Q: A sole trader took goods costing $400 for personal use during the year, but this was not recorded. Which formula correctly adjusts the purchases figure in the income statement?

Net purchases $$= \text{Purchases} - \text{Purchases returns} + \text{Carriage inwards} - \text{Goods for own use}$$

Q: Which of the following is the correct formula for calculating gross profit?

Gross profit $$= \text{Selling price of goods} - \text{Cost of sales}$$

Q: Which formula correctly calculates profit for the year?

Profit for the year $$= \text{Gross profit} + \text{Other income} - \text{Expenses}$$

Question 1

Which of the following best describes the purpose of the trading section of an income statement?

Accepted Answer

To calculate the gross profit earned on goods sold.

Question 2

A sole trader took goods costing $400 for personal use during the year, but this was not recorded. Which formula correctly adjusts the purchases figure in the income statement?

Accepted Answer

Net purchases $$= 	ext{Purchases} - 	ext{Purchases returns} + 	ext{Carriage inwards} - 	ext{Goods for own use}$$

Question 3

Which of the following is the correct formula for calculating gross profit?

Accepted Answer

Gross profit $$= 	ext{Selling price of goods} - 	ext{Cost of sales}$$

Question 4

A business has the following figures: Opening inventory $$5,000$$, Purchases $$20,000$$, Purchases returns $$1,000$$, Carriage inwards $$500$$, Goods for own use $$300$$, and Closing inventory $$4,000. $$What is the cost of sales?

Accepted Answer

Cost of sales $$= 5,000 + (20,000 - 1,000 + 500 - 300) - 4,000 = 20,200$$

Question 5

Which item is NOT part of the double entry system in financial statements?

Accepted Answer

Statement of financial position

Question 6

A business has revenue of $$120,000$$, sales returns of $$2,000$$, opening inventory of $$10,000$$, net purchases of $$80,000$$, carriage inwards of $$1,000$$, and closing inventory of $$9,000. $$What is the gross profit?

Accepted Answer

Gross profit $$= (120,000 - 2,000) - (10,000 + 80,000 + 1,000 - 9,000) = 118,000 - 82,000 = 36,000$$

Question 7

Which of the following statements about the income statement of a service business is correct?

Accepted Answer

It only includes the profit and loss section and a statement of financial position.

Question 8

If a business receives a discount from a supplier, how is this recorded in the income statement?

Accepted Answer

Discount received is added to gross profit as other income.

Question 9

Which formula correctly calculates profit for the year?

Accepted Answer

Profit for the year $$= 	ext{Gross profit} + 	ext{Other income} - 	ext{Expenses}$$

Question 10

A business has gross profit of $$25,000$$, discount received $$1,000$$, wages $$10,000$$, general expenses $$2,000$$, property tax $$500$$, and loan interest $$300. $$What is the profit for the year?

Accepted Answer

Profit for the year $$= 25,000 + 1,000 - (10,000 + 2,000 + 500 + 300) = 26,000 - 12,800 = 13,200$$

Question 11

Why is the profit for the year credited to the capital account?

Accepted Answer

Because it increases the amount the business owes the owner.

Question 12

Which of the following is a correct double entry for closing the purchases account at year end?

Accepted Answer

Credit purchases account, debit income statement.

Question 13

A business has opening inventory $$6,000$$, purchases $$30,000$$, purchases returns $$2,000$$, carriage inwards $$1,000$$, goods for own use $$500$$, and closing inventory $$7,000. $$What is the cost of sales?

Accepted Answer

Cost of sales $$= 6,000 + (30,000 - 2,000 + 1,000 - 500) - 7,000 = 6,000 + 28,500 - 7,000 = 27,500$$

Question 14

Which of the following is NOT a typical business expense for a trading business?

Accepted Answer

Revenue

Question 15

In preparing the income statement, how are notes to a trial balance used?

Accepted Answer

Each note is used twice in the financial statements.

Question 16

A business consultant earns commissions received $$50,000$$, rent receivable $$5,000$$, and incurs property tax $$2,000$$, general expenses $$3,000$$, insurance $$1,000$$, printing and stationery $$500$$, wages $$10,000$$, and loan interest $$400. $$What is the profit for the year?

Accepted Answer

Profit for the year $$= (50,000 + 5,000) - (2,000 + 3,000 + 1,000 + 500 + 10,000 + 400) = 55,000 - 16,900 = 38,100$$

Question 17

Why is it necessary to make two transfers from the income statement to the inventory account at the end of the financial year?

Accepted Answer

To record both opening and closing inventory in the income statement.

Question 18

If a business makes a loss for the year, how is this reflected in the capital account?

Accepted Answer

It is debited to the capital account, reducing the owner's capital.

Question 19

Which of the following is a correct description of the statement of financial position?

Accepted Answer

It shows the assets and liabilities of the business at a certain date.

Question 20

A business has a capital account opening balance of $$100,000. $$During the year, the owner withdrew $$5,000 in $$cash and $$1,000 in $$goods. The profit for the year was $$12,000. $$What is the closing balance of the capital account?

Accepted Answer

Closing balance $$= 100,000 + 12,000 - (5,000 + 1,000) = 106,000$$

Income Statement: Structure, Preparation, and Ledger Transfers

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