Question 1

Which of these is the best measure of an entity's profitability?

Accepted Answer

Profitability can be measured in different ways based on the needs of the user. Pro forma earnings is a non-GAAP measure that excludes certain items, making it more subjective. Profit before tax is a traditional measure, but it could vary depending on the tax structure. Profit post material items is a measure that excludes significant one-off items, but it could still depend on what is considered material. Ultimately, the best measure of profitability depends on the specific requirements of the user.

Question 2

Which of the following statements concerning a company's income tax expense is correct?

Accepted Answer

Income tax expense is calculated based on pre-tax accounting profit, but can differ from the amount of tax paid to the ATO due to differences in accounting rules and tax laws. Additionally, a company may have tax credits or carryforward losses that can impact the amount of tax paid.

Question 3

For a retailing or manufacturing entity,gross profit is equal to sales less:

Accepted Answer

Gross profit is the difference between the revenue (sales) earned and the direct cost incurred in producing or purchasing the goods sold, which is also known as the cost of sales. Therefore, gross profit is equal to sales less cost of sales. Expenses such as rent, salaries, and advertising are not included in the calculation of gross profit.

Question 4

If sales revenue is $600 000 and cost of sales is $450 000,the gross profit margin is:

Accepted Answer

Gross profit margin is calculated by subtracting cost of sales from sales revenue and then dividing the result by sales revenue.

Gross Profit Margin = (Sales Revenue - Cost of Sales) / Sales Revenue

Plugging in the given values, we get

Gross Profit Margin = (600 000 - 450 000) / 600 000 
                    = 150 000 / 600 000 
                    = 0.25 or 25%

Therefore, the correct answer is B) 25%.

Question 5

Under the accounting standard governing the presentation of the statement of profit or loss,the item that is not required to be presented on the face of the statement for a retail entity is:

Accepted Answer

Depreciation is not required to be separately presented on the face of the statement of profit or loss for a retail entity. It is typically included within operating expenses or cost of sales, depending on how the related assets are used in the business.

Question 6

Which of the following expenses must be disclosed by a reporting entity?

Accepted Answer

All of the mentioned expenses must be disclosed by a reporting entity as per the accounting standards and regulations. Amortisation expense represents the systematic allocation of the cost of an intangible asset over its useful life. Lease costs either for operating or finance leases need to be disclosed as they represent significant financial obligations for the reporting entity. Auditors' fees represent the fees paid by the reporting entity to the external auditors for the audit of financial statements, and they need to be disclosed to maintain transparency.

Question 7

Which of the following must exist before income can be recognised?

Accepted Answer

All the options listed are essential conditions for the recognition of income according to the accrual basis of accounting. Income is recognized when an increase in future economic benefits related to an increase in assets or a decrease in liabilities can be reliably measured, which aligns with the principles outlined in financial reporting standards.

Question 8

Which of the following transactions will be recorded as income?

Accepted Answer

Selling inventory on credit for $5,000 is recorded as income because it represents revenue earned from sales, even though the cash has not yet been received.

Question 9

Which of the following is not disclosed in the statement of comprehensive income?

Accepted Answer

Transactions with owners as owners are not disclosed in the statement of comprehensive income. They are disclosed in the statement of changes in equity. The statement of comprehensive income discloses income and expenses recognised in the statement of profit or loss as well as income and expenses recognised directly in equity. Therefore, option D is incorrect.

Question 10

When determining whether an item of expenditure is material,the following must be considered:

Accepted Answer

All of the options must be considered when determining whether an item of expenditure is material. The size and/or nature of the expense, whether its non-disclosure could have an impact on users' decision making, and whether a related asset has been impaired are all important factors to consider.

Question 11

Which of the following statements is correct for an entity that has discontinued part of its operations during the financial year?

Accepted Answer

According to accounting standards, when an entity discontinues part of its operations during the financial year, it must show the profit or loss from the discontinued operation separately to the profit or loss from continued operations. This is required to give a clear picture to the users of financial statements about the financial impact of the discontinuation of the operation. Therefore, option A is the correct statement. The entity cannot include the profit or loss from the discontinued operation as part of continued operations, nor can it show only the profit or loss from the discontinued operation on the financial statements for the year.

Question 12

Which of the following would not be classified as an administrative expense?

Accepted Answer

The answer of Which of the following would not be...

Question 13

For a business selling magazine subscriptions and preparing financial reports on a monthly basis,when should it recognise the revenue from the sale of annual subscriptions?

Accepted Answer

Revenue recognition for annual subscriptions should be done on a straight-line basis over the subscription period, meaning that the revenue is recognized equally each month over the 12-month period. This is because the service provided (the magazine subscription) is spread over the entire year, and recognizing all revenue at once would not accurately reflect the timing of the service provided. Therefore, option B is the best choice.

Question 14

If profit after tax and interest is $400 000,interest expense is $50 000 and taxation expense is $84 000,profit before interest and tax is:

Accepted Answer

Profit before interest and tax is calculated by adding back the interest expense and taxation expense to the profit after tax and interest. Therefore, $400,000 + $50,000 + $84,000 = $534,000.

Question 15

If sales = $455 000,purchases = $225 000,beginning inventory = $150 000 and ending inventory = $118 000,gross profit is:

Accepted Answer

Gross profit is calculated as Sales - Cost of Goods Sold (COGS). COGS is calculated as Beginning Inventory + Purchases - Ending Inventory. Therefore, COGS = $150,000 + $225,000 - $118,000 = $257,000. Gross profit = Sales - COGS = $455,000 - $257,000 = $198,000.

Question 16

Which of the following profit measures represents the raw operating earnings of an entity?

Accepted Answer

EBITDA represents the raw operating earnings of an entity as it excludes interest, taxes, depreciation, and amortization, focusing on the core operational profitability.

Question 17

For the financial year ending 30 June,Sunset Ltd had a beginning balance for equity of $180 000 and an ending balance of $175 000.During the year the owner withdrew $120 000 for private use.How much profit did Sunset Ltd earn during the year?

Accepted Answer

The profit can be calculated by adjusting the change in equity for the owner's withdrawals. The equity decreased by $5,000 ($180,000 - $175,000), but since the owner withdrew $120,000, the profit must be $115,000 to account for both the decrease in equity and the withdrawals.

Question 18

A financial analyst is more interested in:

Accepted Answer

The answer of A financial analyst is more interested in:
...

Question 19

Which of the following are included in a statement of changes in equity?

Accepted Answer

The statement of changes in equity includes all changes in equity during a period, which encompasses equity contributions by and distributions to owners (such as dividends paid and shares purchased) and changes not related to transactions with owners (such as profits or losses).

Question 20

Which of the following statements relating to the presentation of the statement of profit or loss by non-reporting entities is not true?

Accepted Answer

Non-reporting entities are not required to prepare financial statements in accordance with the AASB accounting standards. However, preparing the statement of profit or loss in accordance with accounting standards would increase comparability and enhance the usefulness of the financial information. Therefore, option B is not true.

Quiz 6: Statement of Profit or Loss and Statement of Changes in Equity