Statement of Profit or Loss (Cambridge (CIE) AS Accounting): Revision Note
Exam code: 9706
Statements of profit or loss for limited companies
What is the layout of the statement of profit or loss of a limited company?
The statement of profit or loss for a limited company is prepared in the same way it is prepared for that of a sole trader or a partnership business
It is prepared annually
It is the first of the three financial statements that must be prepared for limited companies
Differences include:
Debenture interest are included as part of finance costs
These appear after the profit from operations
The finance costs are subtracted to give the profit before tax
Tax is included and is then subtracted from the profit before tax
Expenses for a limited company are usually grouped by function
Cost of sales
Distribution costs
Including delivery costs to customers, drivers' wages, warehouse costs, etc.
Administrative expenses
Including other expenses such as office costs, heat and light, etc.
Finance costs
Including debenture interest, loan interest, etc.
Dividends for ordinary shareholders do not appear on the statement of profit or loss
Worked Example
The trial balance of Abrakadabra Limited at 31 March 2024 was as follows:
Abrakadabra Limited Trial Balance at 31 March 2024 | ||
Debit $ | Credit $ | |
Revenue | 166 000 | |
Inventory at 1 April 2023 | 6 820 | |
Purchases | 65 900 | |
Distribution costs | 10 280 | |
Administrative expenses | 35 450 | |
Fittings at cost | 250 000 | |
Provision for depreciation of fittings | 75 000 | |
Trade receivables | 14 400 | |
Bank | 14 965 | |
Trade payables | 8 415 | |
4% Debenture (repayable in 10 years) | 46 000 | |
Share capital | 80 000 | |
Retained earnings | 28 000 | |
Dividends paid on ordinary shares | 5 600 | |
403 415 | 403 415 | |
Additional information:
Inventory at 31 March 2024 was valued at $7 080
Depreciation on fittings is to be charged at 20% method per annum using the reducing balance
Depreciation should be allocated: administrative expenses 60%; distribution costs 40%
Distribution costs include a rent payment of $2 700 for the 3 months from 1 March 2024 to 31 May 2024
Administrative expenses include accrued wages of $4 550
No debenture interest has been paid for the year ended 31 March 2024
Tax for the year is estimated to be $3 700
Prepare the statement of profit or loss for Abrakadabra Limited for the year ended 31 March 2024.
Answer:
Identify which balances affect the statement of profit or loss
Abrakadabra Limited Trial Balance at 31 March 2024 | |||
Debit $ | Credit $ | Statement of profit or loss? | |
Revenue | 166 000 | SoPoL | |
Inventory at 1 April 2023 | 6 820 | SoPoL | |
Purchases | 65 900 | SoPoL | |
Distribution costs | 10 280 | SoPoL | |
Administrative expenses | 35 450 | SoPoL | |
Fittings at cost | 250 000 | ||
Provision for depreciation of fittings | 75 000 | ||
Trade receivables | 14 400 | ||
Bank | 14 965 | ||
Trade payables | 8 415 | ||
4% Debenture (repayable in 10 years) | 46 000 | ||
Share capital | 80 000 | ||
Retained earnings | 28 000 | ||
Dividends paid on ordinary shares | 5 600 | ||
403 415 | 403 415 | ||
Deal with the additional notes and identify how they affect the statement of profit or loss
Item 1 - Calculate the cost of sales
$6 820 + $65 900 - $7 080 = $65 640
Item 2 - Find the year's depreciation charge
Find the current net book value
$250 000 - $75 000 = $175 000
Multiply the net book value by 20%
20% × $175 000 = $35 000
Find the allocations to the different functions
Administrative expenses: 60% × $35 000 = $21 000
Distribution costs: 40% × $35 000 = $14 000
Add the depreciation charge to the relevant expenses
Administrative expenses: $35 450 + $21 000 = $56 450
Distribution costs: $10 280 + $14 000 = $24 280
Item 3 - Subtract the prepaid rent from the balance
Find the cost per month
$2 700 ÷ 3 = $900
Multiply this by two for the prepaid months (April & May)
$900 × 2 = $1 800
Subtract this from the balance for the distribution costs
$24 280 - $1 800 = $22 480
Item 4 - Add the accrued wages to the balance for administrative expenses
$56 450 + $4 550 = $61 000
Item 5 - Calculate the debenture interest
4% × $46 000 = $1 840
Item 6 - Subtract the tax from the profit before tax
Abrakadabra Limited Statement of Profit or Loss for the year ended 31 March 2024 | |
$ | |
Revenue | 166 000 |
Cost of sales | 65 640 |
Gross profit | 100 360 |
Distribution costs | (22 480) |
Administrative expenses | (61 000) |
Profit from operations | 16 880 |
Finance costs | 1 840 |
Profit before tax | 15 040 |
Tax | (3 700) |
Profit for the year | 11 340 |
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