Chapter 10&11

Question 1

What is the purpose of a
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 shows the profit or loss for the year.
• 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 2

What are the 2 main parts of a statement of comprehensive income ?

Answer 2

1. Statement of profit or loss (trading and
   other realised transactions)
2. Other comprehensive income
   (unrealised gains)
   – The sum of which gives total
   comprehensive income

Question 3

What is the purpose of trading accounts

Answer 3

• The first stage in determining the profit for the year involves calculating the gross profit.
• It is usually carried out in the statement of profit or loss. This part of the statement of profit or loss is sometimes presented as a separate account referred to as the trading account.

Question 4

What is a trading account and its purpose?

Answer 4

• The trading account is an account in the ledger and is thus a part of the double entry system.
• 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 5

For Inventory at the start of the period how is this shown in a debit/ credit account?

Answer 5

Debit - Trading account
Credit - Inventory account

Question 6

For Inventory at the end of the period how is this shown in a debit/ credit account?

Answer 6

Debit - Inventory account
Credit -Trading account

Question 7

What account is the statement of profit or loss in? and what is its purpose?

Answer 7

• The statement of profit or loss is also an account in the ledger and is thus a part of the double entry system.
• It is used to ascertain the net profit (or loss) for the period, and is prepared by transferring the balances on all the income and expense accounts in the ledger to the statement of profit or loss account.

Question 8

What is the structure of trading
accounts?

Answer 8

1. Revenue
   - cost of sales/goods sold
2. Inventory at start of year
   + purchases
3. Cost of goods available for sale
   - Inventory at end of year
4. Gross profit

Question 9

What is the structure of statements of profit or loss?

Answer 9

1. Revenue
   - cost of sales/goods sold
2. Gross profit
   - other costs and expenses
3. Selling and distribution costs
4. Administrative expenses
5. Interest payable on loans
6. Profit/(Loss) for the period

Question 10

What is the purpose of statements of
financial position?

Answer 10

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

In a statements of financial position what are non-current assets?

Answer 11

-Items not specifically bought for resale
- Items to be used in the production or distribution of those goods normally sold by the business.
- Durable items that usually last for several years
- There must be an intention to keep them for more than one accounting year

Question 12

In a statements of financial position what are current assets?

Answer 12

• Items that are normally kept by a business for less than one accounting year and/or support the operating activities of the entity.
• The composition of each type of current asset is usually continually changing.

Question 13

Examples of non-current assets?

Answer 13

• Land and buildings
• plant and machinery
• motor vehicles
• office equipment
• furniture
  -fixtures and fittings.

Question 14

Examples of current assets?

Answer 14

• Inventories
• trade receivables
• short term investments
• bank account and cash

Question 15

In a statements of financial position what are current liabilities?

Answer 15

• 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 16

In a statements of financial position what are non-current liabilities?

Answer 16

-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 17

In a statements of financial position what are capital (Equity)?

Answer 17

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