Secondary 4 Principles of Accounts Financial Statements Quiz

Secondary 4 Principles of Accounts Quiz - Financial Statements

ANSWER KEY AND MARKING SCHEME

Total Marks: 50

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Section A: Short Answer (10 marks)

1. Purpose of preparing an Income Statement:

   • To calculate the profit or loss of a business for a specific accounting period (1 mark)
   • To show the revenue earned and expenses incurred during that period (1 mark)
     Accept: To determine the financial performance of the business / To help stakeholders make decisions.

2. Difference between gross profit and net profit:

   • Gross profit is revenue less cost of sales (1 mark)
   • Net profit is gross profit less all other operating expenses (1 mark)
     Accept: Gross profit measures trading efficiency; net profit measures overall profitability after all expenses.

3. Accounting concept and explanation:

   • Prudence/Conservatism concept (1 mark)
   • This concept ensures that assets are not overstated and profits are not overstated; inventory should be valued at the lower amount to avoid overstating the financial position (1 mark)
     Accept: To ensure that losses are recognised as soon as they are known, while profits are only recognised when realised.

4. Two items in the Trading Account section:
   Any two of:

   • Opening inventory (1 mark)
   • Purchases (1 mark)
   • Closing inventory
   • Carriage inwards
   • Revenue (Sales)
   • Purchases returns
     Award 1 mark each for any two correct items.

5. Why closing inventory is a current asset:

   • Closing inventory represents goods that the business expects to sell within the next accounting period (1 mark)
   • It meets the definition of a current asset as it will be converted into cash within the normal operating cycle (1 mark)
     Accept: It is a resource controlled by the business from which future economic benefits are expected.

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Section B: Calculation and Application (24 marks)

6. Cost of Sales Calculation:

	$
Opening inventory	12,500
Add: Purchases	85,000
Less: Purchases returns	(2,300)
Add: Carriage inwards	1,800
Net purchases	84,500
Cost of goods available for sale	97,000
Less: Closing inventory	(14,200)
Cost of sales	82,800

Marking:

• Correct calculation of net purchases (1 mark)
• Correct addition of opening inventory (1 mark)
• Correct subtraction of closing inventory (1 mark)
• Correct final answer: $82,800 (1 mark)
  Method marks awarded even if final answer is incorrect due to arithmetic error.

7. Lee Enterprise - Trading Account for the year ended 30 June 2025

	$	$
Revenue		156,000
Less: Cost of sales
Opening inventory	18,400
Add: Purchases	92,500
Add: Carriage inwards	2,100
	113,000
Less: Closing inventory	(16,800)
Cost of sales		(96,200)
Gross profit		59,800

Marking:

• Correct heading with business name and date (1 mark)
• Correct calculation of cost of goods available for sale (1 mark)
• Correct subtraction of closing inventory (1 mark)
• Correct gross profit: $59,800 (1 mark)

8. Wong Services - Income Statement for the year ended 31 March 2025

	$	$
Revenue		245,000
Less: Cost of sales
Opening inventory	22,000
Add: Purchases	138,000
Add: Carriage inwards	3,500
	163,500
Less: Closing inventory	(19,500)
Cost of sales		(144,000)
Gross profit		101,000
Less: Operating expenses
Salaries	48,000
Rent	24,000
Utilities	6,800
Depreciation - equipment	5,200
Total operating expenses		(84,000)
Net profit		17,000

Marking:

• Correct heading and format (1 mark)
• Correct cost of sales calculation: $144,000 (1 mark)
• Correct gross profit: $101,000 (1 mark)
• Correct listing of all operating expenses (1 mark)
• Correct total operating expenses: $84,000 (1 mark)
• Correct net profit: $17,000 (1 mark)

9. (a) Effect on cost of sales

   • Closing inventory is overstated by $3,200
   • Cost of sales = Opening inventory + Purchases − Closing inventory
   • If closing inventory is overstated, cost of sales is understated (1 mark)
   • Cost of sales is understated by $3,200 (1 mark)

   (b) Effect on net profit

   • Since cost of sales is understated, gross profit is overstated (1 mark)
   • Net profit is therefore overstated by $3,200 (1 mark)

10. (a) Gross profit margin

	2025	2024
Gross profit	$320,000 −$208,000 = $112,000	$280,000 −$182,000 = $98,000
Gross profit margin	($112,000 ÷$320,000) × 100 = 35.00%	($98,000 ÷$280,000) × 100 = 35.00%

• Correct calculation for 2025: 35.00% (1 mark)
• Correct calculation for 2024: 35.00% (1 mark)

(b) Net profit margin

	2025	2024
Net profit	$112,000 −$72,000 = $40,000	$98,000 −$63,000 = $35,000
Net profit margin	($40,000 ÷$320,000) × 100 = 12.50%	($35,000 ÷$280,000) × 100 = 12.50%

• Correct calculation for 2025: 12.50% (1 mark)
• Correct calculation for 2024: 12.50% (1 mark)

(c) Comment on profitability trend

• Both gross profit margin and net profit margin have remained stable at 35.00% and 12.50% respectively (1 mark)
• This indicates that the business has maintained its profitability ratios despite the increase in revenue, suggesting consistent cost control and pricing strategy (1 mark)
  Accept any reasonable interpretation that references the stable ratios and what this implies about business performance.

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Section C: Structured Response (16 marks)

11. Chen Trading - Statement of Financial Position as at 30 September 2025

	$	$	$
Non-current assets
Land and building (at cost)		120,000
Equipment (at cost)	45,000
Less: Accumulated depreciation	(9,000)	36,000
Total non-current assets			156,000
Current assets
Inventory		16,800
Trade receivables		23,400
Prepaid rent		2,100
Cash at bank		8,200
Total current assets			50,500
Total assets			206,500
Capital and liabilities
Capital (1 October 2024)		85,000
Add: Net profit		28,500
		113,500
Less: Drawings		(12,000)
Closing capital			101,500
Non-current liabilities
Bank loan (repayable 2028)			40,000
Current liabilities
Trade payables		15,600
Accrued utilities		1,200
Total current liabilities			16,800
Total capital and liabilities			206,500

Marking:

• Correct heading with business name and date (1 mark)
• Correct classification and calculation of non-current assets: $156,000 (1 mark)
• Correct classification and calculation of current assets: $50,500 (1 mark)
• Correct total assets: $206,500 (1 mark)
• Correct calculation of closing capital: $101,500 (1 mark)
• Correct classification of non-current liabilities: $40,000 (1 mark)
• Correct classification and calculation of current liabilities: $16,800 (1 mark)
• Statement balances: Total assets = Total capital and liabilities = $206,500 (1 mark)

12. Difference between current and non-current assets:

• Current assets are assets that are expected to be converted into cash, sold, or used up within one year or the normal operating cycle of the business (1 mark)
• Non-current assets are assets held for long-term use in the business, typically for more than one year, and are not intended for resale (1 mark)
  Examples: Current asset – inventory/trade receivables/cash; Non-current asset – land and buildings/equipment (1 mark for any correct example of current, 1 mark for any correct example of non‑current)

13. (a) Likely cause of decrease in net profit margin:

• Operating expenses have increased at a faster rate than gross profit (1 mark)
• While gross profit margin remained stable, the net profit margin fell, meaning expenses are taking a larger share of revenue (1 mark)

(b) One action to improve net profit margin:

• Reduce or control operating expenses (e.g., renegotiate rent, cut unnecessary costs) (1 mark)
• Increase selling prices without affecting demand (1 mark)
  Accept any reasonable suggestion.

14. Reason for high gross profit but low net profit:

• Very high operating expenses (e.g., rent, salaries, depreciation) are consuming most of the gross profit. (2 marks)
• Poor expense control or one-off expenses that are not part of cost of sales. (1 mark for valid reason, 1 mark for elaboration)

15. Purpose of the Statement of Financial Position:

• To report the assets, liabilities, and owner’s equity (capital) of a business at a specific point in time (1 mark)
• It shows the financial position and helps users assess liquidity, solvency, and capital structure (1 mark)
  Accept: To show what the business owns and owes on a particular date.

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Section D: Extended Application (10 marks)

16. Ahmad Trading - Income Statement for the year ended 31 December 2025

	$	$
Revenue		450,000
Less: Cost of sales
Opening inventory	25,000
Add: Purchases	280,000
Less: Purchases returns	(5,000)
Add: Carriage inwards	3,500
Net purchases	278,500
Cost of goods available for sale	303,500
Less: Closing inventory	(22,000)
Cost of sales		(281,500)
Gross profit		168,500
Less: Operating expenses		(95,000)
Net profit		73,500

Marking:

• Correct heading with business name and date (1 mark)
• Correct calculation of cost of sales: $281,500 (1 mark)
• Correct gross profit: $168,500 (1 mark)
• Correct net profit: $73,500 (1 mark)

17. Difference between trade payables and trade receivables:

• Trade receivables are amounts owed to the business by its customers for credit sales (1 mark)
• Trade payables are amounts the business owes to its suppliers for credit purchases (1 mark)
  Accept: Receivables are assets, payables are liabilities.

18. Effect of repaying a portion of bank loan:

• Cash at bank decreases (current asset) (1 mark)
• Bank loan decreases (non-current/current liability, depending on the portion repaid) (1 mark)
• Total assets and total liabilities both decrease, but the accounting equation remains in balance.

19. Example of a non-current liability:

• Bank loan (repayable after one year) (1 mark)
• Mortgage payable, debentures, etc.

20. Example of a current asset other than inventory:

• Trade receivables (1 mark)
• Cash at bank, prepaid expenses, etc.

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END OF ANSWER KEY