Question 1

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

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 2

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?

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 3

If equity at the beginning of the period is $180 000, profit for the period is $90 000 and $25 000 is withdrawn by the owner during the period, equity at the end of the period is:

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 4

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?

Accepted Answer

Under the accrual accounting approach, revenue is recognized when the goods are delivered or services are rendered, regardless of when the payment is received. Therefore, revenue from the sale of timber on credit would be recognized at the point when the goods are delivered to and accepted by the customer.

Question 5

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

Accepted Answer

Cost of sales represents the cost of goods sold or the purchase price of the goods that have been sold. Payments for stock refer to the cost of purchasing inventory, sales represent revenue earned, and merchandise is the inventory or goods being sold.

Question 6

Under accrual accounting, profit is measured as:

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 7

When is income considered to have been earned?

Accepted Answer

All of the choices are required for income to be considered earned. The company must have substantially completed the activities necessary to generate the income, it must be probable that any income owing will be received, and the amount of income generated must be reliably measured. Additionally, any outstanding expenses, such as warranty claims, must be identified.

Question 8

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

Accepted Answer

According to the Conceptual Framework, income should be recognized in the profit report if it is probable that the inflow of resources has occurred and the inflow can be reliably measured. Matching income with expenses is not a recognition criteria for income, but instead, a principle for determining the appropriate timing and amount of expense recognition. Therefore, both criteria A and B must be satisfied for income to be recognized.

Question 9

The recognition criteria that must be satisfied under the Conceptual Framework for an expense to be included in the income statement is:

Accepted Answer

According to the Conceptual Framework, an expense should only be recognized in the income statement when it meets two criteria: (1) it is probable that an outflow of resources has occurred, and (2) the outflow of resources can be reliably measured. Therefore, only choices A and B are correct, and the answer is D (Both A and B).

Question 10

Which of these are not 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 11

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?

Accepted Answer

Option B provides a suitable format of presenting the statement of financial performance for a medium-sized furniture store operated as a partnership. The format considers the gross profit, cost of sales, and expenses, which are key elements in determining the net profit or loss of the business. Option A and C are incomplete and do not provide a breakdown of the factors that contribute to the profit or loss. Option D presents only the gross profit, but does not account for the expenses that reduce it to the net profit or loss.

Question 12

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

Accepted Answer

Recognition of income means documenting it in the income statement as part of the profit calculation. It is not necessary for the income to be received in cash for it to be recognized as income. The income recognition criteria contained in the Conceptual Framework have not been replaced by the realization convention.

Question 13

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

Accepted Answer

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

Question 14

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:

Accepted Answer

Since the equity at the beginning and end of the period is the same, there is no profit or loss from operations. However, since additional capital of $20 000 was paid in by the owner, the equity at the end of the period should increase by that amount. Since it remained the same, it means there were losses of $20 000. Therefore, the correct choice is C, loss $20 000.

Question 15

Which statement about net profit is not true?

Accepted Answer

Net profit represents the amount of profit after deducting all expenses, including taxes, interest, and depreciation. It does not necessarily represent the amount of cash generated from operations for the period.

Question 16

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

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 17

Which statement is not correct?

Accepted Answer

This statement is incorrect as a profit is earned when income is greater than expenses, not the other way around.

Question 18

Accrual accounting:

Accepted Answer

Accrual accounting recognises expenses when they have been incurred, regardless of whether the cash has or hasn't been paid. This means that expenses are recorded when the economic benefits derived from them have been used up. This is in contrast to cash accounting which recognises expenses only when the cash has been paid out.

Question 19

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

Accepted Answer

A clothing shop primarily earns its income by selling clothes to customers.

Question 20

Under accrual accounting, income is:

Accepted Answer

Under accrual accounting, income is recognized when it is earned, regardless of whether the cash has been received or not. Income is the inflow of assets or the reduction in liabilities that arise as a result of trading operations, such as sales of goods or services. This is in contrast to cash accounting, where income is recognized only when cash is received.

Quiz 3: Measuring and Reporting Financial Performance