Financial Statements Practice: Income Statement & Statement of Financial Position

Q1. Prepare an income statement for Leo Lam (sole trader) for the year ended 31 December 2024, using the following figures:

• Sales: $268,550

• Purchases: $103,050

• Closing inventory: $13,059

• Rent and rates: $36,000

• Wages and salaries: $120,000

• Water and electricity: $8,985

Background

Topic: Income Statement (Profit and Loss Account)

This question tests your ability to prepare an income statement, which summarizes a business’s revenues and expenses over a period to determine the net profit or loss.

Key Terms and Formulas

• Sales: Total revenue from goods sold.

• Cost of Goods Sold (COGS): The direct costs attributable to goods sold during the period.

• Gross Profit: Sales minus COGS.

• Expenses: Operating costs such as rent, wages, and utilities.

• Net Profit: Gross profit minus total expenses.

$\text{COGS} = \text{Purchases} - \text{Closing Inventory}$

$\text{Gross Profit} = \text{Sales} - \text{COGS}$

$\text{Net Profit} = \text{Gross Profit} - \text{Total Expenses}$

Step-by-Step Guidance

1. Start by listing the sales revenue for the year: $268,550.

2. Calculate the cost of goods sold (COGS) by subtracting closing inventory from purchases:

   $\text{COGS} = 103,050 - 13,059$

3. Subtract COGS from sales to find gross profit:

   $\text{Gross Profit} = 268,550 - \text{COGS}$

4. Add up all the expenses (rent and rates, wages and salaries, water and electricity):

   $\text{Total Expenses} = 36,000 + 120,000 + 8,985$

5. Subtract total expenses from gross profit to find net profit:

   $\text{Net Profit} = \text{Gross Profit} - \text{Total Expenses}$

Try solving on your own before revealing the answer!

Final Answer: Net profit is $13,574

All calculations follow the standard income statement format for a sole trader. The net profit is found by subtracting total expenses from gross profit.

Q2. Prepare a statement of financial position (balance sheet) for Alex Chan’s business as at 31 October 2024, using the following balances:

• Motor vehicles: $30,255

• Trade receivables: $12,730

• Trade payables: $7,460

• Bank: $23,900

• Inventory: $14,555

• Net profit for the year: $35,990

• Office equipment: $62,430

• Capital, 1 November 2023: ? (to be calculated)

Background

Topic: Statement of Financial Position (Balance Sheet)

This question tests your ability to prepare a statement of financial position, which shows the financial position of a business at a specific date by listing its assets, liabilities, and capital.

Key Terms and Formulas

• Non-current assets: Long-term assets like office equipment and motor vehicles.

• Current assets: Assets expected to be converted to cash within a year (inventory, receivables, bank).

• Current liabilities: Obligations due within a year (trade payables).

• Net current assets: Current assets minus current liabilities.

• Capital: Owner’s equity at the start of the period, adjusted for net profit.

$\text{Net Current Assets} = \text{Current Assets} - \text{Current Liabilities}$

$\text{Total Assets} = \text{Non-current Assets} + \text{Net Current Assets}$

$\text{Capital at year-end} = \text{Capital at start} + \text{Net Profit}$

Step-by-Step Guidance

1. List non-current assets (office equipment and motor vehicles) and sum them:

   $62,430 + 30,255$

2. List current assets (inventory, trade receivables, bank) and sum them:

   $14,555 + 12,730 + 23,900$

3. List current liabilities (trade payables): $7,460.

4. Calculate net current assets:

   $\text{Net Current Assets} = \text{Total Current Assets} - 7,460$

5. Add non-current assets and net current assets to get total assets.

6. Calculate closing capital by adding net profit for the year to opening capital (which you’ll need to solve for based on the total assets and net profit).

Try solving on your own before revealing the answer!

Final Answer: Closing capital is $136,410; opening capital is $100,420

The statement of financial position balances total assets with capital and liabilities. Opening capital is found by subtracting net profit from closing capital.