Question Tag: Income Statement

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  • 5 Marks

AA – Nov 2024 – L2 – Q3b – Audit Assertions for the Income Statement

Explain two key audit assertions for the income statement.

Audit assertions are claims made by management regarding the accuracy and completeness of various elements of financial statements. These assertions are used by auditors to develop audit procedures and gather evidence to support their audit opinion. Assertions are categorised into those related to the income statement and those related to the statement of financial position.

Required:
Explain TWO key Audit Assertions for the Income Statement.

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  • 30 Marks

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

Despite the global recession, demand for the company’s products has recently increased and is expected to grow over the next two years.

As part of a recent strategic review, the directors made the following projections for the years ending March 31, 2018, and March 31, 2019:

  1. An anticipated annual revenue increase of 8% for each year.
  2. Operating costs (excluding depreciation) expected to rise by 4% per year.
  3. Tax rate to remain at 21%, payable in the year liability arises.
  4. The trade receivables/revenue and trade payables/operating costs ratios will stay the same.
  5. Inventory levels to increase by 10% in the year ending March 31, 2018, and then remain stable.
  6. Non-current assets, including Lekki Plc.’s headquarters and factory, are not depreciated, and capital allowances are negligible.
  7. Dividend growth rate to remain at 6% annually, with dividends declared at the year-end and paid the following year.
  8. Purchase of new machinery at N8 million, financed through existing overdraft facilities. Machinery to be depreciated straight-line over 8 years with a N1 million residual value; capital allowances will apply at 18% reducing balance.
  9. Finance costs are projected to increase by 50% in the year ending March 31, 2018, and remain stable thereafter.

Financial Statement Extracts (March 31, 2017):

  • Income Statement:
    • Revenue: N60,240,000
    • Operating Costs: N49,500,000
    • Operating Profit: N10,740,000
    • Finance Costs: N800,000
    • Profit before Tax: N9,940,000
    • Tax: N2,286,000
    • Profit after Tax: N7,654,000
  • Statement of Financial Position:
    • Assets:
      • Non-current Assets: N28,850,000
      • Current Assets:
        • Inventories: N9,020,000
        • Trade Receivables: N9,036,000
        • Cash and Equivalents: N396,000
    • Equity and Liabilities:
      • Ordinary Share Capital: N16,700,000
      • Retained Earnings: N12,482,000
      • Non-current Liabilities: N8,000,000 (6% Debentures)
      • Current Liabilities: N10,120,000 (Trade Payables, Dividends)

Assume today is April 1, 2017.

a. Prepare a Forecast Financial Statement (Income Statement, Statement of Financial Position, and Cash Flow Statement) for each of the years ending March 31, 2018, and March 31, 2019.
(24 Marks)

Note: All calculations should be rounded up to the nearest N’000.

b. Beyond March 31, 2019, the directors are considering the disposal of a smaller subsidiary due to poor performance. The Finance Director suggests avoiding liquidation to minimize industrial relations issues.

Required: Discuss three non-liquidation methods to divest the subsidiary.
(6 Marks)

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  • 15 Marks

FA – May 2012 – L1 – SB – Q1 – Accounts of Not-for-Profit Entities

Prepare income statement, income and expenditure account, and statement of financial position for a not-for-profit society.

The following details are available from the books of Tops Darts Society:

(iii)
The person handling Dart sales, “all in cash,” disappeared with the money received from this source. It is unknown how much was stolen, but all darts were sold at a profit of 33⅓% on cost price.

(iv)
Three people paid life membership fees of N4,000 each. One-tenth of this amount is to be credited to the income and expenditure account each year, while the remaining is treated as prepaid.

(v)
Depreciation on equipment is to be calculated at 20%.

You are required to:

(a) Draw up a Darts Income Statement for the year 2011 to calculate the gross profit on Darts sold. The cash stolen should be credited to this account, with a debit shown in the Income and Expenditure Account.
(b) Prepare an Income and Expenditure Account for the year ended 31 December 2011, and a Statement of Financial Position as at that date.

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  • 1 Marks

FA – May 2012 – L1 – SA – Q30 – Accounting Treatment for Bad and Doubtful Debts

Identifying how a decrease in provision for doubtful debts impacts the income statement and provision account.

A decrease in provision for doubtful debts is ……………………. to the income statement and ……………………….. to the provision for doubtful debt account.

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  • 1 Marks

FA – Nov 2020 – L1 – SA – Q2 – Financial Statements Preparation

Difference between an income statement and an income and expenditure account.

The difference between an income statement and an income and expenditure account is that:
A. An income and expenditure account is another name for an income statement.
B. An income statement is prepared for a business while an income and expenditure account is prepared for a not-for-profit organization.
C. An income statement is prepared for a business while an income and expenditure account is prepared on a cash flow basis.
D. An income statement is prepared on an accrual basis while an income and expenditure account is prepared on a cash basis.
E. An income statement is prepared for a manufacturing business while an income and expenditure account is prepared for a non-manufacturing business.

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  • 1 Marks

FA – May 2014 – L1 – SA – Q11 – Financial Statements Preparation

Calculates the cost of sales from given gross profit and sales figures.

Aye Limited has a gross profit of 11% and its sales are N150,000. What is the cost of sales?
A. N133,500
B. N142,500
C. N154,500
D. N160,000
E. N165,000

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  • 1 Marks

FA – Nov 2015 – L1 – SA – Q8 – Financial Statements Preparation

This question calculates the revised net profit after correcting an accounting error.

Compute the revised net profit, given a net profit before the adjustment as N550,000.
A. N300,000
B. N400,000
C. N525,000
D. N700,000
E. N800,000

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  • 12 Marks

PT – May 2020 – L2 – Q4b – Special considerations for taxation of gifts and capital allowances.

Calculation of the chargeable income for Stella-VD Ltd for the 2018 year of assessment.

The Company’s assets include the following:

Type of Assets Date of Acquisition Cost (GH¢)
Factory Building 01/10/2017 300,000
Plant and Machinery 25/10/2017 171,000
Delivery Van 01/11/2017 50,000
Computers 01/10/2017 40,000
Furniture and Fittings 10/12/2017 150,000
Other Office Equipment 01/10/2017 200,000
Office Building 30/06/2018 500,000
Required:
Required:
a) Compute the appropriate capital allowance for 2017 and 2018 year of assessment. (8 marks)
b) Calculate the chargeable income of the company for assessment year 2018.
(12 marks)

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  • 7 Marks

CR – May 2018 – L3 – Q2c – Financial instruments: Recognition and measurement Corporate reporting

Show the accounting treatment for a convertible loan note under IFRS 9 for income statement and financial position.

Alfa Limited issued a GH¢5,000,000 18% convertible loan note at par on 1 July 2015 with interest payable annually in arrears. Three years later, on 30 June 2018, the loan note becomes convertible into equity shares on the basis of GH¢100 of loan note for 50 equity shares, or it may be redeemed at par in cash at the option of the loan note holder. The Financial Accountant of Alfa Limited has observed that the use of a convertible loan note was preferable to a non-convertible loan note as the latter would have required an interest rate of 24% in order to make it attractive to investors.

The present value of GH¢1 receivable at the end of the year, based on discount rates of 18% and 24%, can be taken as:

Year 18% 24%
1 0.847 0.806
2 0.718 0.650
3 0.609 0.524

Required:
Show the accounting treatments for the convertible loan note in Alfa Limited’s:
i) income statement for the years ended 30 June 2016, 2017, and 2018. (3 marks)
ii) statement of financial position as at 30 June 2016, 2017, and 2018. (4 marks)
(Note: Assume that the share option is taken at the end of June 30, 2018.)

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  • 15 Marks

MA – Nov 2020 – L2 – Q2b – Budgetary Control, Cash Budgets and Master Budgets

Prepare various budgets and an income statement for October 2019 for Mercury Company’s TomaCan product.

Mercury Company’s management wants to prepare budgets for one of its products, TomaCan, for October 2019.

The firm sells the product for GH¢75 per unit and has the following expected sales (in units) for these months in 2019:

July August September October November December
6,000 7,000 8,000 9,000 10,000 11,000

The production process requires 5 kilos of Atadwe and 3 kilos of Ginger. The firm’s policy is to maintain an ending finished goods inventory each month equal to 15% of the following month’s budgeted sales, but in no case less than 1,300 units. All materials inventories are to be maintained at 10% of the production needs for the next month, but not to exceed 3,000 kilos. The firm expects all inventories at the end of September to be within the guidelines. The purchase department expects the materials to cost GH¢1.75 per kilo for Ginger and GH¢5.00 per kilo for Atadwe respectively.

The production process requires direct labor at two Skill Levels (SL). The rate for labor at SL1 is GH¢45 per hour, and for SL2 is GH¢25 per hour. SL1 can process one batch of TomaCan per hour, while SL2 uses double the time of SL1 for the same output. Each batch consists of 10 units.

Variable manufacturing overhead is GH¢100 per batch plus GH¢75 per direct labor-hour. Fixed production overhead is GH¢51,240. It is the plan of Mercury Company to spend a third of variable and fixed production overhead costs on selling and administration expenses. The company is in the 25% tax bracket but enjoys a rebate of 50% because of its location. The company uses an actual cost system. The unit cost of production in October is the same as that of September.

Required: On the basis of the preceding data and projections, prepare the following budgets:

i) Production budget for October (in units).
ii) Direct materials purchases budget for October (in kilos).
iii) Direct materials purchases budget for October (in Cedis).
iv) Direct manufacturing labor budget for October (in Cedis).
v) Income statement for the month of October 2019.

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  • 20 Marks

MA – Nov 2015 – L2 – Q2 – Budgetary control

Prepare budgeted income statement, statement of financial position, and cash budget for Brofre Limited for the first quarter.

Brofre Limited retails fertilizer to farmers in Ghana. The company has approached its bankers to provide funding for next year’s operations, and a three-month master budget has been requested for review by the bankers.

You have been approached by the management as a consultant to prepare the 1st quarter budget for the banker’s consideration for its next year’s operations.

End of Accounting year December 2014:

Item GHS
Debtors 23,000
Bank balance 55,000
Fixed asset at cost 698,000
Provision for depreciation 98,000
Creditors Balance 48,000
Operating expenses (Dec) 60,000
Sales (Dec) 400,000
December Ending Inventory 20,000
Retained earnings 120,000

Additional information provided:

  1. Depreciation is provided at the rate of 5% on the cost of non-current assets.
  2. Closing inventory is expected to increase by GHS 2,000 in January from December levels. This is expected to increase by the same figure in February from the projected figure in January. It is expected that in March, closing inventory is desired to be GHS 26,000.
  3. The company makes a profit of 25% on its sales.
  4. Operating expenses are expected to increase by 10% from that of December and this is projected to increase at the same growth rate until March.
  5. Sales are projected to grow by 15% from December until March.
  6. The Debtors figure is desired to be proportional to the sales values.
  7. Creditors value for the three months is expected to be as follows: January – GHS 50,000; February – GHS 46,000; March – GHS 52,000.

You are required as a consultant for Brofre Limited to prepare for their bankers:

a) The budgeted income statement for the three months. (7 marks)
b) The budgeted statement of financial position for the three months. (7 marks)
c) The cash budget for the three months. (6 marks)
(Total = 20 marks)

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  • 20 Marks

FA – Mar 2024 – L1 – Q4 – Non-current assets and depreciation | Preparation of financial statements of a sole trader

Prepare the Statement of Profit or Loss and Statement of Financial Position for Kontiba Enterprise, including necessary adjustments.

Kontiba Enterprise

Statement of Profit or Loss for the year ended 30 September 2023

The following information is also available:
1) Only 10 months’ salaries are shown in the Trial Balance. An equal amount is paid for
salaries for each month of the year.
2) As at 30 September 2023, GH¢2,560 had been prepaid for insurance, whilst GH¢328 was
owing for general expenses.
3) GH¢3,680 had been charged to general expenses for the owner’s private holiday.
4) As at 30 September 2023, inventory was valued at GH¢18,000.
5) A customer, owing GH¢4,032 has been declared bankrupt. This amount is to be written
off in full.
6) An allowance for receivables is to be maintained at 3% of the receivables balance.
7) As at 30 September 2023, the business’s land was valued at GH¢80,000. Land is not
depreciated.
8) Depreciation is to be provided as follows:
Buildings: 4% per annum using the straight line method.
Equipment: 25% per annum using the straight line method.
Page 7 of 20

Motor vehicles: 40% per annum using the reducing balance method.
9) There were no additions or disposals of non-current assets during the financial year.

Required:
i) Prepare the statement of profit or loss for the year ended 30 September 2023. (10 marks)
ii) Prepare the statement of financial position as at 30 September 2023. (10 marks)

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  • 20 Marks

FA – July 2023 – L1 – Q4 – Preparation of limited liability company financial statements

Prepare the statement of profit or loss and statement of financial position for a limited liability company using the provided trial balance and adjustments.

The following trial balance relates to Pakro Ltd at 31 July 2022:

The following matters remain to be adjusted for in preparing the financial statements for the year ended 31 July 2022:

  1. The cost of inventory of GHȼ 38,400 for the year ended 31 July 2022 was based on an inventory count on 4 August 2022. Between 31 July 2022 and 4 August 2022, the following transactions took place:
Item GHȼ
Purchases of goods 8,000
Sales of goods (profit margin 20% on sales) 12,000
Goods returned by Pakro Ltd to a supplier 800
  1. Trade receivables totaling GHȼ24,000 are to be written off and allowance for receivables is to be adjusted to GHȼ8,000. The irrecoverable debt expense is to be included in administrative expenses.
  2. Pakro Ltd receives rent for subletting part of its building. The rent, which is receivable quarterly in advance, was received as follows:
Date of receipt Period covered GHȼ
1 July 2021 3 months to 30 September 2021 7,200
1 October 2021 3 months to 31 December 2021 7,200
30 December 2021 3 months to 31 March 2022 9,000
4 April 2022 3 months to 30 June 2022 9,000
1 July 2022 3 months to 30 September 2022 9,000
  1. The loan of GHȼ60,000 was taken out on 1 January 2022 with annual interest of 12%. The interest is payable in equal instalments on the first day of April, July, October, and January in arrears. The loan is repayable in full during the financial year ended 31 July 2026.
  2. Depreciation is to be provided for as follows:
    • Buildings 2.5% per year on cost
    • Plant and equipment 25% per year on cost
    • 70% of the depreciation is to be charged in cost of sales, and 15% each in distribution costs and administrative expenses.
  3. Current year income tax charged was GHȼ18,105.

Required:

a) Prepare the Statement of Profit and Loss for the year ended 31 July 2022. (10 marks)
b) Prepare the Statement of Financial Position as at 31 July 2022. (10 marks)

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  • 20 Marks

FA – May 2021 – L1 – Q4 – Inventory | Non-current assets and depreciation | Preparation of limited liability company financial statements

Preparation of financial statements for a limited liability company, including adjustments for inventory, prepayments, accruals, depreciation, and allowance for receivables.

The following is the trial balance of Poloo Ltd as at 31 December 2020:

Account Debit (GH¢) Credit (GH¢)
Authorised, issued, and called-up capital:
– 500,000 equity shares of GH¢1 each 500,000
– 60,000 7% redeemable preference shares of 50p each 30,000
Equipment: cost 350,000
Equipment: accumulated depreciation 75,000
Motor vehicle: cost 160,000
Motor vehicle: accumulated depreciation 25,650
Premises 220,000
Inventory as at 1 January 2020 51,980
Bank 10,050
Sales 508,420
Purchases 225,000
Trade receivables 130,010
Trade payables 10,200
Distribution costs 80,400
Administrative expenses 45,240
Irrecoverable debts 1,250
Allowance for receivables 14,360
Rent received 8,500
Income from investments 17,040
Interim dividend on equity shares 7,420
Retained earnings 51,760
General reserve 40,420
Total 1,281,350 1,281,350

Additional information:
i) Inventories as at 31 December 2020 are valued at GH¢85,420.
ii) Insurance includes GH¢840 for one and half years ending 30 June 2021. Insurance is included in administrative expenses.
iii) Rent received includes an amount of GH¢2,400 paid in advance as at 31 December 2020.
iv) Distribution costs of GH¢750 were prepaid, and administrative expenses of GH¢800 were owing as at 31 December 2020.
v) The total trade receivables balance of GH¢130,010 includes a balance of GH¢1,010 which has been outstanding for ten months. Poloo Ltd has decided to write off this balance.
vi) Poloo Ltd’s policy is to allow for receivables on the basis of the length of time the debt has been outstanding. The aged analysis of trade receivables at 31 December 2020 and the required allowance are shown below:

Age of Debt Balance (GH¢) Allowance Required
0 – 30 days 80,000 Nil
31 – 60 days 40,000 20% of balances
Over 60 days 10,010 85% of balances

vii) On 15 January 2020, Poloo Ltd purchased premises at a cost of GH¢105,000. This cost included GH¢3,500 relating to legal costs. The legal costs of GH¢3,500 had been included in administrative expenses and not in the cost of premises. Premises are not depreciated.
viii) On 1 April 2020, Poloo Ltd purchased equipment that cost GH¢50,000. This transaction was entered in the accounts on 1 April 2020.
ix) Depreciation is to be provided as follows:

  • Equipment: 20% per annum on cost
  • Motor vehicles: 20% per annum reducing balance basis
    x) Depreciation on equipment is apportioned 20% to administrative expenses and 80% to distribution costs. Depreciation is charged for each month of use. Depreciation of motor vehicles is treated as a distribution cost.

Required:
Prepare, for Poloo Ltd, the following statements in accordance with International Financial Reporting Standards (IFRS):
a) Statement of Profit or Loss for the year ended 31 December 2020.
(10 marks)
b) Statement of Financial Position as at 31 December 2020.
(10 marks)

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  • 20 Marks

FA – Nov 2020 – L1 – Q4 – Accruals and prepayments | Inventory | Non-current assets and depreciation | Preparation of financial statements of a sole trader

Preparation of the income statement and statement of financial position for a sole trader with adjustments for inventory, accruals, prepayments, depreciation, and other relevant adjustments.

Kofi Badu, a sole trader, extracted the following Trial Balance from the business books as of 30 April 2019:

The following information is also relevant:
i) The closing inventory as at 30 April 2019 was valued at GH¢8,010.
ii) As at 30 April 2019, accrued rent income for the year amounted to GH¢420; heat and light accrued was GH¢260; whilst salaries of GH¢720 was paid in advance.
iii) During the year, Kofi Badu had withdrawn goods costing GH¢720 for his personal use. This had not been recorded in the accounts.
iv) New equipment costing GH¢2,650 was purchased during the year but had been mistakenly included in purchases. This is yet to be corrected.
v) A cheque for GH¢440 received from a customer in full settlement of a debt of GH¢450 has not yet been entered in the accounts.
vi) Allowance for doubtful debt is to be maintained at 2% of receivables.
vii) Depreciation is to be provided for as follows:

  • Equipment- 20% per annum using the straight-line method. A full year’s depreciation is provided on all equipment held at 30 April 2019, regardless of the date of purchase.
  • Motor vehicles- 40% per annum using the reducing balance method.

Required:
a) Prepare a statement of profit or loss for Kofi Badu for the year ended 30 April 2019.
(12 marks)

b) Prepare a statement of financial position for Kofi Badu as at 30 April 2019.

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  • 31 Marks

FA – May 2016 – L1 – Q1 – Accruals and prepayments | Bad and doubtful debt | Preparation of financial statements of a sole trader

Prepare income statement and balance sheet, identify and explain accounting concepts related to specific adjustments.

Asomdwee Enterprise is run by a sole trader. The following Trial Balance was prepared from the business accounts on 30th September 2015:

Account Dr (GH¢) Cr (GH¢)
Capital 185,280
Inventory 24,200
Sales 421,450
Purchases 167,350
Purchase returns 6,040
Electricity 2,230
Discounts allowed 2,420
Discounts received 4,270
Motor expenses 1,580
Drawings 32,000
Bank 24,511
Salaries 108,000
Insurance 15,400
Receivables 110,140
Irrecoverable debts 1,420
Allowance for receivables 3,153
Payables 76,288
General expenses 6,780
9% Loan (2012-2019) 150,000
Loan interest 12,000
Land and buildings 340,000
Accumulated depreciation – buildings 26,000
Equipment 22,000
Accumulated depreciation – equipment 10,300
Motor vehicles 26,000
Accumulated depreciation – motor vehicles 13,250
Total 896,031 896,031

The following information is also available:
i) Only 10 months’ salaries are shown in the Trial Balance. An equal amount is paid for salaries for each month of the year.
ii) As at 30th September 2015, GH¢3,200 had been prepaid for insurance, whilst GH¢410 was owing for general expenses.
iii) GH¢4,600 had been charged to general expenses for the owner’s private holiday.
iv) As at 30th September 2015, inventory was valued at GH¢22,500.
v) A customer, owing GH¢5,040, has been declared bankrupt. This amount is to be written off in full.
vi) An allowance for receivables is to be maintained at 3% of the remaining receivables.
vii) As at 30th September 2015, the business’s land was valued at GH¢100,000. Land is not depreciated.
viii) Depreciation is to be provided as follows:

  • Buildings: 4% per annum using the straight-line method.
  • Equipment: 25% per annum using the straight-line method.
  • Motor vehicles: 40% per annum using the reducing balance method.
    ix) There were no additions or disposals of non-current assets during the financial year.

Required:
a) Prepare the Income Statement for the year ended 30th September 2015. (8 marks)
b) Prepare the Statement of Financial Position as at 30th September 2015. (6 marks)
c) i) Identify the accounting concept involved in each of the footnotes/items (i), (iii), and (v). (3 marks)
ii) Explain the correct accounting treatment in each case. (3 marks)

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  • 20 Marks

FA – Nov 2015 – L1 – Q6 -Preparation of limited liability company financial statements

Prepare an income statement and financial statements for a vehicle spare parts dealer, Agyakoo, from incomplete records.

Agyakoo is a vehicle spare parts dealer in Aboisokai. He deposits his cash takings into his bank account after retaining GH¢2,000 per week for personal use and paying wages and other expenses. For the accounting period ending 31st December 2014, the following expenses were noted:

Description GH¢
Staff wages 1,440
Cleaning 1,200
Sundry 5,000
Telephone 600
Rent 10,000
Electricity 500
Accountancy fees 750

The following are his bank transactions:

Description GH¢
Income Tax 3,000
Telephone 600
Bank Lodgments:
Cash Sales 30,100
Bulk Sales (Cheques) 95,000
Treasury bill Interest 5,000
Payments to Suppliers 110,000
Rent 10,000
Electricity 500
Balance as at 1st January 2014 6,000

Additional Information:

01/01/2014 31/12/2014
Furniture & Fittings 1,200 1,100
Stocks in Trade 10,500 7,650
Payables – Goods Purchased 1,670 2,750
Payables – Rent 5,000 6,000
Payables – Electricity 500 650
Payables – Telephone 150 200
Accountancy Fee – 750
Treasury Bills 10,000 10,000
Receivables – Bulk Sales 8,000 15,000

You are required to:
i. Prepare an Income Statement for the year ending 31st December 2014. (10 marks)
ii. Prepare a Statement of Affairs as at 1st January 2014. (2 marks)
iii. Prepare a Statement of Financial Position as at 31st December 2014. (8 marks)

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