Financial Statements Of A Company

Under the Companies Act, preparation of financial statements is mandatory for all registered companies. These statements include the balance sheet, profit and loss account, cash flow statement and explanatory notes. They ensure transparency, accountability and proper reporting to shareholders, creditors and regulatory authorities. Because financial statements are essential for evaluating performance and ensuring compliance, their preparation is compulsory and not optional.

Proposed dividend becomes a definite obligation once recommended by the board of directors, and therefore it is recorded under "Short-term Provisions." Contingent liabilities depend on uncertain future events such as legal disputes or guarantees. Proposed dividend does not depend on uncertainty; it is payable to shareholders unless the company withdraws the proposal before approval. As per accounting standards, proposed dividend is a provision, not a contingent liability.

Capital reserves arise from capital profits such as premium on issue of shares, profit on forfeiture of shares, profit prior to incorporation, and gains on revaluation. These profits come from non-operational activities and therefore cannot be distributed as dividends. Instead, they are transferred to the Capital Reserve for strengthening financial stability or issuing bonus shares. Revenue profits, on the other hand, go to the Profit and Loss Account. Hence, the statement is true because capital reserves are indeed created from capital profits.