Scribd
Upload
130 views3 pages

Key Answers To Week 4 Topic - Income Statement

This document provides solutions to tutorial questions about the connection between statements of financial position and performance, and information an investor would need when a company announces an increase in profits. It explains that the statement of financial position summarizes transactions affecting income and expenses, and equity is impacted by profit/loss and equity changes. The company profit announcement indicates higher profits, but an investor would need additional financial and non-financial information to evaluate the investment opportunity.

Uploaded by

Liyendra Fernando
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
130 views3 pages

Key Answers To Week 4 Topic - Income Statement

This document provides solutions to tutorial questions about the connection between statements of financial position and performance, and information an investor would need when a company announces an increase in profits. It explains that the statement of financial position summarizes transactions affecting income and expenses, and equity is impacted by profit/loss and equity changes. The company profit announcement indicates higher profits, but an investor would need additional financial and non-financial information to evaluate the investment opportunity.

Uploaded by

Liyendra Fernando
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

SUGGESTED SOLUTION TO WEEK 5 TUTORIAL QUESTIONS

3.1 What is the major connection between the statements of financial position and
performance?
The statement of financial position summarises the transactions for the period
affecting income (revenues and other gains) and expenses. At the end of the
period these accounts are closed and the ‘profit or loss for the period’ is
transferred to the ‘Retained Profits’ account in the statement of financial
position (balance sheet).
Equity (end) = Equity (beg) + Profit for the period (or − Loss for the period) +
New equity contributions for the period − Equity distributions for the period.

3.6 Company Xcel Ltd announces an increase of 10% in profit


for the year to $1,700,000. As a potential investor in the
company:
(a) What does this announcement tell you?
(b) What other information do you require for deciding
whether or not to invest in the company?

Solution:

(a) The announcement informs us that the amount of the


profit for the year and the change from the previous
year’s profit.

(b) Additional information would be required, being:


(i) The accounting methods used in computing
the profit, and whether the methods have
changed from the previous year.
(ii) The components of the profit figure, and how
they have changed from the previous year.
(iii) What the expected profit had been and
whether the actual was below or above
expectations.
(iv) The performance in comparison to other
similar firms and other industry groups.
(v) The expectations of firm performance in the
future.
(vi) The expectations of returns from alternative
investments.
(vii) Non-financial information about the firm (e.g.
change in management; new product
development; new markets; political
sensitivity etc.).
(viii) The level of risk related to investments in this
company.

AE3.2

(a) Sales are $120,000


Gross profit 30% of sales is $36,000
So cost of sales is $84,000

Opening inventory plus purchases minus closing inventory equals cost of sales
So 5,000 + $80,000 – x = 84,000 where x is closing inventory
Closing inventory is $1,000

(b) Sales were $120,000


Gross profit was 30% so $36,000, so cost of sales was $84,000
Opening stock plus purchases less closing stock = cost of sales
So 25,000 + purchases – 8,000 = $84,000
So purchases = 84,000 – 25,000 + 8,000 = $67,000
AE3.5

The following income statement information relates to a trading enterprise and covers four
independent situations. Calculate the missing figures.
(a) (b) (c) (d)
$ $ $ $
Net sales 200,000 600,000 800,000 ?
Opening inventory 54,000 120,000 ? 230,000
Net purchases 130,000 ? 500,000 ?
Available inventory 184,000 ? ? ?
Closing inventory 44,000 85,000 150,000 255,000
Cost of sales ? 390,000 ? 660,000
Gross profit 60,000 210,000 260,000 240,000
Operating expenses 70,000 165,000 205,000 ?
Net profit/(loss) ? ? ? (25,000)

(a) (b) (c) (d)


Net sales 200,000 600,000 800,000 * 900,000
Opening inventory 54,000 120,000 * 190,000 230,000
Net purchases 130,000 * 355,000 500,000 * 685,000
Available 184,000 * 475,000 * 690,000 * 915,000
Closing inventory 44,000 85,000 150,000 255,000
Cost of goods sold * 140,000 390,000 * 540,000 660,000
Gross profit 60,000 210,000 260,000 240,000
Operating expenses 70,000 165,000 205,000 * 265,000
Net profit/(loss) * (10,000) * 45,000 * 55,000 (25,000)

Additional question

Accrual accounting
RM
Transactions

1 10,000 (expense)

2 200,000 (revenue)

3 18,000 (expense)

4 55,000 (expense)

5 1,000 (expense)

6 1,200 (expense)

7 1,000 (revenue)

Profit(Loss)

115,800 (profit)

You might also like