Profit & Loss Account Flashcards
(8 cards)
What is the primary purpose of a profit and loss account?
A. To calculate the business’s assets and liabilities
B. To show total capital invested by shareholders
C. To display the profit available for distribution
D. To record income and expenses over an accounting period
D. To record income and expenses over an accounting period
Explanation: The profit and loss account summarises income earned and expenses incurred to determine net profit or loss over a specific period.
Which of the following would NOT normally appear in a profit and loss account?
A. Wages
B. Sales revenue
C. Debtors
D. Rent
C. Debtors
Explanation: Debtors are an asset and appear on the balance sheet. The profit and loss account only includes income and expense accounts.
A business has the following entries: Opening stock £5,000, Purchases £20,000, and Closing stock £8,000. What is the cost of sales?
A. £17,000
B. £27,000
C. £23,000
D. £25,000
A. £17,000
Explanation: Cost of sales = Opening stock + Purchases – Closing stock = £5,000 + £20,000 – £8,000 = £17,000.
If a business earns £600,000 in revenue and incurs £100,000 in cost of sales and £350,000 in expenses, what is the net profit?
A. £250,000
B. £500,000
C. £150,000
D. £100,000
D. £150,000
Explanation: Gross profit = £600,000 – £100,000 = £500,000. Net profit = £500,000 – £350,000 = £150,000.
Which of the following best defines “gross profit”?
A. Net profit before tax
B. Income less expenses
C. Income less cost of sales
D. Cash at bank plus total income
C. Income less cost of sales
Explanation: Gross profit is the total income minus the cost of sales. Net profit includes further deductions for expenses.
A business paid £12,000 in insurance for the upcoming year on 1 October. Its year-end is 31 December. How much insurance expense will appear in the profit and loss account for the year ending 31 December?
A. £12,000
B. £3,000
C. £9,000
D. £6,000
B. £3,000
Explanation: Only 3 months’ worth (Oct–Dec) relates to the current accounting period. £12,000 ÷ 12 × 3 = £3,000.
Which of the following would be classified as an expense in the profit and loss account?
A. Stock
B. Motor vehicle
C. Postage
D. Cash in hand
C. Postage
Explanation: Postage is a recurring cost and classified as an expense. Stock and vehicles are assets; cash in hand is also an asset.
Which of the following would result in an increase in net profit, assuming all else remains constant?
A. Increasing depreciation
B. Increasing rent
C. Reducing electricity expenses
D. Increasing wages
C. Reducing electricity expenses
Explanation: A reduction in expenses (like electricity) increases net profit, while increases in other expenses (depreciation, rent, wages) reduce it.
