Chapter 5.2: Statement of Financial Position of a Trading Business

Question 1

What does the Trading Portion of the Statement of Financial Performance show?

Answer 1

The gross profit or gross loss from buying and selling goods.

Question 2

What is the formula for calculating Gross Profit / Gross Loss?

Answer 2

Gross Profit / Gross Loss = Net Sales Revenue - Cost of Sales

Question 3

What is Net Sales Revenue?

Answer 3

Sales revenue - Sales returns

Question 4

What is gross profit?

Answer 4

Gross profit is where net sales revenue is greater than cost of sales.

Question 5

What is gross loss?

Answer 5

Gross loss is where net sales revenue is less than cost of sales.

Question 6

What does Gross Profit measure?

Answer 6

Gross Profit measures how well a trading business is able to sell its goods to create profit. The higher the gross profit of a business, the greater its ability to sell.

Question 7

What will a high Gross Profit ensure?

Answer 7

A high gross profit will ensure that the business will be able to cover its other expenses. If there is a gross loss, the business is already not able to recover its cost of sales. It can be further concluded that the business is not able to recover its other expenses as well.

Question 8

Is it usual for a business to sell its goods at a price lower than their cost? What could be some reasons?

Answer 8

It could be because the goods are close to expiry / obsolescence. Another reason could be that the business is going into liquidation.

Question 9

What does the trading portion of the Statement of Financial Performance look like?

Answer 9

Statement of Financial Performance for the period ended XXX

Sales revenue XXX

Less: Sales Returns (XX)

Net Sales Revenue XXX

Less: Cost of sales (XX)

Gross Profit XXX

Question 10

Profit and Loss Portion of the Statement of Financial Performance

What does the profit and loss portion of the Statement of Financial Performance show?

Answer 10

The overall profitability of a business. The profit that is calculated is the profit for the period. It is calculated by deducting total expenses from total income.

Question 11

What is the formula for calculating Profit / (Loss) for the period?

Answer 11

Profit / (Loss) for the period = Total Income - Total Expenses

When all the income the business earns is greater than all its expenses, the business has a profit for the period. However, if all the income is less than all the expenses, then the business suffers a loss. Loss for the financial period is shown within brackets.

Question 12

How is the loss for the financial period reflected?

Answer 12

Within brackets.

Question 13

How else can the profit for the period be calculated?

Answer 13

Profit for the period = Gross Profit + Other Income - Other Expenses

Question 14

HOM: Striving for Accuracy

To Memorise please.

Give some examples of other income (i.e. revenue receipts).

Answer 14

1. interest income
2. commission income
3. discount received
4. rental income

Question 15

HOM: Striving for Accuracy

To memorise accurately please.

Give some examples of other expenses in a trading business.

Answer 15

All expenses of the business except for cost of sales that are part of normal business operations and are known as operating expenses.

Question 16

How is cost of sales distinguished from other expenses?

Answer 16

By simply calling the latter operating expenses.

Question 17

What is another way of looking at the profit for a trading business?

Answer 17

Profit for the period = (Sales Revenue - Sales Returns) - Cost of Sales + Other Income - Other Expenses = Gross Profit + Other Income - Other Expenses

Question 18

What does profitability measure?

Answer 18

Profitability measures the ability of a business to continue its operations. The higher the profit of a business, the greater its ability to operate in the long term. A business that continues to have losses will have to close down.