Accounting; Preparing Financial statements for Sole Traders

Question 1

What is the statement of profit or loss?

Answer 1

The statement of profit or loss provides a summary of the results of a business’s trading activities during a given accounting year.

It basically shows the profit or loss for the year.

Question 2

What is the purpose of a statement profit or loss ?

SPL

Answer 2

The purpose of a statement of profit or loss is to enable users, such as the owner(s), to evaluate the financial performance of a business.

Question 3

What was the SPL previously known as

Answer 3

Income statement

Question 4

What is the other part of SPL known as ?

Answer 4

Comprehensive income ie unrealised gains

Question 5

Therefore what two parts make up the total comprehensive income ?

Answer 5

Income statement and Comprehensive income

Question 6

State the name of the first part the profit and loss account ?

Answer 6

Trading account

Question 7

What happens in the trading account?

Answer 7

Calculating the gross profit
It is used to ascertain the gross profit for the period, and is prepared by transferring the balances on the sales, purchases and returns accounts to the trading account.

Question 8

State the two formats in which the preparation of final financial statements; the trading account can be done in ?

Answer 8

1. Account form in the ledger

2. Vertical form for presentation to the owner(s) of a business

Question 9

What is the statements of financial position

Answer 9

The statement of financial position is a list of the assets, liabilities and capital of a business at the end of a given accounting year.

Question 10

Define the purpose of statements of financial position ?

Answer 10

It provides information about the resources and debts of the reporting entity. This enables users to evaluate its financial position, in particular whether the business is likely to be unable to pay its debts.

Question 11

What is the statement of financial position aka as?

Answer 11

Balance sheet

Question 12

Describe the major components looked at within the statement of financial position?

Answer 12

Assets: non-current/current
Liabilities: current/non-current
Owner’s (Stockholders’) Equity/ Capital

Question 13

Define Assets

Answer 13

Assets are things that the company owns.

Question 14

Define Non-current assets

Answer 14

Noncurrent assets are a company’s long-term investments for which the full value will not be realized within the accounting year

Question 15

Define Current assets

Answer 15

A current asset is a company’s cash and its other assets that are expected to be converted to cash within one year of the date appearing in the heading of the company’s balance sheet.

Question 16

Give examples of Non-current assets

Answer 16

Land and buildings; plant and machinery; motor vehicles; office equipment; furniture, fixtures and fittings.

Question 17

Give examples of Current assets

Answer 17

Inventories, trade receivables, short term investments, money in a bank cheque account and in cash.

Question 18

What are Current liabilities ?

Answer 18

Debts owed by a business that are payable within one year (often considerably less) of the reporting period date; e.g. trade payables and bank overdrafts.

Question 19

What are Non-current liabilities

Answer 19

These are debts owed by a business that are not due until after one year (often much longer) of the reporting period date; e.g. loans and mortgages.

Question 20

Define Owner’s (Stockholders’) Equity/ Capital

Answer 20

This refers to the amount of money invested in the business by the owner(s).

Question 21

Describe the structure of statements of financial position : vertical

Answer 21

Non-current assets
\+
Current assets
=
Total assets
=
Equity and Reserves 
\+
Non-current liabilities
\+
Current liabilities
=
Total equity and liabilities