Reporting Financial Position And Performance 1

Question 1

What is the purpose of a trial balance?

Answer 1

To summarize the balances in a business’s books of account after bookkeeping for the period has been completed.

A trial balance lists balances in two columns that add up to the same total.

Question 2

What are the two columns in a trial balance based on?

Answer 2

The accounting equation, with debit (Dr) items on the left and credit (Cr) items on the right.

A mnemonic for remembering this is ‘Drive on the left, Crash on the right’.

Question 3

What adjustments are required before preparing financial statements?

Answer 3

• Accruals and prepayments
• Closing inventory
• Cost of sales
• Depreciation
• Bad debts

These adjustments ensure accurate financial reporting.

Question 4

What are accruals?

Answer 4

Outstanding expenses that need to be recorded for goods or services received but not yet invoiced.

Accruals increase the expense figure in the income statement.

Question 5

How do prepayments affect the income statement?

Answer 5

They reduce the expense figure for the current year and are recorded as a current asset in the statement of financial position.

Prepayments are expenses paid in advance for future periods.

Question 6

What is closing inventory?

Answer 6

The value of inventory at the end of the accounting period, used in the cost of sales calculation.

Closing inventory is a current asset in the statement of financial position.

Question 7

Define cost of sales.

Answer 7

The cost of goods sold during a period, calculated by adding opening inventories to purchases and deducting closing inventories.

This calculation ensures that only costs associated with sold goods are recognized.

Question 8

When preparing an income statement, what is deducted from gross profit to calculate operating profit?

Answer 8

All remaining expenses, except interest paid.

Operating profit is calculated before interest and taxes are deducted.

Question 9

What is the first statement usually prepared in financial statement preparation?

Answer 9

The income statement.

The profit figure from the income statement is needed for the statement of financial position.

Question 10

What is the matching convention in accounting?

Answer 10

Expenses should be matched with the revenues they help to generate, regardless of when cash is paid or received.

This principle ensures accurate profit reporting for a period.

Question 11

True or False: Closing inventory from one year becomes the opening inventory for the next year.

Answer 11

True.

This continuity is essential for accurate cost of sales calculations.

Question 12

Fill in the blank: The trial balance is a _______ list of the balances in a business’s books of account.

Answer 12

trial

It reflects all transactions recorded during the financial period.

Question 13

What should be the value of inventory according to the prudence convention?

Answer 13

The lower of cost and net realizable value.

This approach prevents overstatement of assets.

Question 14

What adjustment is made to wages expense?

Answer 14

Add £450 to wages expense

This reflects an accrual adjustment for wages.

Question 15

What adjustment is made to the Statement of Financial Position (SFP) regarding current liabilities?

Answer 15

Add accrual of £450 to SFP

This is for wages that have been incurred but not yet paid.

Question 16

How much of the purchases did Michael use for his own use?

Answer 16

£300

This amount is deducted from purchases and added to drawings.

Question 17

What is the adjustment made to purchases in the income statement?

Answer 17

Reduce purchases by £300

This reflects the amount used by Michael for personal use.

Question 18

What is the total revenue reported in Michael’s income statement?

Answer 18

£37,200

This is the total revenue before any deductions.

Question 19

What is the opening inventory amount?

Answer 19

£7,552

This is the inventory available at the beginning of the year.

Question 20

What is the adjusted total for purchases after accounting for personal use?

Answer 20

£22,812

This is calculated as £23,112 - £300.

Question 21

What is the closing inventory amount in the income statement?

Answer 21

£9,976

This is the inventory available at the end of the year.

Question 22

What is the gross profit reported in Michael’s income statement?

Answer 22

£16,812

This is calculated as total revenue minus cost of sales.

Question 23

What is the total amount of salaries and wages expense after adjustments?

Answer 23

£5,344

This includes the original amount plus the adjustment.

Question 24

What is the adjusted rent and rates expense?

Answer 24

£1,102

This is calculated as £1,152 - £50.

Question 25

What is the operating profit reported?

Answer 25

£6,634

This is the profit after deducting all expenses from gross profit.

Question 26

What are the total non-current assets reported in the Statement of Financial Position?

Answer 26

£6,000

This includes fixtures and fittings, and motor vehicles.

Question 27

What is the total current assets amount?

Answer 27

£27,172

This includes inventory, receivables, prepayments, and cash.

Question 28

What is the total assets reported in the Statement of Financial Position?

Answer 28

£33,172

This is the sum of non-current and current assets.