Chapter 12 - Preparation Of Financial Statements

Question 1

Format of statement of profit or loss

Answer 1

Sales revenue

Less cost of sales

Equals gross profit

Less expenses

Equals profit for the year (also known as net profit)

Question 2

Format for Statement of financial position

Answer 2

Non current assets

Plus net current assets (current assets - current liabilities)

Minus non current liabilities

Equals net assets

Equals capital/equity

Question 3

Costs of sales

Answer 3

This represents the cost to the business of the goods which have been sold in this financial year. Cost of sales is:

Opening inventory

Plus purchases

Minus closing inventory

Equals cost of sales

Question 4

Assets and the order of liquidity

Answer 4

It is important to list the non current assets and current assets in an increasing order of liquidity. Those that are furthest away from cash are listed first.

Question 5

Adjustments to financial statements

Answer 5

The main adjustments to financial statements are for:

Closing inventory

Accruals and prepayments of expenses and income

Depreciation of non current assets

Irrecoverable debts written off

Allowance for doubtful receivables

Question 6

Further items in financial statements

Answer 6

Carriage in - expense to a buyer of the carriage costs. This is added to the cost of purchases

Carriage out - the seller pays the expense of the carriage charge. In the statement of profit or loss this is show as an expense.

Sales returns - sales returns is where a credit customer returns goods to the business. The amount of sales returns is deducted from the sales revenue figure in the profit or loss

Purchase returns - a business returns goods to the business. The amount of purchases returns is deducted from the figure for purchases in the profit or loss.

Discounts received - shown in the profit or loss as income received

Discounts allowed - shown in the profit or loss as an expense

Question 7

Service sector businesses

Answer 7

The business is supplying services instead of trading goods so there is not gross profit calculation.

The statement of profit or loss contains the income from business activity and the expenses are deducted to give the profit or loss for the year