Financial Statements of a Company Class 12: Schedule III Formats and Solved Questions

What Financial Statements of a Company is about

Weightage: This chapter is in Part B Option I: Financial Statement Analysis, which a student takes instead of Option II (Computerised Accounting). The syllabus unit Analysis of Financial Statements carries 12 of the 80 theory marks and covers this chapter together with the chapters Analysis of Financial Statements and Accounting Ratios.Source: CBSE Accountancy (055) syllabus 2026-27, Part B Option I: Financial Statement Analysis

In real board papers: asked in 2 of the 2 board papers we hold (2026 to 2026), on average 3 marks per paper. See the questions

Key concepts

Meaning and nature of financial statements

NCERT section 3.1, 3.2

Financial statements are the organised summary of a company's accounting records, prepared at the end of an accounting period, that show its financial position (Balance Sheet) and financial performance (Statement of Profit and Loss), with notes.

Their nature comes from four ingredients:

• Recorded facts: figures come from the books at historical cost, not market values.
• Accounting conventions: such as valuing inventory at the lower of cost or market price, materiality and conservatism.
• Postulates: assumptions like going concern, money measurement and realisation.
• Personal judgements: estimates such as useful life for depreciation or the provision for doubtful debts.

Worked example

Suppose a company bought land for ₹20 lakh in 2005 that is worth ₹1.5 crore today. At what value does it appear in the balance sheet and which feature of financial statements explains this? [1 mark]

Try it first, then show the solutionSolution

1. Financial statements use recorded (historical) cost.
2. Going concern supports showing assets at cost rather than at sale value.

Answer: At ₹20 lakh (cost), because financial statements are based on recorded facts.

Objectives, uses and importance

NCERT section 3.3, 3.5

The main objective is to help users make decisions. Specific objectives: information about economic resources and obligations, about earning capacity, about cash flows, about the effectiveness of management in using resources, and about activities that affect society.

Users and uses: shareholders (return and safety of investment), management (planning and control), lenders and creditors (ability to repay), employees (stability, bonus), government (taxes, policy), investors and the public. Financial statements are also a report on stewardship: how well the management has used shareholders' funds.

Worked example

Suppose a bank is deciding whether to give a five-year loan to a company. What would it look for in the financial statements? [3 marks]

Try it first, then show the solutionSolution

1. Earning capacity: profit trends in the Statement of Profit and Loss.
2. Existing obligations: long-term borrowings in the Balance Sheet.
3. Ability to pay interest: finance costs relative to profit; and assets available as security.

Answer: Profitability, existing debt and the company's ability to service interest and repay the loan.

Balance Sheet: Schedule III format

NCERT section 3.4

The Balance Sheet is in vertical form with a Note No. column and figures for the current and previous year.

I. Equity and Liabilities: (1) Shareholders' funds: share capital; reserves and surplus; money received against share warrants. (2) Share application money pending allotment. (3) Non-current liabilities: long-term borrowings; deferred tax liabilities (net); other long-term liabilities; long-term provisions. (4) Current liabilities: short-term borrowings; trade payables; other current liabilities; short-term provisions.

II. Assets: (1) Non-current assets: fixed assets (tangible assets, intangible assets, capital work-in-progress, intangible assets under development); non-current investments; deferred tax assets (net); long-term loans and advances; other non-current assets. (2) Current assets: current investments; inventories; trade receivables; cash and cash equivalents; short-term loans and advances; other current assets.

NCERT uses "tangible assets"; the amended Schedule III calls them "property, plant and equipment", and you may see either term.

Worked example

Suppose a company has a 10-year bank loan of ₹5,00,000 of which ₹1,00,000 is repayable within the next 12 months. How is it shown? [1 mark]

Try it first, then show the solutionSolution

1. ₹4,00,000 is due after 12 months: long-term borrowings.
2. ₹1,00,000 due within 12 months: current maturities of long-term debt under other current liabilities.

Answer: Long-term borrowings ₹4,00,000; other current liabilities ₹1,00,000.

Current and non-current classification

NCERT section 3.4 (current/non-current distinction)

An item is current if (any one): it is used in the normal operating cycle; it is expected to be realised or settled within 12 months of the reporting date; it is held for trading; or it is cash or a cash equivalent (or, for a liability, the company cannot defer settlement beyond 12 months). Everything else is non-current.

Useful fixed rules: inventories are always current; fixed assets are always non-current (even with a short life); deferred tax is always non-current; loans repayable on demand (bank overdraft, cash credit) are short-term borrowings.

Worked example

Classify: (i) bank overdraft, (ii) loose tools, (iii) capital work-in-progress, (iv) calls in advance. [2 marks]

Try it first, then show the solutionSolution

1. (i) Current liabilities → short-term borrowings.
2. (ii) Current assets → inventories.
3. (iii) Non-current assets → fixed assets.
4. (iv) Current liabilities → other current liabilities.

Answer: As listed above.

Notes to accounts: share capital and reserves and surplus

NCERT section 3.4

Share capital note: authorised, issued and subscribed capital (fully paid and not fully paid), calls in arrears deducted, share forfeiture added.

Reserves and surplus note: capital reserve, securities premium, general reserve, and surplus (balance in the Statement of Profit and Loss). A debit balance of the Statement of Profit and Loss is shown as a negative figure under Reserves and Surplus (even if this makes the total negative), not as an asset.

Preliminary expenses and discount/loss on issue of debentures are written off in the year incurred, from securities premium first and then from the Statement of Profit and Loss, so they do not remain in the balance sheet.

Worked example

Suppose a company has a general reserve of ₹2,00,000, securities premium of ₹50,000 and a debit balance of ₹70,000 in the Statement of Profit and Loss. Show reserves and surplus. [2 marks]

Try it first, then show the solutionSolution

1. General reserve 2,00,000 + securities premium 50,000 = 2,50,000.
2. Less surplus (debit balance) 70,000.

Answer: Reserves and surplus ₹1,80,000, with the debit balance shown as a deduction.

Statement of Profit and Loss: Schedule III format

NCERT section 3.4.2

I. Revenue from operations; II. Other income (interest, dividends, rent and gains not from the main business); III. Total income.

IV. Expenses: (a) cost of materials consumed; (b) purchases of stock-in-trade; (c) changes in inventories of finished goods, work-in-progress and stock-in-trade; (d) employee benefits expense; (e) finance costs (interest, including debenture interest, and other borrowing costs); depreciation and amortisation expense; other expenses.

V. Profit before tax (III − IV); VI. Tax expense; VII. Profit for the period. Earnings per share follows. (Exceptional items, extraordinary items and discontinued operations are excluded from the syllabus.)

Worked example

Under which heads of the Statement of Profit and Loss are these shown: (i) interest on debentures, (ii) salaries and wages, (iii) dividend received on investments, (iv) amortisation of patents? [2 marks]

Try it first, then show the solutionSolution

1. (i) Finance costs.
2. (ii) Employee benefits expense.
3. (iii) Other income.
4. (iv) Depreciation and amortisation expense.

Answer: As listed above.

Limitations of financial statements

NCERT section 3.6

• Historical costs: assets are shown at cost, not at current value, so the position may be out of date.
• Ignore price-level changes: rupees of different years are added as if equal.
• Leave out qualitative information: skills of staff, reputation, labour relations do not appear.
• Interim reports: the true result is known only when the business closes; annual figures involve estimates.
• Personal bias and estimates: depreciation methods, inventory valuation and provisions vary between firms.
• Window dressing: figures can be presented to look better than reality.

Worked example

Suppose a software company's biggest strength is its team of skilled engineers. Why does this not appear in its balance sheet? [1 mark]

Try it first, then show the solutionSolution

1. Financial statements record only items measurable in money from transactions.
2. Staff skills are qualitative and not bought in a transaction.

Answer: Because financial statements ignore qualitative factors, one of their limitations.

Financial Statements of a Company in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Balance Sheet Format under Schedule III
• Current and Non-current Classification
• Statement of Profit and Loss under Schedule III

Financial Statements of a Company: key facts

Current item test

Operating cycle, or within 12 months, or held for trading, or cash and cash equivalents

Balance sheet equation (Schedule III)

Shareholders' funds + non-current liabilities + current liabilities = non-current assets + current assets

Profit before tax

Revenue from operations + other income − total expenses

Profit for the period

Profit before tax − tax expense

Tangible fixed assets (net)

Gross block − accumulated depreciation

Long-term loan split

1. 1.Due after 12 months
2. 2.long-term borrowings; due within 12 months
3. 3.other current liabilities (current maturities)

How the board asks Financial Statements of a Company

The question patterns to expect, and the method that works for each.

Tricks to remember Financial Statements of a Company

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Four rules that never change

  Inventories: current. Fixed assets: non-current. Deferred tax: non-current. Overdraft: short-term borrowing.

  Use it when: Quick classification.

• FCPJ for nature

  Facts, Conventions, Postulates, Judgements.

  Use it when: Nature of financial statements.

• SR-NC-C on the left

  Shareholders' funds, Non-current liabilities, Current liabilities.

  Use it when: Order of the liabilities side.

• Seven expense heads

  Materials, Purchases, Changes, Employees, Finance, Depreciation, Others.

  Use it when: Statement of Profit and Loss.

Financial Statements of a Company: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In the board paper this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Financial Statements of a Company

The slips examiners see most often, and what to write instead.

• ✗Mistake: Showing a debit balance of Profit and Loss as an asset

  Older formats listed it among fictitious assets.

  ✓Do this: Show it as a negative figure under Reserves and Surplus.

  Usually costs: 1 mark.

• ✗Mistake: Putting bank overdraft under trade payables or other current liabilities

  It is current, but the sub-head matters.

  ✓Do this: Bank overdraft and cash credit are short-term borrowings.

  Usually costs: ½-1 mark.

• ✗Mistake: Classifying loose tools as tangible fixed assets

  They are tools.

  ✓Do this: Schedule III places loose tools under inventories.

  Usually costs: ½-1 mark.

• ✗Mistake: Writing only the major head

  Thinking the head is enough.

  ✓Do this: Questions ask for major head and sub-head; give both.

  Usually costs: Half the marks per item.

• ✗Mistake: Including exceptional or extraordinary items

  Copying the full NCERT format.

  ✓Do this: They are excluded from the 2026-27 syllabus; use the format up to profit for the period.

  Usually costs: Time and possible errors.

NCERT exercise guide: Financial Statements of a Company

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Financial Statements of a Company: previous year questions

• Asked in 2 of the 2 board papers we hold (2026 to 2026), on average 3 marks per paper; 2 questions in all, counting OR alternatives. In 4 of 4 sample papers.

Counted from the real papers on our previous year papers page, not estimated. Average marks are over every board paper we hold, with an OR pair counted once. Chapter tags are ours.

Solved board questions from Financial Statements of a Company

Real questions from recent papers. Try each one first, then open our step-by-step solution with marks per step.

Every Financial Statements of a Company question, by year

Practice questions on Financial Statements of a Company

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Which of the following is shown under "Short-term borrowings"?
   (a) Debentures
   (b) Bank overdraft
   (c) Trade payables
   (d) Outstanding expenses

   Hint

   Repayable on demand.

   Answer

   (b) Bank overdraft

2. Q2 · 1 mark · MCQBoard level

   Securities premium is shown in the Balance Sheet under:
   (a) Share capital
   (b) Reserves and surplus
   (c) Other long-term liabilities
   (d) Current liabilities

   Hint

   Shareholders' funds.

   Answer

   (b) Reserves and surplus

3. Q3 · 3 marks · Short answerBoard level

   Explain the nature of financial statements.

   Hint

   Four ingredients.

   Answer

   They are based on recorded facts (historical cost), follow accounting conventions (such as lower of cost or market for inventory), rest on postulates (going concern, money measurement, realisation) and involve personal judgements (depreciation, provisions).

4. Q4 · 3 marks · Short answerBoard level

   State three objectives of financial statements.

   Hint

   Resources, earning capacity, cash flows.

   Answer

   To give information about economic resources and obligations; about earning capacity; about cash flows (also management effectiveness and social activities).

5. Q5 · 3 marks · Short answerHarder board level

   Classify: (i) unclaimed dividend, (ii) mining rights, (iii) provision for tax, (iv) marketable securities, (v) current maturities of long-term debt, (vi) debentures.

   Hint

   Use the classification table.

   Answer

   Item	Major head	Sub-head
   Unpaid (unclaimed) dividend	Current liabilities	Other current liabilities
   Mining rights / patents / trademarks	Non-current assets	Fixed assets: intangible assets
   Provision for tax	Current liabilities	Short-term provisions
   Marketable securities	Current assets	Current investments
   Current maturities of long-term debt	Current liabilities	Other current liabilities
   Debentures (repayable after 12 months)	Non-current liabilities	Long-term borrowings

6. Q6 · 3 marks · Short answerHarder board level

   Suppose a company has equity share capital of 50,000 shares of ₹10 each fully called, with calls in arrears of ₹2 per share on 1,000 shares, and ₹6,000 in Share Forfeiture A/c. Show the share capital note.

   Hint

   Deduct arrears, add forfeiture.

   Answer

   Subscribed and fully paid: 49,000 shares × ₹10 = ₹4,90,000. Subscribed but not fully paid: 1,000 shares × ₹10 = ₹10,000 less calls in arrears ₹2,000 = ₹8,000. Add Share Forfeiture ₹6,000. Total ₹5,04,000.

7. Q7 · 3 marks · Short answerHarder board level

   Suppose a company's 10-year loan of ₹5,00,000 has ₹1,00,000 due in the next year. Show it in the Balance Sheet and Notes.

   Hint

   Split by the 12-month test.

   Answer

   Long-term borrowings (Note): bank loan ₹4,00,000. Other current liabilities (Note): current maturities of long-term debt ₹1,00,000.

8. Q8 · 1 mark · Assertion-reasonHOTS / competency

   Assertion (A): A debit balance of the Statement of Profit and Loss is shown under "Other current assets".
   Reason (R): A debit balance represents accumulated losses.
   (a) Both true and R explains A (b) Both true, R does not explain A (c) A true, R false (d) A false, R true

   Hint

   Where do losses go in Schedule III?

   Answer

   (d) A is false: it is shown as a negative figure under Reserves and Surplus. R is true.

9. Q9 · 3 marks · Short answerHOTS / competency

   Suppose an analyst says, "This company's Balance Sheet shows land at ₹10 lakh, so the land is worth ₹10 lakh." Evaluate this statement using two limitations of financial statements.

   Hint

   Historical cost and price changes.

   Answer

   The figure is historical cost, not current value; and price-level changes are ignored, so land bought years ago may now be worth much more. The statement is therefore misleading.

10. Q10 · 4 marks · Short answerHarder board level

    Prepare the Statement of Profit and Loss: revenue from operations ₹12,00,000; other income ₹20,000; purchases of stock-in-trade ₹7,00,000; increase in inventories ₹50,000; employee benefits ₹1,50,000; finance costs ₹40,000; depreciation ₹60,000; other expenses ₹1,00,000; tax 25%.

    Hint

    An increase in inventories is subtracted from expenses.

    Answer

    Total income ₹12,20,000. Expenses: 7,00,000 − 50,000 + 1,50,000 + 40,000 + 60,000 + 1,00,000 = ₹10,00,000. Profit before tax ₹2,20,000; tax ₹55,000; profit for the period ₹1,65,000.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Under which sub-head is unpaid dividend shown?Show answer

   Other current liabilities.

2. 2.Where are marketable securities shown?Show answer

   Current assets → current investments.

3. 3.Where is provision for tax shown?Show answer

   Current liabilities → short-term provisions.

4. 4.Where is capital work-in-progress shown?Show answer

   Non-current assets → fixed assets.

5. 5.Under which head is interest on debentures shown?Show answer

   Finance costs.

6. 6.Name two limitations of financial statements.Show answer

   Historical cost; ignore qualitative factors (also price changes, estimates, interim nature, window dressing).

7. 7.Which items are excluded from the Statement of Profit and Loss in the 2026-27 syllabus?Show answer

   Exceptional items, extraordinary items and discontinued operations.

8. 8.What is the 12-month test?Show answer

   An item realisable or settled within 12 months (or within the operating cycle) is current.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you explain the four ingredients of the nature of financial statements?
• ☐Can you list five objectives and five users?
• ☐Can you write the Balance Sheet format from memory?
• ☐Can you apply the current/non-current test?
• ☐Can you place bank overdraft, loose tools and calls in advance correctly?
• ☐Can you split a long-term loan into long-term and current maturities?
• ☐Can you show a debit balance of Profit and Loss correctly?
• ☐Can you prepare the Share Capital note with arrears and forfeiture?
• ☐Can you classify expenses into the seven heads?
• ☐Can you list six limitations of financial statements?

Financial Statements of a Company: frequently asked questions