CXC Principles of Accounts: Financial Statements 1 — Questions and Answers
Question 1: What is the primary purpose of the Income Statement?
- To show the assets and liabilities of a business at a specific date
- To show the revenues and expenses of a business over a period (Correct answer)
- To show the cash movements in and out of a business
- To show the long-term financial position of shareholders
Correct answer: To show the revenues and expenses of a business over a period
The Income Statement reports a business's revenues and expenses over a specific accounting period, resulting in a net profit or net loss.
Question 2: Which of the following is classified as revenue on an Income Statement?
- Rent expense
- Cost of goods sold
- Sales income (Correct answer)
- Depreciation
Correct answer: Sales income
Sales income is revenue — it is money earned from the business's primary trading operations.
Question 3: The formula for calculating Gross Profit is:
- Net Sales + Cost of Goods Sold
- Net Sales − Cost of Goods Sold (Correct answer)
- Net Sales − Operating Expenses
- Revenue − Net Profit
Correct answer: Net Sales − Cost of Goods Sold
Gross Profit = Net Sales minus Cost of Goods Sold (COGS), representing profit earned before deducting operating expenses.
Question 4: Net Profit is calculated as:
- Gross Profit + Operating Expenses
- Gross Profit − Operating Expenses (Correct answer)
- Revenue − Cost of Goods Sold only
- Total Assets − Total Liabilities
Correct answer: Gross Profit − Operating Expenses
Net Profit = Gross Profit minus all Operating Expenses, representing the final profit after all costs have been deducted.
Question 5: Which of the following would appear as an expense on the Income Statement?
- Land and buildings
- Salaries paid to employees (Correct answer)
- Accounts receivable
- Closing inventory
Correct answer: Salaries paid to employees
Salaries are an operating expense incurred in running the business and are recorded on the Income Statement.
Question 6: The term 'accrued expense' in accounting refers to:
- Cash already received for services not yet provided
- An expense incurred but not yet paid in cash (Correct answer)
- An asset that has been fully depreciated
- A payment made in advance for future goods
Correct answer: An expense incurred but not yet paid in cash
An accrued expense is a cost already incurred by the business but for which cash payment has not yet been made.
Question 7: Which accounting concept requires that revenue and related expenses be recorded in the same accounting period?
- Going concern concept
- Matching concept (Correct answer)
- Prudence concept
- Consistency concept
Correct answer: Matching concept
The Matching Concept (also called the Accruals Concept) requires that expenses be matched to the revenue they helped generate in the same period.
CXC Principles of Accounts: Financial Statements 1
What is the primary purpose of the Income Statement?