Reporting Financial Position And Performance 1.2

Question 1

What is a trial balance?

Answer 1

A summary of all balances in a business’s books of account at the end of a financial period.

It ensures that total debits equal total credits.

Question 2

What is the purpose of a trial balance?

Answer 2

Ensures total debits equal total credits.

Question 3

What items are included in the debit (Dr) section of a trial balance?

Answer 3

• Assets
• Expenses
• Drawings

Question 4

What items are included in the credit (Cr) section of a trial balance?

Answer 4

• Liabilities
• Equity
• Income

Question 5

What adjustments are required before final financial statements can be prepared?

Answer 5

Accruals and Prepayments.

Question 6

Define accruals.

Answer 6

Expenses incurred but not yet paid or invoiced by year-end.

Question 7

How are accruals recorded in financial statements?

Answer 7

• Expense in the income statement
• Liability in the statement of financial position (current liabilities)

Question 8

Provide an example of an accrual.

Answer 8

If £600 electricity covers Feb–Apr, and year-end is March, accrue £400 (2/3 × £600).

Question 9

Define prepayments.

Answer 9

Payments made in advance for next year’s expenses.

Question 10

How are prepayments recorded in financial statements?

Answer 10

• Reduction of expense in the income statement
• Asset in the statement of financial position (current assets)

Question 11

Provide an example of a prepayment.

Answer 11

£1,200 paid for photocopier rental (July–June). At Dec year-end, £600 is prepaid (6/12 × £1,200).

Question 12

What is closing inventory?

Answer 12

Value of unsold inventory at year-end.

Question 13

How is closing inventory treated in financial statements?

Answer 13

• Deducted in the cost of sales calculation in the income statement
• Recorded as a current asset in the statement of financial position

Question 14

What is the matching principle in relation to inventory?

Answer 14

Inventory not sold doesn’t contribute to the year’s revenues.

Question 15

What is the formula for calculating Cost of Sales?

Answer 15

Cost of Sales = Opening Inventory + Purchases - Closing Inventory

Question 16

Calculate the Cost of Sales given: Opening Inventory = £4,000, Purchases = £68,350, Closing Inventory = £3,000.

Answer 16

Cost of Sales = £4,000 + £68,350 - £3,000 = £69,350.

Question 17

What does an income statement show?

Answer 17

Profit by matching revenues with expenses.

Question 18

List the key sections of an income statement.

Answer 18

• Gross Profit: Revenue - Cost of Sales
• Operating Profit: Gross Profit - Operating Expenses
• Net Profit: Operating Profit - Finance Costs (e.g., interest)

Question 19

What does a statement of financial position report?

Answer 19

Assets, liabilities, and equity at year-end.

Question 20

List the key sections of a statement of financial position.

Answer 20

• Assets: Non-current and current (e.g., inventory, receivables, cash)
• Equity: Capital + Profit - Drawings
• Liabilities: Current and non-current