Financial Statements for Sole Traders (Cambridge (CIE) IGCSE Accounting): Flashcards
Exam code: 0452 & 0985
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What are the two sections of a statement of profit or loss, and what does each find?
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What are the two sections of a statement of profit or loss, and what does each find?
The trading section finds the gross profit.
The profit and loss section finds the profit for the year, and the gross profit is what links the two.
Which adjustments turn the purchases figure into the cost of sales?
Add the opening inventory and the carriage inwards.
Then subtract the closing inventory, any purchases returns, and any goods taken by the owner.
Complete the sentence about delivery costs:
The cost of getting goods delivered to the business is part of the cost of sales, but the cost of delivering goods to customers is an
instead.The completed sentence is:
The cost of getting goods delivered to the business is part of the cost of sales, but the cost of delivering goods to customers is an expense instead.
Why does a service business's statement of profit or loss have no gross profit?
Because it does not buy or sell goods, so there is no trading section and no cost of sales.
The statement simply starts with the income received and subtracts the expenses.
Which entries to the statement of profit or loss increase the profit?
Credit entries increase the profit, and these are usually the incomes.
Debit entries decrease it, and these are usually the expenses.
Define operating profit.
Operating profit, also called profit from operations, is the profit for the year before the loan interest is subtracted.
Where a business has no finance costs, the two figures are the same.
True or False?
A loss is shown in a statement of profit or loss by putting the figure in brackets.
True.
A negative final figure is written in brackets, so (500) means a loss of $500.
Revenue is $258 258 and the cost of sales is $144 356, with other income of $591 and expenses of $88 835. What is the profit for the year?
$25 658.
The gross profit is $258 258 − $144 356 = $113 902, and then $113 902 + $591 − $88 835 = $25 658.
What does a statement of financial position show, and for what moment in time?
It shows the business's assets, liabilities and capital at a particular date.
It is a snapshot of the position on that one day, rather than a record of what happened over a period.
Complete the sentence about listing non-current assets:
assets such as goodwill and brand names are listed before assets such as machinery and vehicles.The completed sentence is:
Intangible assets such as goodwill and brand names are listed before tangible assets such as machinery and vehicles.
How is the capital figure built up in the statement of financial position?
Start with the opening capital, then add the profit for the year or subtract a loss.
Finally subtract the drawings to give the capital at that date.
True or False?
The statement of financial position is part of the double entry system.
False.
The balances of the accounts are stated on it; they are not transferred to it by a double entry.
Why must the two halves of a statement of financial position have equal totals?
Because everything the business owns has been funded either by its owner or by someone it owes.
The total assets therefore equal the capital plus the liabilities.
On a trial balance, how can you tell whether "bank" is an asset or a liability?
By the side the balance is on.
A debit balance means there is money in the bank, which is an asset; a credit balance means the account is overdrawn, which is a liability.
Why is the statement of financial position prepared after the statement of profit or loss?
Because the profit or loss for the year is needed before the capital section can be completed.
The profit increases the capital and a loss reduces it, so it has to be known first.
Where do the figures for a statement of financial position come from?
From the trial balance or list of balances, together with the additional information given after it.
The valuation of the closing inventory is normally found in that additional information rather than in the trial balance.
A trial balance lists "provision for depreciation of equipment". Is that this year's depreciation charge?
No, it is the depreciation accumulated in earlier years.
This year's charge is given separately in the additional information after the trial balance.
A trial balance shows a provision for depreciation of $10 800 and this year's charge is $3840. What accumulated depreciation goes in the statement of financial position?
$14 640.
The year's charge is added to the provision already brought forward, so $10 800 + $3840 = $14 640.
Why does the accumulated depreciation column include the current year's charge?
Because the statement of financial position shows the position after the year's accounting has been done.
The charge has already been made, so it forms part of the total depreciation to date.
True or False?
The same depreciation figure appears in both financial statements.
False.
The statement of profit or loss shows only the year's charge, while the statement of financial position shows the accumulated total. The two are equal only in the asset's first year.
Furniture costing $15 000 is depreciated at 20% per annum reducing balance. What are the accumulated depreciation and net book value after two years?
The accumulated depreciation is $5400 and the net book value is $9600.
The charges are 20% × $15 000 = $3000 and then 20% × $12 000 = $2400, and $15 000 − $5400 = $9600.
Where does the opening allowance for irrecoverable debts come from?
From the trial balance, which carries the balance brought forward from the previous year.
The closing allowance is the figure you have to work out.
Why is the allowance for irrecoverable debts recalculated every year?
Because it is normally a percentage of the trade receivables, and that balance changes from one year to the next.
A fresh estimate is therefore needed at each year end.
How is a decrease in the allowance labelled in the statement of profit or loss?
As reduction in allowance for irrecoverable debts, listed with the other income.
An increase is labelled simply allowance for irrecoverable debts and listed with the expenses.
A business starts trading and sets its allowance at 4% of trade receivables of $24 000. What appears in the statement of profit or loss?
$960 as an expense.
The allowance is 4% × $24 000 = $960, and because it has risen from zero the whole amount is charged.
True or False?
The full balance of the allowance appears in the statement of financial position every year.
True.
It is listed under trade receivables and subtracted from them. Only the change in the allowance goes to the statement of profit or loss.
A trial balance shows the electricity that has been paid. How do you get the figure for the statement of profit or loss?
Add any amount still owed at the year end and subtract any amount paid in advance.
The statement shows the total due for the year, not the amount that happened to be paid.
Complete the sentence about several prepayments:
Where a business has several prepaid expenses, they are added together and shown as a single figure called
under current assets.The completed sentence is:
Where a business has several prepaid expenses, they are added together and shown as a single figure called other receivables under current assets.
Electricity costs $250 a month and the December bill is still unpaid at the year end. What goes in each statement?
$3000 in the statement of profit or loss, since 12 × $250 = $3000 is due for the year.
The unpaid $250 is a current liability in the statement of financial position.
Insurance is $600 every six months, and three months have been paid in advance at the year end. What goes in each statement?
$1200 in the statement of profit or loss, since $600 ÷ 6 = $100 a month and 12 × $100 = $1200.
The $300 paid in advance is a current asset in the statement of financial position.
True or False?
An expense that is still owed at the year end is shown as an asset.
False.
The business still owes that money, so it is a liability. The test is simply whether the business owes or is owed.
A trial balance shows the rent that has been received. How do you get the figure for the statement of profit or loss?
Add any amount still owed to the business and subtract any amount received in advance.
The statement shows the income due for the year, not the amount that happened to arrive.
A tenant pays $2400 on 1 January for twelve months' rent, and the financial year ends on 30 September. What rent goes in the statement of profit or loss?
$1800.
The rent is $2400 ÷ 12 = $200 a month, and nine of those months fall inside the financial year.
Complete the sentence about several prepaid incomes:
Where a business has several prepaid incomes, they are added together and shown as a single figure called
under current liabilities.The completed sentence is:
Where a business has several prepaid incomes, they are added together and shown as a single figure called other payables under current liabilities.
True or False?
Income received in advance is shown as a liability.
True.
The business has been paid for something it has not yet provided, so it still owes the customer. It appears under current liabilities as other payables.
Commission of $375 is received every three months, and the last three months' commission is unpaid at the year end. What goes in each statement?
$1500 in the statement of profit or loss, since $375 ÷ 3 = $125 a month and 12 × $125 = $1500.
The $375 still owed is a current asset in the statement of financial position.
Why is each item of additional information used twice?
Because every adjustment affects both financial statements.
It changes a figure in the statement of profit or loss and a figure in the statement of financial position.
The owner has taken goods for personal use. How is that adjusted?
Subtract the value from the purchases in the statement of profit or loss.
Then add the same value to the drawings in the statement of financial position.
True or False?
Every item of additional information adjusts a figure that is already in the trial balance.
False.
Some adjustments create a new line that was never in the trial balance, such as the closing inventory or the depreciation charge for the year.
Trade receivables include a debt to be written off, and the allowance is set at a percentage of trade receivables. Which comes first?
Write off the irrecoverable debt first.
The allowance is then worked out on the reduced trade receivables figure, not on the original one.
Complete the sentence about the closing inventory:
The closing inventory is subtracted from the purchases in the statement of profit or loss, and included under
in the statement of financial position.The completed sentence is:
The closing inventory is subtracted from the purchases in the statement of profit or loss, and included under current assets in the statement of financial position.
Trade receivables are $25 000, of which $1000 is to be written off, and the allowance is 5% of trade receivables. What is the allowance?
$1200.
The trade receivables fall to $25 000 − $1000 = $24 000, and 5% × $24 000 = $1200.
How is the recovery of a debt written off shown in the financial statements?
As other income labelled debts recovered in the statement of profit or loss.
It is also added to the bank or cash figure in the statement of financial position.
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