Question 1

What is the expense in the statement of financial performance which represents the purchase price of the goods that have been sold?
A)payments for stock.
B)cost of sales.
C)sales.
D)merchandise.

Accepted Answer

Cost of sales, also known as cost of goods sold, represents the cost incurred to produce or purchase the goods that have been sold during the period. This includes the cost of raw materials, direct labor and overhead expenses.

Question 2

Which is the best description of the relationship between the statement of financial performance and the statement of financial position?
A)There is no direct relationship between the statement of comprehensive income and the statement of financial position.
B)The opening statement of financial position plus the profit equals the closing statement of financial position.
C)The statement of financial position is the link between two statement of comprehensive incomes.
D)The statement of financial performance explains the change in equity that arises from operating activities.

Accepted Answer

The statement of financial performance, often referred to as the income statement or statement of comprehensive income, details a company's revenues, expenses, and profits or losses over a period. This directly affects the equity section of the statement of financial position (balance sheet) by explaining changes in retained earnings or equity that result from the company's operations, such as profits earned or losses incurred.

Question 3

Identify the outgoing that could not appear in the statement of financial performance.
A)Interest paid.
B)Wages and salaries.
C)Purchase of flowers for the waiting room.
D)Repayment of loan.

Accepted Answer

Repayment of loan is not included in the statement of financial performance because it is considered a financing activity, not an expense related to the operations of the business. The statement of financial performance (also known as the income statement) records revenues and expenses, not the repayment of principal on debt.

Question 4

Under accrual accounting, profit is measured as:
A)income minus expenses.
B)assets minus liabilities.
C)sales minus cost of sales.
D)cash sales minus payments for expenses.

Accepted Answer

Profit under accrual accounting is measured as income minus expenses, reflecting the company's financial performance over a period, regardless of when cash transactions occur.

Question 5

When is income considered to have been earned?
A)it is probable that any income owing will be received and any outstanding expenses, such as warranty claims, can be identified.
B)the activities necessary to generate the income are substantially complete.
C)the amount of income generated can be reliably measured.
D)all of the above.

Accepted Answer

All of the above conditions need to be met for income to be considered earned. It must be probable that the income will be received, the activities necessary to generate the income must be substantially complete, and the amount of income generated must be reliably measured. Only when all of these conditions are met can income be recognized as earned.

Question 6

Which statement is not correct? A)A loss is incurred when expenses > income. B)A profit is earned when income < expenses. C)A loss is incurred when income < expenses. D)A profit is earned when income > expenses.

Accepted Answer

A profit is earned when income > expenses, not income < expenses. Therefore, option B is not correct.

Question 7

Which of these are not alternative names for the same thing?
A)Gross profit; profit.
B)Cost of sales; cost of goods sold.
C)Statement of comprehensive income; profit and loss statement: statement of financial performance.
D)None of the above, i.e., all are alternative names for the same thing.

Accepted Answer

Gross profit and profit are not synonymous. Gross profit refers to the revenue minus the cost of goods sold, not accounting for other operating expenses, interest, or taxes. Profit, however, can refer to several different figures on an income statement, such as operating profit, net profit, or gross profit, depending on the context.

Question 8

Which statement about net profit is not true?
A)Net profit normally represents the amount of cash generated from operations for the period.
B)Net profit is a measure of achievement or productive effort.
C)Net profit increases equity.
D)None of the statements, i.e., all are true.

Accepted Answer

Net profit does not necessarily represent the amount of cash generated from operations for the period. It is calculated by deducting all expenses including non-cash expenses such as depreciation and amortization from revenues. Therefore, it includes non-cash items and may not always directly represent cash generated during the period.

Question 9

Accrual accounting:
A)recognises expenses when they have been incurred (economic benefits used up), regardless of whether the cash has or hasn't been paid.
B)recognises expenses when they are possible.
C)recognises expenses when they are earned.
D)recognises expenses when the cash has been paid.

Accepted Answer

Accrual accounting recognises expenses when they have been incurred (economic benefits used up), regardless of whether the cash has or hasn't been paid. This means that the expenses are recognised based on the matching principle, which aims to match expenses with revenues in the same accounting period. This provides a more accurate picture of the company's financial position and performance.

Question 10

Which of the following would be a suitable format for the statement of financial performance for a medium size furniture store operation as a partnership?
A)income - expenses = profit
B)sales - cost of sales = gross profit - expenses = profit
C)income + expenses = profit
D)sales - cost of sales = gross profit

Accepted Answer

The format in option B provides a complete picture of the financial performance of the furniture store operation, taking into account both the revenue and cost of sales. Subtracting expenses from the gross profit will give the net profit, which is the final figure that reflects the overall financial performance of the business. Options A and C are too simplistic and do not provide enough information, while option D only gives the gross profit and does not take into account the expenses.

Question 11

In relation to the recognition and realisation of income, which statement is correct?
A)Recognition of income means including it in the income statement as part of the profit calculation.
B)Income from a credit sale is normally recognised in the statement of financial performance when the cash is received.
C)The realisation convention has replaced the income recognition criteria contained in the Conceptual Framework.
D)All of the statements are correct.

Accepted Answer

Recognition of income means including it in the income statement as part of the profit calculation. This statement is correct as per the Conceptual Framework for Financial Reporting, which states that income is recognised when an increase in future economic benefits related to an increase in an asset or a decrease in a liability has arisen, and that it can be reliably measured. The recognition of income can be done without the receipt of cash, and it is recognised in the income statement as part of the profit calculation. Option B is incorrect because the recognition of income is not based on the receipt of cash, and option C is incorrect as the realisation principle is a part of the income recognition criteria.

Question 12

If equity at the beginning of the period is $180,000, profit for the period is $90,000 and $25,000 is withdrawn by the owner during the period, equity at the end of the period is:
A)$115,000.
B)$245,000.
C)$289,000.
D)cannot be calculated from the information provided.

Accepted Answer

The equity at the end of the period can be calculated using the formula: 
Equity at the end of period = Equity at the beginning + Profit for the period - Owner's withdrawals 
= $180,000 + $90,000 - $25,000 
= $245,000

Question 13

If equity at the beginning of the period is $100,000 and at the end of the period is $100,000 and additional capital of $20,000 is paid into the business by the owner during the period, profit or loss is:
A)profit $10,000.
B)loss $30,000.
C)loss $20,000.
D)profit $30,000.

Accepted Answer

If equity at the beginning of the period is $100,000 and at the end of the period is $100,000, that means there is no change in equity during the period. If additional capital of $20,000 is paid into the business, it increases the equity to $120,000. Therefore, if there is no profit, there must be a loss of $20,000 to keep the equity at the same level as the beginning of the period. Thus, the correct answer is C, loss $20,000.

Question 14

Which accounting statement is specifically designed to measure and report on how much profit an entity has made?
A)the statement of cash flows.
B)the statement of financial position.
C)the statement of financial performance.
D)all of the above.

Accepted Answer

The statement of financial performance, also known as the income statement or profit and loss statement, is specifically designed to measure and report on how much profit an entity has made. The statement of cash flows reports on the cash inflows and outflows of an entity, while the statement of financial position (also known as the balance sheet) provides information on an entity's assets, liabilities, and equity at a specific point in time.

Question 15

If a business decided to classify its expenses under the headings 'Selling and Distribution,' 'General and Administrative' and 'Financial,' into which groupings would 1. depreciation of sales staff's motor vehicles and 2. bad debts written off, fall?
A)1. general and administrative; 2. financial.
B)1. selling and distribution; 2. financial.
C)1. financial; 2. selling and distribution.
D)1. selling and distribution; 2. general and administrative.

Accepted Answer

1. Depreciation of sales staff's motor vehicles is related to selling and distribution as it is an expense related to the process of selling and distribution.
2. Bad debts written off falls under financial as it is related to accounts receivables and cash management, which are part of financial activities.

Question 16

Under accrual accounting, income is:
A)the cash received from customers for goods or services provided by the business.
B)the cash collected from accounts receivable.
C)the money the owner puts into the business to start operations.
D)the inflow of assets or the reduction in liabilities that arise as a result of trading operations.

Accepted Answer

Under accrual accounting, income is recognized when it is earned, regardless of when the cash is collected or paid. It is the inflow of assets or the reduction in liabilities that arise as a result of trading operations, such as the sale of goods or services. Therefore, option D is the best choice. Options A and B refer to cash received or collected, which is not the same as income. Option C refers to the owner's investment in the business, which is not income either.

Question 17

If equity at the beginning of the period is $45,000 and at the end of the period is $56,000 and $20,000 is withdrawn by the owner during the period, calculate profit. (Use the stock approach.)
A)$1,000.
B)$41,000.
C)$76,000.
D)$31,000.

Accepted Answer

Using the stock approach formula:
Equity at end = Equity at beginning + profit - withdrawals
$56,000 = $45,000 + profit - $20,000
$56,000 = $25,000 + profit
Profit = $56,000 - $25,000
Profit = $31,000
Therefore, the answer is D.

Question 18

The recognition criteria that must be satisfied under the Conceptual Framework for income to be included in the profit report is:
A)Probable that the inflow of resources has occurred.
B)Inflow of resources able to be reliably measured.
C)Income must be matched with expenses.
D)Both A and B.

Accepted Answer

The recognition criteria that must be satisfied under the Conceptual Framework for income to be included in the profit report are: (A) probable that the inflow of resources has occurred, and (B) the inflow of resources able to be reliably measured. Therefore, option D, which includes both criteria, is the correct answer. The criterion of matching expenses with revenue is a concept of accrual accounting, but it is not relevant to the recognition criteria.

Question 19

Which type of business would call its main source of income sales?
A)Financial adviser.
B)Accounting firm.
C)Bank.
D)Clothing shop.

Accepted Answer

A clothing shop typically sells clothing items to customers, making sales its main source of income. Financial advisers, accounting firms, and banks may earn income from a variety of sources such as fees, commissions, interest, etc.

Question 20

Under the accrual accounting approach, at which stage of the operating cycle would income be recognised by a timber yard from the sale of timber on credit?
A)Goods delivered to and accepted by customer.
B)Money received from customer.
C)Money banked by business.
D)Order received from customer.

Accepted Answer

Under the accrual accounting approach, income is recognized at the point when the goods are delivered to and accepted by the customer, regardless of whether the sale is made on credit or cash. This is because the revenue is earned at the point when the goods are sold, and not when the money is actually received from the customer. Therefore, the correct choice would be A - Goods delivered to and accepted by customer.

Quiz 3: Measuring and Reporting Financial Performance

What is the expense in the statement of financial performance which represents the purchase price of the goods that have been sold?

Which is the best description of the relationship between the statement of financial performance and the statement of financial position?

Identify the outgoing that could not appear in the statement of financial performance.

Under accrual accounting, profit is measured as:

When is income considered to have been earned?

Which statement is not correct?

Which of these are not alternative names for the same thing?

Which statement about net profit is not true?

Accrual accounting:

Which of the following would be a suitable format for the statement of financial performance for a medium size furniture store operation as a partnership?

In relation to the recognition and realisation of income, which statement is correct?

If equity at the beginning of the period is $180,000, profit for the period is $90,000 and $25,000 is withdrawn by the owner during the period, equity at the end of the period is:

If equity at the beginning of the period is $100,000 and at the end of the period is $100,000 and additional capital of $20,000 is paid into the business by the owner during the period, profit or loss is:

Which accounting statement is specifically designed to measure and report on how much profit an entity has made?

If a business decided to classify its expenses under the headings 'Selling and Distribution,' 'General and Administrative' and 'Financial,' into which groupings would 1. depreciation of sales staff's motor vehicles and 2. bad debts written off, fall?

Under accrual accounting, income is:

If equity at the beginning of the period is $45,000 and at the end of the period is $56,000 and $20,000 is withdrawn by the owner during the period, calculate profit. (Use the stock approach.)

The recognition criteria that must be satisfied under the Conceptual Framework for income to be included in the profit report is:

Which type of business would call its main source of income sales?

Under the accrual accounting approach, at which stage of the operating cycle would income be recognised by a timber yard from the sale of timber on credit?