Deck 6: Statement of Profit or Loss and Statement of Changes in Equity

Question 1

Which of these would not be recorded as increasing income on 13 January?

A) Cash sale on 13 January.
B) Cash sale on 31 January.
C) Credit sale on 13 January.
D) Sale where $2 000 is paid on 13 January and the balance of $3 000 is paid on 5 February.

Answer 1

B

Question 2

A transaction recording accrued income will:

A) have no effect on total assets.
B) increase cash and decrease sales income.
C) increase accounts receivable and sales income.
D) increase accounts receivable and accounts payable.

Answer 2

C

Question 3

Machinery is purchased for $80 000.It is estimated that it has a useful life of 5 years and a residual value of $5 000.Using the straight-line method,the carrying value of the machine at the end of the fourth year of the machine's useful life is:

A) $15 000
B) $80 000
C) $20 000
D) $60 000

Answer 3

$20 000

Question 4

An entity's financial year ends on 30 June.On 1 May it pays a 12-month insurance premium of $24 000.Under the accrual system of accounting how much of the premium will be recognised as an expense for the current year ended 30 June and how much will be treated as an asset (prepaid insurance)?

A) $4 000 expense and $20 000 prepaid insurance.
B) $20 000 expense and $4 000 prepaid insurance.
C) $12 000 expense and $12 000 prepaid insurance.
D) $6 000 expense and $18 000 prepaid insurance.

Question 5

An owner contributes $50 000 to expand the business.This transaction would:

A) increase income.
B) increase expenses.
C) increase capital.
D) decrease income.

Question 6

For the month of October: total sales = $125 000,total purchases = $80 000,beginning inventory = $32 000 and ending inventory = $44 000.The cost of sales for October is:

A) $68 000
B) $125 000
C) $45 000
D) $8 000

Question 7

Expenses classified by function would be categorised as:

A) marketing expenses.
B) borrowing expenses.
C) selling and distribution expenses.
D) all of the above.

Question 8

Equipment is purchased for $50 000.It is to be depreciated on a diminishing balance basis using a rate of 10%.How much will be charged for depreciation expense for year 3 of the machine's life?

A) $4 050
B) $5 000
C) $4 500
D) $15 000

Question 9

An entity pays wages on a fortnightly basis and the next payroll date is 8 September.If wages expense is not accrued at 31 August the effect on the financial statements for August will be:

A) an overstatement of assets and profit.
B) an understatement of assets and profit.
C) an understatement of liabilities and an overstatement of profit.
D) an overstatement of liabilities and an understatement of profit.

Question 10

For a retail entity,cost of sales is calculated as follows:

A) ending inventory + purchases - beginning inventory.
B) purchases - ending inventory - beginning inventory.
C) beginning inventory - purchases + ending inventory.
D) beginning inventory + purchases - ending inventory.

Question 11

Office supplies are purchased in bulk and recorded as an asset.They are used by staff on a daily basis.An expense recognising the use of the office supplies will normally be recorded:

A) when the supplies are purchased.
B) when supplies are paid for.
C) at the end of the accounting period when an end-of-period adjustment is prepared for supplies used.
D) on a daily basis when supplies are taken from storage.

Question 12

The statement of profit or loss:

A) reports the assets, liabilities and equity at a specific point in time.
B) summarises the change in retained earnings over a specific period of time.
C) presents the income and expenses of an entity for a specific period of time.
D) reports the changes in assets, liabilities and equity over a period of time.

Question 13

Machinery is purchased for $140 000.It is estimated that it has a useful life of 5 years and a residual value of $20 000.Using the straight-line method,calculate the amount of annual depreciation to be charged.

A) $12 000
B) $24 000
C) $28 000
D) $14 000

Question 14

In order to comply with accounting standards,reporting entities are required to classify expenses:

A) without aggregation.
B) by nature or function.
C) by function only.
D) in no particular way.

Question 15

Triple bottom line reporting is when entities report on their:

A) financial performance.
B) social performance.
C) environmental performance.
D) all of the above.

Question 16

Which of the following will be classified as income?

A) Interest received.
B) Fees charged for services provided.
C) Gain on sale of equipment.
D) All of the above.

Question 17

Auto Care Ltd serviced a motor vehicle on 30 April and issued the invoice to the owner when the motor vehicle was picked up at the end of the day.The owner sends a cheque to Auto Care Ltd on 2 May which is received and banked by Auto Care Ltd on 6 May.Auto Care Ltd will recognise income on:

A) 30 April.
B) 2 May.
C) 6 May.
D) 31 May.

Question 18

Under the current accounting standards,which of the following items is not included in the measurement of profit in the statement of profit or loss?

A) Loss on the disposal of non-current assets.
B) Gain on asset revaluation.
C) Cost of sales.
D) Dividends received.

Question 19

Machinery is purchased for $140 000.It is estimated that it has a useful life of 5 years and a residual value of $20 000.Using the straight-line method,the balance in the accumulated depreciation account at the end of the third year of the machine's useful life is:

A) $140 000
B) $68 000
C) $24 000
D) $72 000

Question 20

Equity is decreased by:

A) liabilities.
B) expenses.
C) income.
D) assets.

Question 21

Which of these is the best measure of an entity's profitability?

A) Pro forma earnings.
B) Profit before tax.
C) Profit post material items.
D) There is no one 'best' profit measure; it depends on the requirements of the user.

Question 22

Which of the following statements concerning a company's income tax expense is correct?

A) Income tax expense is calculated as pre-tax accounting profit multiplied by the company tax rate.
B) Income tax expense often differs from the amount of tax paid to the ATO (Australian Taxation Office).
C) Income tax expense will only rarely differ from the amount of tax paid to the ATO.
D) Income tax expense will be the same as the amount of tax paid to the ATO.

Question 23

For a retailing or manufacturing entity,gross profit is equal to sales less:

A) purchases.
B) all expenses.
C) cost of sales.
D) all expenses other than cost of sales.

Question 24

If sales revenue is $600 000 and cost of sales is $450 000,the gross profit margin is:

A) 75%
B) 25%
C) 33%
D) 67%

Question 25

Under the accounting standard governing the presentation of the statement of profit or loss,the item that is not required to be presented on the face of the statement for a retail entity is:

A) cost of sales.
B) finance costs.
C) depreciation.
D) tax expense.

Question 26

Which of the following expenses must be disclosed by a reporting entity?

A) Amortisation expense.
B) Lease costs.
C) Auditors' fees.
D) All of the above.

Question 27

Which of the following must exist before income can be recognised?

A) The increase in future economic benefits related to an increase in an asset or a decrease in a liability must have arisen.
B) The increase in future economic benefits must be able to be measured reliably.
C) All options must exist.
D) Income recognition must occur at the same time as the recognition of increases in assets or reductions in liabilities.

Question 28

Which of the following transactions will be recorded as income?

A) Borrow $50 000 from the bank.
B) A. J. Smith pays $2 500 for goods sold to him on credit last month.
C) Sold inventory on credit for $5 000.
D) Owner contributes $8 000 of personal funds to the business.

Question 29

Which of the following is not disclosed in the statement of comprehensive income?

A) Transactions with owners as owners.
B) Income and expenses recognised in the statement of profit or loss.
C) Income and expenses recognised directly in equity.
D) All of the above options are disclosed in the statement of comprehensive income.

Question 30

When determining whether an item of expenditure is material,the following must be considered:

A) the size and/or nature of the expense.
B) whether its non-disclosure could have an impact on users' decision making.
C) whether a related asset has been impaired.
D) all of the above options must be considered.

Question 31

Which of the following statements is correct for an entity that has discontinued part of its operations during the financial year?

A) The entity must show the profit or loss from the discontinued operation separately to the profit or loss from continued operations.
B) The entity must include the profit or loss from the discontinued operation as part of continued operations.
C) The entity must not show the profit or loss from the discontinued operation on the financial statements for the year.
D) The entity must show only the profit or loss from the discontinued operation on the financial statements for the year.

Question 32

Which of the following would not be classified as an administrative expense?

A) Salaries and wages of sales staff.
B) Stationery.
C) Depreciation of office equipment.
D) Rates.

Question 33

For a business selling magazine subscriptions and preparing financial reports on a monthly basis,when should it recognise the revenue from the sale of annual subscriptions?

A) When a customer pays the annual subscription.
B) Monthly, on a straight-line basis over the 12 month subscription period.
C) Evenly, from the month of payment up to the end of the current financial year.
D) When the annual subscription period expires.

Question 34

If profit after tax and interest is $400 000,interest expense is $50 000 and taxation expense is $84 000,profit before interest and tax is:

A) $450 000
B) $291 000
C) $534 000
D) $484 000

Question 35

If sales = $455 000,purchases = $225 000,beginning inventory = $150 000 and ending inventory = $118 000,gross profit is:

A) $198 000
B) $257 000
C) $75 000
D) $230 000

Question 36

Which of the following profit measures represents the raw operating earnings of an entity?

A) Profit after taxation.
B) Earnings before interest and taxation (EBIT).
C) Gross profit.
D) Earnings before interest, taxation, depreciation and amortisation (EBITDA).

Question 37

For the financial year ending 30 June,Sunset Ltd had a beginning balance for equity of $180 000 and an ending balance of $175 000.During the year the owner withdrew $120 000 for private use.How much profit did Sunset Ltd earn during the year?

A) $5 000
B) $115 000
C) $125 000
D) $60 000

Question 38

A financial analyst is more interested in:

A) post-tax profit as a means of assessing profitability.
B) pre-tax profit as it

Question 39

Which of the following are included in a statement of changes in equity?

A) All changes in equity arising from equity contributions and dividends paid.
B) All changes in equity arising from shares purchased.
C) All changes in equity arising separately from non-owner changes in equity (e.g. profit).
D) All options are included in a statement of changes in equity.

Question 40

Which of the following statements relating to the presentation of the statement of profit or loss by non-reporting entities is not true?

A) There is no prescribed format.
B) The statement of profit or loss must be prepared in accordance with the AASB accounting standards.
C) The purpose of the statement of profit or loss is to report the profit or loss for the entity for the reporting period.
D) Income is usually more detailed and less aggregated than that prepared for a reporting entity.

Question 41

An expense is considered to be __________________ if its non-disclosure could affect decisions made by the users of the statement of profit or loss.

Question 42

The statement of profit or loss measures an entity's financial _________.

Question 43

Which of the following is an example of other comprehensive income?

A) Dividends received.
B) Sales income.
C) Royalties.
D) Revaluations of assets recorded directly in the revaluation surplus account.

Question 44

If the beginning balance of equity is $82 000,the ending balance is $37 000,and the loss for the period is $33 000,how much did the owner withdraw during the period for personal use?

A) $78 000
B) $49 000
C) $45 000
D) $12 000

Question 45

Managers' use of accounting discretion allowable under accounting policy choices and estimates to portray a desired level of profit in a particular reporting period is

Question 46

The statement of profit or loss is normally completed:

A) before the balance sheet.
B) after the balance sheet.
C) at the same time as the balance sheet.
D) at any time, the order of completion for these two statements is irrelevant.

Question 47

A statement of changes in equity shows closing capital as:

A) beginning capital + capital contribution - profit - drawings.
B) beginning capital + capital contribution + profit + drawings.
C) beginning capital + capital contribution + profit - drawings.
D) beginning capital - capital contribution + profit - drawings.

Question 48

Accrued income is recognised _________ the cash has been received.

Question 49

Gains from the disposal of non-current assets are recognised as ____________ income.

Question 50

The accounting standards require a statement of changes in ______________ to be prepared by all reporting entities.

Question 51

An ______________ expense is recognised when the value of an asset is determined to be lower than its carrying amount.

Question 52

The ______________ of _____________ depreciation method measures depreciation based on an asset's activity or output relative to the total activity or output expected.

Question 53

An entity's profit or loss is measured over a _________ period of time.

Question 54

Two expenses that are recognised under accrual accounting but which do not involve any cash flows _________ and _________.

Question 55

For a transaction to be recognised as income in the statement of profit or loss the elements must satisfy both the ________________ and ________________criteria as specified in the Conceptual Framework.

Question 56

Increases in assets or decreases in liabilities that result in increases in equity,other than those relating to contributions from holders of equity claims,is the Framework's definition of ____________________.

Question 57

If an item meets the definition of an expense,to be reported in the income statement it must also meet the recognition criteria of being probable that the decrease in economic benefits has arisen and that the amount is able to be reliably _______________.

Question 58

When an asset's __________ amount is lower than its carrying amount,the asset is deemed to have been __________.

Question 59

The relevant profit measure that isolates the returns associated with investment decisions is ______________ ______________ ______________ and ______________.

Question 60

The main expense incurred by a retail business is __________ of __________.

Question 61

A loss reported on the statement of profit or loss decreases the __________ section of the balance sheet.

Question 62

Other ______________ income represents all changes in equity other than profit or loss,and transactions associated with owners such as dividends and capital contributions.