AAT L3 Final Accounts Preparation 1 — Questions and Answers
Question 1: The statement of profit or loss for a sole trader begins with:
- Gross profit
- Total expenses
- Revenue (sales) (Correct answer)
- Net profit
Correct answer: Revenue (sales)
The income statement (profit or loss) starts with Revenue (sales/turnover) at the top, then deducts cost of sales to arrive at gross profit, before deducting expenses to reach net profit.
Question 2: Gross profit is calculated as:
- Revenue minus total expenses
- Revenue minus cost of sales (Correct answer)
- Net profit plus expenses
- Cost of sales minus revenue
Correct answer: Revenue minus cost of sales
Gross profit = Revenue − Cost of Sales. Cost of sales includes opening inventory plus purchases minus closing inventory (and any returns or carriage inwards).
Question 3: In a partnership, the appropriation account shows:
- How the net profit is divided between the partners (Correct answer)
- The total revenue of the partnership
- The drawings of each partner
- The capital invested by each partner
Correct answer: How the net profit is divided between the partners
The appropriation account follows the income statement for a partnership; it distributes the net profit between partners by showing interest on capital, salaries (if agreed), and the profit share.
Question 4: Partners' current accounts record:
- The original capital invested by each partner
- The day-to-day transactions — drawings, salary, interest on capital, and profit share (Correct answer)
- The total assets of the partnership
- Bank transactions only
Correct answer: The day-to-day transactions — drawings, salary, interest on capital, and profit share
Partners' current accounts track the fluctuating element of each partner's stake: credits for salary allowance, interest on capital, and profit share; debits for drawings and interest on drawings.
Question 5: For a limited company, dividends are shown in the financial statements as:
- An operating expense in the income statement
- A deduction from retained earnings in the statement of changes in equity (Correct answer)
- A non-current liability on the balance sheet
- A component of share capital
Correct answer: A deduction from retained earnings in the statement of changes in equity
Dividends paid are distributions of profit to shareholders; they are shown as a deduction from retained earnings in the statement of changes in equity, not as an expense in the income statement.
Question 6: The balance sheet (statement of financial position) of a sole trader includes which of the following components of equity?
- Share capital and retained earnings
- Capital introduced, retained profit, and drawings (Correct answer)
- Ordinary shares, preference shares, and reserves
- Called-up share capital and share premium
Correct answer: Capital introduced, retained profit, and drawings
For a sole trader, equity comprises opening capital plus capital introduced plus net profit for the period, minus drawings. There is no share capital — the owner's equity is shown as capital.
AAT L3 Final Accounts Preparation 1
The statement of profit or loss for a sole trader begins with: