Deck 3: The Income Statement

Question 1

Fred runs a general store and has the following statement of profit or loss balances in his books at 31 December 2019: opening inventory: £25,000, wages: £45,000, sales: £275,000, purchases: £130,000, heat and light: £15,000, closing inventory: £28,700. What is Fred's gross profit for the year ended 31 December 2019?

A) £88,700
B) £103,700
C) £141,300
D) £148,700

Answer 1

D

Question 2

If sales are £200,000, opening inventory is £20,000, purchases for the year are £100,000 and gross profit is £110,000, what is the closing inventory figure?

A) £10,000
B) £30,000
C) £80,000
D) £90,000

Answer 2

B

Question 3

On 31 August 2019, the following balances for the financial year have been extracted from Jatinder's books: Sales: £357,000, Purchases: £225,000, Value of goods returned by customers: £3,500, Closing inventory: £32,000, Value of goods returned to suppliers: £4,300, Opening inventory: £28,200. What is Jatinder's gross profit for the year ended 31 August 2019?

A) £132,300
B) £135,800
C) £136,600
D) £140,100

Answer 3

C

Question 4

At 31 March 2020, the following balances for the financial year have been extracted from Rupinder's books: Sales: £435,000, Purchases: £278,000, Bulk discounts received: £1,800, Closing inventory: £41,500, Discounts allowed not taken up by customers: £2,900, Opening inventory: £37,800. What is Rupinder's gross profit for the year ended 31 March 2020?

A) £160,700
B) £162,500
C) £163,600
D) £165,400

Question 5

Which one of the following would not form part of the gross profit calculation?

A) Sales
B) Purchases
C) Irrecoverable debts
D) Sales returns

Question 6

Which of the following are taken into account when calculating gross profit? Please select all that apply.

A) The allowance for receivables
B) Purchase returns
C) Closing inventory
D) Discounts allowed not taken up

Question 7

Hassan's purchases for the financial year ended 30 September 2019 were £375,000. At 30 September 2018, his closing inventory was £35,200 and his inventory at 30 September 2019 has been valued at £37,800. Purchase returns during the year amounted to £5,730 and discounts allowed by suppliers totalled up to £1,875. What is Hassan's cost of sales for the year ended 30 September 2019?

A) £364,795
B) £366,670
C) £368,545
D) £372,400

Question 8

In the year ended 31 August 2019, Marina made total sales of £552,000. She made sales returns of £22,500. She allowed her customers discounts of £2,500, 40% of which were not taken up. Her cost of sales for the year was £386,000. What was Marina's gross profit for the year ended 31 August 2019?

A) £142,500
B) £143,500
C) £144,500
D) £146,000

Question 9

Gross profit = (sales - sales returns + discounts allowed not taken up) - (opening inventory + purchases - purchases returns - discounts received - closing inventory)

Question 10

Ismail's sales for the financial year totalled up to £500,000. Opening inventory at the start of the financial year was valued at £60,000 while closing inventory had a value of £75,000. Purchase returns during the financial year amounted to a total of £5,000 and gross profit for the financial year was £220,000. What were Ismail's purchases during the financial year?

A) £260,000
B) £270,000
C) £290,000
D) £300,000

Question 11

Joseph has been trading for many years as an accountant. At 1 May 2019, his clients owed him £125,000 in unpaid fees. During the year to 30 April 2020, Joseph's clients paid him £800,000 in cash and at the end of his financial year on 30 April 2020 unpaid fees amounted to £150,000. What revenue should Joseph recognize in his statement of profit or loss for the year ended 30 April 2020?

A) £775,000
B) £800,000
C) £825,000
D) £950,000

Question 12

Marios sells goods online. At 1 January 2019 his customers owed him £12,000. During the year ended 31 December 2019, Marios received £150,000 in cash from customers but paid out £1,000 in refunds for goods returned. At 31 December 2019, Marios is owed £10,000 by his customers. What revenue figure should Marios recognise in his statement of profit or loss for the year ended 31 December 2019?

A) £147,000
B) £148,000
C) £149,000
D) £150,000

Question 13

Revenue in the statement of profit or loss is calculated as:

A) Sales - sales returns - discounts allowed not taken up
B) Sales - sales returns + discounts allowed not taken up
C) Sales - sales returns
D) Sales + sale returns

Question 14

Fatima had trade receivables of £152,000 at 1 December 2019. During the year to 30 November 2020 she received cash of £795,000 and made refunds to her customers of £12,000. At 30 November 2020, her trade receivables were £146,000. What revenue figure should Fatima recognise in her statement of profit or loss for the year ended 30 November 2020?

A) £777,000
B) £789,000
C) £795,000
D) £801,000

Question 15

Martin pays his business rates at quarterly intervals during the year. He paid £2,100 on 1 April 2019, £2,400 on 1 July 2019, £2,800 on 1 October 2019, £3,000 on 1 January 2020 and £3,300 on 1 April 2020. How much business rates expense should Martin recognize in his statement of profit or loss for the financial year ended 31 May 2020?

A) £10,300
B) £11,100
C) £11,500
D) £13,600

Question 16

Michelle pays her business electricity bills in arrears. On 7 September 2018 she paid the bill relating to June, July and August 2018. This bill amounted to £990. She then paid £1,100 for the three months to 30 November 2018 on 7 December 2018, £1,350 for the three months to 28 February 2019 on 8 March 2019 and £1,000 for the three months to 31 May 2019 on 8 June 2019. The electricity bill for the three months to 31 August 2019 came to £1,020 and was paid on 10 September 2019. Michelle's trading year runs from 1 July to 30 June each year. What was Michelle's electricity expense charge in her statement of profit or loss for the financial year ending 30 June 2019?

A) £5,460
B) £4,470
C) £4,450
D) £4,440

Question 17

Paolo pays his annual rates bill by 10 monthly instalments starting on 1 April each year. He pays £450 a month from 1 April 2018 to 1 January 2019. From 1 April 2019 he pays £500 a month for the ten payments ending on 1 January 2020. What amount should Paolo charge in his statement of profit or loss for his rates expense for the financial year ended 30 September 2019?

A) £4,500
B) £4,750
C) £5,000
D) £5,700

Question 18

Mary rents a workshop from which she conducts her manufacturing business. At 1 September 2018 Mary had paid rent in advance of £2,200. During the next 12 months, Mary paid out £12,300 in rent. At 31 August 2019, Mary owed £1,500 in rent for the financial year to 31 August 2019. Mary now needs to determine the annual rent expense for the year to 31 August 2019. Which one of the following calculations will enable Mary to determine the correct annual rent expense that she should show in her statement of profit or loss for the financial year?

A) Prepayment at 1 September 2018 + payments made during the year - accrual at 31 August 2019.
B) Prepayment at 1 September 2018 - payments made during the year + accrual at 31 August 2019.
C) Prepayment at 1 September 2018 - payments made during the year - accrual at 31 August 2019.
D) Prepayment at 1 September 2018 + payments made during the year + accrual at 31 August 2019.

Question 19

Pankaj Limited has an accrual for motor expenses at 1 October 2019. Payments of motor expenses are made regularly during the year. At 30 September 2020, Pankaj Limited has a prepayment of motor expenses. Which one of the following calculations will enable Pankaj Limited to determine the correct motor expenses charge in the statement of profit or loss for the financial year to 30 September 2020?

A) Payments made during the year + accrual at 1 October 2019 + prepayment at 30 September 2020.
B) Payments made during the year + accrual at 1 October 2019 - prepayment at 30 September 2020.
C) Payments made during the year - accrual at 1 October 2019 - prepayment at 30 September 2020.
D) Payments made during the year - accrual at 1 October 2019 + prepayment at 30 September 2020.

Question 20

Esther Limited has an accrual for telephone expenses at 1 May 2019. Payments of telephone expenses are made regularly during the year. At 30 April 2020, Esther Limited has an accrual for telephone expenses. Which one of the following calculations will enable Esther Limited to determine the correct telephone expenses charge in the statement of profit or loss for the financial year to 30 April 2020?

A) Payments made during the year + accrual at 30 April 2020 - accrual at 1 May 2019.
B) Payments made during the year + accrual at 30 April 2020 - accrual at 1 May 2019.
C) Payments made during the year + accrual at 30 April 2020 + accrual at 1 May 2019.
D) Payments made during the year - accrual at 30 April 2020 - accrual at 1 May 2019.

Question 21

Known irrecoverable debts are deducted from trade receivables after the allowance for receivables has been calculated.

Question 22

Irrecoverable debts are charged as an expense in the statement of profit or loss to distribution and selling costs.

Question 23

The allowance for receivables is calculated as a percentage of trade receivables after deducting known irrecoverable debts.

Question 24

Only the annual increase or decrease in the allowance for receivables is deducted from trade receivables in the statement of financial position, while the entire allowance for receivables is charged to administrative expenses in the statement of profit or loss.

Question 25

The annual expense for irrecoverable debts and the increase or decrease in the allowance for receivables for the financial year is charged (or credited) to revenue (sales).

Question 26

Farzana Limited has trade receivables at 30 September 2019 of £275,000. Of these trade receivables, there is a known irrecoverable debt of £15,000. The directors also want to create an allowance for receivables of 5% of the remaining trade receivables. At 30 September 2018, the allowance for receivables was £17,000. What is the total charge to the statement of profit or loss for irrecoverable debts and the allowance for receivables for the year ended 30 September 2019?

A) £11,000
B) £13,000
C) £13,750
D) £15,000

Question 27

Anand has total trade receivables at 30 April 2019 of £425,000. Of this total, £15,000 consists of irrecoverable debts which will never be paid. At the year-end Anand wishes to create an allowance for receivables of 7% of trade receivables. At 30 April 2018, the allowance for receivables was £25,000. What is the increase in the allowance for receivables which will be charged to the statement of profit or loss for the year ended 30 April 2019?

A) £3,700
B) £15,000
C) £18,700
D) £28,700

Question 28

At 31 December 2019, Puggles Limited has total trade receivables of £795,000. There is a known irrecoverable debt included in this figure of £25,000. The directors of Puggles Limited wish to create an allowance for receivables of 4%. The allowance for receivables at 31 December 2018 was £27,000. How much will Puggles Limited charge to the statement of profit or loss as an expense in respect of irrecoverable debts and the allowance for receivables in the financial statements for the year ended 31 December 2019?

A) £21,200
B) £28,800
C) £29,800
D) £55,800

Question 29

At 31 October 2019, Froggles Limited has total trade receivables of £852,000. There is a known irrecoverable debt included in this figure of £12,000. The directors of Froggles Limited wish to create an allowance for receivables of 6%. The allowance for receivables at 31 October 2018 was £65,600. What is the reduction in the allowance for receivables that will be credited to the statement of profit or loss for the year ended 31 October 2019?

A) £3,200
B) £12,000
C) £14,480
D) £15,200

Question 30

At 31 August 2019, Moggles Limited has total trade receivables of £650,000. There is a known irrecoverable debt included in this figure of £25,000. The directors of Moggles Limited wish to create an allowance for receivables at 31 August 2019 of 3%. The allowance for receivables at 31 August 2018 was £22,000. What is the total charge to the statement of profit or loss in respect of irrecoverable debts and the allowance for receivables for the year ended 31 August 2019?

A) £6,250
B) £18,750
C) £21,750
D) £25,000

Question 31

At 30 April 2020, Jamie has total trade receivables of £552,000. There is a known irrecoverable debt of £27,000 and Jamie wishes to create an allowance for receivables of 6% of trade receivables at 30 April 2020. The allowance for receivables at 1 May 2019 stood at £27,900. What is the net figure for trade receivables that Jamie will disclose in her statement of financial position at 30 April 2020?

A) £525,000
B) £518,880
C) £497,100
D) £493,500

Question 32

Bob has trade receivables of £422,000 at 30 September 2019. This trade receivables figure includes a known irrecoverable debt of £18,000. At 30 September 2018, Bob had set up an allowance for receivables of £20,000. At 30 September 2019, Bob wishes to create an allowance for receivables of 4% of trade receivables. What is the net figure that Bob will disclose in his statement of financial position for trade receivables at 30 September 2019?

A) £384,000
B) £387,840
C) £405,120
D) £407,840

Question 33

Moya has trade receivables at 31 July 2019 of £380,000 after deducting a known irrecoverable debt of £9,500 and making a 5% allowance for receivables. What is the total value of Moya's trade receivables before she made the 5% allowance for receivables and before she deducted the known irrecoverable debt?

A) £389,500
B) £400,000
C) £409,500
D) £410,000

Question 34

Jane has trade receivables at 31 August 2019 of £715,000. There are known irrecoverable debts at that date amounting to £35,000. Jane had an allowance for receivables of £32,000 at 31 August 2018. Jane wishes to create an allowance for receivables at 31 August 2019 of 5% of trade receivables. What is the net figure that Jane will disclose in her statement of financial position for trade receivables at 31 August 2019?

A) £644,250
B) £646,000
C) £648,000
D) £678,000

Question 35

Nikki has trade receivables at 31 December 2019 of £552,000 after deducting a known irrecoverable debt of £23,000 and making an 8% allowance for receivables. What is the total value of Nikki's trade receivables before she created the 8% allowance for receivables and before she deducted the known irrecoverable debt?

A) £575,000
B) £600,000
C) £623,000
D) £625,000

Question 36

When calculating depreciation on the reducing balance basis, residual value is always deducted from cost when calculating the annual depreciation expense.

Question 37

Straight line depreciation is calculated as (cost - residual value) ÷ the number of years in which an asset will be used in the business.

Question 38

Sarah Limited owns motor vehicles with a cost of £60,000 and an estimated residual value of £10,000. At 30 November 2019, £20,000 of depreciation had been provided on these motor vehicles. Sarah Limited also owns plant and machinery with a cost of £100,000 and an estimated residual value of £5,000. Plant and machinery accumulated depreciation at 30 November 2019 was £35,000. Sarah Limited depreciates motor vehicles at 20% per annum on the straight line basis while plant and machinery is depreciated on the reducing balance basis at the rate of 25% per annum. What will the total depreciation charge on these assets be for the year ended 30 November 2020?

A) £26,250
B) £28,250
C) £33,750
D) £35,750

Question 39

Ellie Limited has just set up in business. The directors have acquired the following non-current assets. The cost, estimated residual value and the depreciation rates to be applied to each class of assets are shown in the table below. What is the total depreciation charge that Ellie Limited will recognise in its statement of profit or loss for its first year of operations?
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Cost }$ $\quad$ $\quad$ $\text { Residual value Depreciation Basis }$
$\begin{array}{llll} & £ & £ & \\\text { Motor vehicles } & 120,000 & 30,000 & 25 \% \text { straight line } \\\text { Equipment } & 200,000 & 60,000 & 30 \% \text { reducing balance }\end{array}$

A) £64,500
B) £72,000
C) £82,500
D) £90,000

Question 40

Caroline Limited's depreciation policy is as follows:
Motor vehicles are depreciated at the rate of 25% reducing balance.
Plant and equipment is depreciated at the rate of 20% straight line.
At 30 April 2019, Caroline Limited has the following non-current assets:
Motor vehicles: cost: £150,000, accumulated depreciation: £66,000.
Plant and equipment: cost: £220,000, estimated residual value: £20,000, accumulated depreciation: £80,000.
What will the depreciation charge for the year ended 30 April 2020 be on each of these two classes of non-current assets?

A) Motor vehicles depreciation: £37,500, Plant and equipment depreciation: £44,000.
B) Motor vehicles depreciation: £37,500, Plant and equipment depreciation: £40,000
C) Motor vehicles depreciation: £21,000, Plant and equipment depreciation: £44,000
D) Motor vehicles depreciation: £21,000, Plant and equipment depreciation: £40,000

Question 41

At 31 December 2019, TC Limited has plant and equipment with a carrying amount of £225,000. Depreciation charged in the year to 31 December 2019 was £75,000 and the depreciation policy of the company is to depreciate plant and equipment at the rate of 20% straight line. The directors estimated that the plant and equipment would have a residual value of £50,000 at the date the assets were acquired. What is the original cost of the plant and equipment?

A) £300,000
B) £350,000
C) £375,000
D) £425,000

Question 42

Dibble Limited purchased plant and equipment on 1 December 2016. The directors estimated that the plant and equipment would have a useful life of 5 years and a residual value of £31,000. The plant and equipment was depreciated on a reducing balance basis at a rate of 40% per annum. During the year ended 30 November 2019, depreciation of £57,600 was charged on this plant and equipment and the asset had a carrying amount on 30 November 2019 of £86,400. What was the original cost of this plant and equipment?

A) £266,667
B) £400,000
C) £431,000
D) £900,000

Question 43

Shakil buys a new computer system for his business on 1 July 2019 at a cost of £30,000. He decides to depreciate the new computer system at a rate of 30% reducing balance. He estimates that the new computer system will have a residual value of £5,000 at the end of its useful life. What will the carrying amount of the new computer system be at 30 June 2022?

A) £7,500
B) £10,290
C) £13,575
D) £14,700

Question 44

Benny buys equipment at a cost of £60,000 to use in his business on 1 September 2017. Benny decides that the asset will have a useful life of 4 years and that it will have a residual value of £6,000. Benny's policy is to depreciate on the straight line basis, charging depreciation on non-current assets from the month of purchase. What will the equipment's carrying amount be at 31 December 2019?

A) £25,000
B) £27,375
C) £28,500
D) £31,500

Question 45

Tom buys machinery costing £66,000 for use within his business on 1 October 2018. Tom's financial year end is 31 December each year. Tom estimates that the machinery will have a useful life of 5 years and a residual value of £6,000. Tom uses the straight line basis of depreciation to allocate the cost of non-current assets to his statement of profit or loss and charges depreciation on a monthly basis. How much depreciation will have been charged on this machinery by 31 December 2020?

A) £24,000
B) £27,000
C) £29,700
D) £39,000

Question 46

Katerina pays £200,000 to acquire plant and equipment for use in her business on 1 April 2018. She decides that the plant and equipment will have a useful life of four years and a residual value of £36,000. Katerina's policy is to depreciate plant and equipment at 35% reducing balance. What will the carrying amount of this plant and equipment be at 31 March 2020?

A) £60,000
B) £84,500
C) £85,200
D) £105,290

Question 47

Which of the following statements does not describe the function of depreciation?

A) Depreciation is an application of the accruals basis of accounting, matching the cost of using non-current assets in the business to the accounting periods benefiting from their use.
B) Depreciation is a deduction from the cost of a non-current asset which is charged as an expense each year in the statement of profit or loss.
C) Depreciation represents a loss in value of non-current assets and aims to provide a realistic current market value for non-current assets at each statement of financial position date.
D) Depreciation is an allocation of the cost of non-current assets to the accounting periods benefiting from their use.

Question 48

Which of the following statements about depreciation are true? Please select all that apply.

A) Depreciation is an application of the accruals basis of accounting.
B) Depreciation is a way of saving up for a replacement asset.
C) Depreciation is not a cash flow.
D) Depreciation is a deduction from the cost of a non-current asset that is charged as an expense in the statement of profit or loss each year.

Question 49

Which of the following statements accurately describe what depreciation does not do? Please select all that apply.

A) Depreciation does not represent the allocation of the cost of non-current assets to the accounting periods benefiting from the use of those assets by an organization.
B) Depreciation does not represent a loss in value of a non-current asset.
C) Depreciation is not a way of providing a current value for non-current assets at each statement of financial position date.
D) Depreciation is not a way of saving up for a replacement asset.

Question 50

Depreciation is applied in such a way as to provide current values for non-current assets in each statement of financial position.

Question 51

Siobhan buys a new van on 1 September 2018 for use in her delivery business. The van cost £22,000 and Siobhan estimates that she will be able to sell the van at the end of its useful life for £6,000. The van is to be depreciated over four years on the straight line basis. On 31 August 2020, Siobhan sells the van for £12,000. What is the profit or loss that she makes on this sale?

A) £2,000 loss
B) £2,000 profit
C) £1,000 loss
D) £1,000 profit

Question 52

Marwan purchased equipment 3 years ago for £60,000. Marwan estimated that the residual value of the equipment would be £15,000 and he has depreciated the asset at the rate of 30% on the reducing balance basis. He has now sold the asset for £22,000. What was the profit or loss on the disposal of this asset?

A) £8,435 loss
B) £8,435 profit
C) £1,420 loss
D) £1,420 profit

Question 53

Ellie Limited has the following statement of profit or loss figures for the financial year ended 31 May 2019: Cost of sales: £157,000, Finance expense: £5,000, Finance income: £2,000, Revenue: £252,000, Distribution and selling costs: £30,000, Administration expenses: £25,000. What is Ellie Limited's operating profit for the year ended 31 May 2019?

A) £37,000
B) £40,000
C) £65,000
D) £95,000

Question 54

In published financial statements, profit before tax =

A) Revenue - cost of sales.
B) Operating profit + finance income (interest receivable) - finance expense (interest payable).
C) Gross profit - distribution and selling costs - administration expenses.
D) Revenue - cost of sales - distribution and selling costs - administration expenses + finance income (interest receivable) - finance expense (interest payable) - income tax.

Question 55

Fadia Limited has the following statement of profit or loss figures for the financial year ended 30 November 2019: Finance expense: £4,000, Finance income: £500, Distribution and selling costs: £45,500, Administration expenses: £58,000, Income tax: £8,000, Profit for the year: £25,000. What is Fadia Limited's operating profit for the year ended 30 November 2019?

A) £29,500
B) £33,000
C) £36,500
D) £140,000

Question 56

Which of the following statements about the statement of profit or loss is not true?

A) Income in the statement of profit or loss represents all the revenue earned during the financial period.
B) Income - expenditure = the profit or loss for the financial period.
C) Expenditure in the statement of profit or loss represents all the cash paid out during the financial period.
D) Expenditure in the statement of profit or loss represents all the expenses incurred during the financial period.

Question 57

Which of the following statements are true? Please select all that apply.

A) Profits and losses on the sale of non-current assets are included as part of revenue in the statement of profit or loss.
B) Expenses represent decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
C) Finance income and finance expense are excluded from the trading part of the statement of profit or loss.
D) Income represents increases in increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.

Question 58

Revenue in the statement of profit or loss includes all the income of an entity for an accounting period.

Question 59

Which one of the following statements is not true?

A) Revenue - cost of sales = gross profit.
B) Cost of sales = the costs incurred directly in the making or buying in of the products sold
C) Operating profit = gross profit - distribution and selling costs - administration expenses + finance income.
D) Profit for the year = all the income for the year - all the expenditure for the year.

Question 60

Which of the following statements are not true? Please select all that apply.

A) Profit before tax = all the income for the year - all the expenditure for the year.
B) Cash received from a trade receivable increases sales and increases cash.
C) A prepayment is an expense paid in advance of the accounting period to which it relates.
D) Cost - residual value = carrying amount.

Question 61

Accounts produced on a cash received and cash paid basis lack comparability.

Question 62

If most of the economic benefits represented by a non-current asset will be used up in the early years of the non-current asset's useful life, then straight line depreciation would be the most suitable method of depreciation to apply to this asset.

Question 63

Which one of the following statements is true?

A) Irrecoverable debts are deducted from sales.
B) Discounts received are recorded as sales in the statement of profit or loss.
C) Closing inventory is valued at selling price.
D) Purchase returns are deducted from cost of sales.