Financial Statements

Question 1

What is the purpose of the income statement?

Answer 1

The purpose of the income statement is to determine the final result of the business. The final result refers to whether the business made a profit or loss

Question 2

What is the purpose of the balance sheet?

Answer 2

The purpose of the balance sheet is to determine the final position of the business. The final position refers to its assets in relation to its equity and liabilities.

Question 3

What is the format of the income statement?

Answer 3

-Sales (actually net sales comprising of sales less debtors allowances but we write it as sales)
- Cost of sales ( )
- Gross profit. This is sales - cost of sales
-Other operating income
=Rent income
=Discount received
=Bad debts recovered
=Provisions for bad debts adjustment
-Gross operating income (Gross profit + other operating income)
- Operating expenses ( )
=
=
=
-Operating profit (Gross operating income - operating income
-Interest income(Interest on current account, interest on fixed deposit)
-Profit before interest expense/Finance cost(sum of the two above it)
-Interest expense (Interest on loan, interest on mortgage bond, interest on overdraft)
( )
- Net profit

Question 4

What is the format of a balance sheet?

Answer 4

• Assets
• Non-Current Assets
• Fixed/Tangible assets (carrying value)
• Financial assets(fixed deposit)
• Current Assets
• Inventories (Trading stock + consumable stores on hand)
• Trade and other receivables (Debtors control, accrued income, prepaid expense)
• Cash and cash equivalents(Bank(debit balance), petty cash, cash float)
• TOTAL ASSETS
• Equity and Liabilities
• Owner’s equity
• Capital
• Current accounts
• Non-current liabilities
• Loan
• Current Liabilities
• Trade and other receivables(Creditors control, Income received in advance, Accrued expense)
• Bank overdraft (credit balance)
• Current portion of loan

-TOTAL EQUITY AND LIABILITIES