The Income Statement

30. A company buys 500 units of stock at a cost of £22 per unit. During the year, it sells 450 units at a price of £30 per unit. What is the “cost of goods sold” on the Income Statement? A. £11,000 B. £9,900 C. £13,500 D. £3,600   Answer : B “Cost of goods sold” must be the cost of the goods SOLD! This is due to the “accruals” or “matching” concept. Using the wrong figure will affect profit, and therefore tax! In this example – and there are several ways to calculate the correct answer –...

29. A company buys a new piece of machinery for £55,000 cash. It is expected to last for 8 years and will have a scrap value of £7,000 The company uses straight line depreciation A. In the year of purchase, there is a cash movement of £55,000 and a depreciation charge and therefore a reduction in profit of £6,000. B. In the year of purchase, there is a cash movement of £49,000 which is £55,000 paid for the machine and £6,000 depreciation charge. C. In the year of purchase, there is a cash...

28. A company has bought, amongst other things, the following items over the last 12 months: • New Delivery Vehicle, cost £18,000• Insurance for the vehicle, cost £1,500• Stapler, cost £5• Raw materials used in production, cost £2,500 Which of the following statements is correct? A. The Vehicle is Capital Expenditure. The Insurance, Stapler and Raw Materials are revenue expenditure. B. The Vehicle and Insurance are Capital Expenditure. The Stapler and Raw Materials are revenue expenditure. C....

27. Which of the following statements is correct? For a business that buys raw materials and manufactures a product: A. “Revenue” or "Turnover" or "Sales" is all money that comes into the business, including items such as bank interest received. B. “Revenue” or “Turnover” or “Sales” is money that is left over once the cost of the raw materials is taken off. C. “Revenue” or “Turnover” or “Sales” is the money that has actually been received from people buying goods. D. “Revenue” or “Turnover” or...

26. A company made the following transactions last year: • Bought goods for resale, cost £8,000• Wages, cost £12,000• Rent, cost £6,000• Heat, Light & Power, cost £3,000• Sales, £40,000 A. Operating Profit is £32,000 B. Operating Profit is £19,000 C. Operating Profit is £11,000 D. Operating Profit is £27,000   Answer : C Operating Profit, or “net profit”, is the profit left after expenses have been paid:

25. If the cost of goods sold was £8,000 for goods which eventually sold for £20,000, what is mark-up? A. 40% B. 60% C. 150% D. 250%   Answer : C

24. If the cost of goods sold was £8,000 for goods which eventually sold for £20,000, what is the gross profit ratio? A. 40% B. 60% C. 150% D. 250%   Answer : B

23. The part of a company's group accounts that reports income from a small investment in another company, of which it has little influence, is known as: A. Dividends receivable B. Minority interest C. Exceptional item D. Segmental disclosure   Answer : A

22. In a company's group accounts, the part of the groups profits that belongs to shareholders outside the group (for example, shareholders of a subsidiary) is known as: A. Dividends receivable B. Minority interest C. Exceptional item D. Segmental disclosure   Answer : B

21. Which of the following are ways in which managers can manipulate the income statement in order to show a higher profit? A. Bringing forward the recognition of sales B. Overstate closing inventory C. Make repairs and maintenance look like capital expenditure D. All of the above   Answer : D

20. Which of the following statements is correct? A. Buying new premises is a revenue expenditure B. Buying a new car is capital expenditure C. The cost of using a car is a capital expenditure D. Statements A and B are both correct   Answer : B

19. Which of the following statements is correct? A. The distinction between capital expenditure and revenue expenditure is always clear B. Sometimes the distinction between capital expenditure and revenue expenditure is not clear C. Buying a new car is revenue expenditure D. Statements B and C are both correct   Answer : B

18. If purchases for the year are £18,250, closing stock £7,275 and cost of goods sold £17,525, what was the opening stock? A. £6,500 B. £7,950 C. £28,550 D. £7,225   Answer : A

17. If opening stock for the year is £8,000, closing stock £5,000 and cost of goods sold £19,000, what is the value of purchases for the year? A. £6,000 B. £9,000 C. £16,000 D. £3,000   Answer : C

16. Which of the following statements is correct? A. Capital expenditure appears on the income statement, not the statement of financial position B. Revenue expenditure appears on the income statement, not the statement of financial position C. Revenue expenditure does not appear on the income statement D. Capital expenditure is not associated with depreciation   Answer : B

15. If a company purchases a machine for £60,000 and charges depreciation at 10% on a diminishing balance basis, what is the depreciation charge in the forth year? A. £5,042 B. £4,374 C. £6,000 D. £4,860   Answer : B

14. If a company buys a machine for £12,000 with an estimated useful life of 4 years and a residual value of £4,000, what is the annual depreciation charge if calculated on a straight line basis? A. £2,000 B. £4,000 C. £1,000 D. £3,000   Answer : A

13. Which of the following statements is false? A. A depreciation expense is not paid out in cash B. Depreciation is not a process for valuing assets C. A depreciation expense is paid out in cash D. A provision for depreciation is a bookkeeping entry, not an allocation of cash   Answer : C

12. If opening stock is £3,000, purchases for the year £15,000 and the cost of goods sold is £14,000, what is the value of closing stock? A. £2,000 B. £4,000 C. £3,000 D. £5,000   Answer : B

11. If opening stock is £2,000, purchases for the year £12,000 and closing inventory £3,000, what is the cost of goods sold? A. £13,000 B. £7,000 C. £11,000 D. £17,000    Answer : C

10. Revenue is: A. The amount received from borrowing B. The amount of cash received from sales C. The amount of cash received from sales and the disposals of fixed assets D. The amount of sales that have been made during a period   Answer : D

9. Which of the following statements is false? A. The "equity" component of the statement of financial position is increased by the amount of profit earned during the year B. The "equity" component of the statement of financial position is decreased by the amount of profit earned during the year C. The "equity" component of the statement of financial position is reduced by the amount of dividend to be paid for the year D. The "equity" component of the statement of financial position may change...

8. Profit before tax: A. Operating profit + interest receivable - interest payable B. Operating profit + interest receivable + interest payable C. Operating profit - interest receivable - interest payable D. Operating profit - tax    Answer : A

6. Which version of profit is used as the basis for determining the amount of dividend paid to shareholders? A. Gross profit B. Profit after taxation C. Profit before taxation D. Operating profit    Answer : B

7. Operating profit is: A. Sales - cost of sales + operating expenses B. Sales + cost of sales + operating expenses C. Sales - cost of sales - operating expenses D. Sales + cost of sales - operating expenses    Answer : C

5. Depreciation is not a process of valuing assets TRUE  

4. Expenses are the amount paid out in cash during an accounting period FALSE  

3. Revenue is the amount received in cash during an accounting period FALSE  

2. Gross profit is the difference between sales and the cost of goods sold TRUE  

1. Profit = revenue + expenses FALSE