AAT L3 Final Accounts Preparation 4 — Questions and Answers
Question 1: Which financial statement shows the assets and liabilities of a business at a specific point in time?
- Statement of profit or loss
- Statement of cash flows
- Statement of financial position (Correct answer)
- Statement of changes in equity
Correct answer: Statement of financial position
The statement of financial position (balance sheet) is a snapshot at a specific date, showing assets, liabilities, and equity. It is a position statement, not a period statement.
Question 2: For a limited company, retained earnings brought forward plus profit for the year minus dividends paid equals:
- Net assets
- Retained earnings carried forward (Correct answer)
- Share capital
- Total equity
Correct answer: Retained earnings carried forward
Retained earnings c/f = retained earnings b/f + profit for the year − dividends paid. This movement in retained earnings is part of the statement of changes in equity.
Question 3: The going concern concept means financial statements are prepared on the assumption that:
- The business will be sold within one year
- The business will continue trading for the foreseeable future (Correct answer)
- All assets will be liquidated at market value
- The business has been trading for at least five years
Correct answer: The business will continue trading for the foreseeable future
The going concern basis assumes the entity will continue in operation for the foreseeable future, so assets are valued at cost less depreciation rather than liquidation values.
Question 4: Depreciation for the year is treated in the final accounts as:
- A non-current asset deducted from revenue
- An expense in the income statement (Correct answer)
- A liability in the balance sheet
- Deducted from gross profit before reaching operating profit
Correct answer: An expense in the income statement
Annual depreciation is an expense charged to the income statement (profit or loss), reducing net profit; the accumulated depreciation reduces the carrying amount of the non-current asset in the balance sheet.
Question 5: Interest on partners' capitals is credited to partners because:
- It is a tax deduction for the partnership
- It compensates partners for the use of their capital investment in the business (Correct answer)
- It is required by UK company law
- It replaces drawings
Correct answer: It compensates partners for the use of their capital investment in the business
Interest on capital recognises that partners' capital is tied up in the business; it compensates partners with different capital balances for the relative size of their investment before the remaining profit is shared.
Question 6: When inventory is damaged and written down to net realisable value, the journal entry is:
- Debit Inventory, Credit Cost of Sales
- Debit Inventory Write-Down Expense, Credit Inventory (Correct answer)
- Debit Cash, Credit Inventory
- Debit Revenue, Credit Inventory
Correct answer: Debit Inventory Write-Down Expense, Credit Inventory
Inventory written down: debit the inventory write-down expense (or cost of sales) to recognise the loss, and credit inventory to reduce the asset to its net realisable value.
AAT L3 Final Accounts Preparation 4
Which financial statement shows the assets and liabilities of a business at a specific point in time?