give the proforma of Trading Account and
explain why it is prepared.
3. Calculate the cost of goods sold from the information given below:

Amount (`)
Opening stock 20,000
Closing stock 18,000
Purchases 85,000
Carriage on purchases 2,300
Carriage on sales 3,000
Offi ce Rent 5,800
Sales 1,40,000
Wages paid to keep the goods in the godown 3,000
Purchases Returns 5,000

4. How would a change in depreciation expense flow through the fi nancial statements?
5. What could a company do with excess cash on the balance sheet?
6. If you want to assess the health of a company and you could choose between looking at
3 years of income statements or 3 years of balance sheets, which would you choose and
why?

7. Which of the three financial reporting statements (balance sheet, income statement,
statement of cash flows) is most important and why do you believe this is so?

8. Analyse the interrelationships between the four fi nancial statements.
9. What financial statements are non-profits required to issue?

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