AAT L3 Final Accounts Preparation 2 — Questions and Answers
Question 1: When preparing a profit or loss account, accrued income at year end is:
- Deducted from revenue
- Added to revenue as income earned but not yet received (Correct answer)
- Ignored as it is not yet due
- Classified as a long-term asset
Correct answer: Added to revenue as income earned but not yet received
Accrued income is revenue earned during the period but not yet received; it is added to revenue in the income statement and shown as a current asset (accrued income) on the balance sheet.
Question 2: In a limited company's income statement, corporation tax is shown as:
- An operating expense before gross profit
- A deduction from gross profit
- A tax charge after profit before tax (Correct answer)
- Not shown — it appears only in the notes
Correct answer: A tax charge after profit before tax
In a limited company's income statement, corporation tax is shown as a tax charge deducted from profit before tax to arrive at profit after tax (profit for the year).
Question 3: Partners' capital accounts are normally fixed. Changes are made for:
- Monthly drawings only
- Additional capital introduced or permanent changes to the partnership agreement (Correct answer)
- Profit share allocations each year
- Interest on drawings
Correct answer: Additional capital introduced or permanent changes to the partnership agreement
Fixed capital accounts only change for significant events such as additional capital contributions, permanent withdrawals of capital, or changes agreed in the partnership agreement; routine items go through current accounts.
Question 4: Carriage inwards is classified as:
- A selling expense
- Part of cost of sales (cost of goods sold) (Correct answer)
- A financial expense
- An administrative expense
Correct answer: Part of cost of sales (cost of goods sold)
Carriage inwards is the cost of having goods delivered to the business; as it is part of the cost of acquiring inventory, it is included in cost of sales, not treated as a selling or administrative expense.
Question 5: The revaluation reserve in a limited company balance sheet arises from:
- Profits retained in the business
- An upward revaluation of non-current assets (Correct answer)
- The issue of shares at a premium
- Currency translation differences
Correct answer: An upward revaluation of non-current assets
When a non-current asset is revalued upwards, the gain is not recognised in profit or loss but instead credited to a revaluation reserve within equity on the balance sheet.
Question 6: A limited company's statement of changes in equity shows:
- Only the profit for the year
- All changes in equity during the period including profit, dividends, share issues, and other movements (Correct answer)
- The tax liability for the year
- Only share capital movements
Correct answer: All changes in equity during the period including profit, dividends, share issues, and other movements
The statement of changes in equity reconciles the opening and closing equity balances by showing all movements: profit for the year, other comprehensive income, dividends paid, share issues, and transfers.
AAT L3 Final Accounts Preparation 2
When preparing a profit or loss account, accrued income at year end is: