Income statement: practice questions

How to approach these questions

The income statement tests ordering and classification. Before you fill in any figure, sketch the skeleton in sequence: revenue, less returns inwards, gives net revenue. Then opening inventory plus purchases (less returns outwards, plus carriage inwards), minus closing inventory, gives cost of sales.

Then gross profit, then the list of expenses, then profit for the year. Writing this frame first stops you dropping a whole section under time pressure. It also gives the examiner a structure to award method marks against.

Give the statement a full title, such as "Income Statement for the year ended 31 December". The heading often carries a presentation mark.

Read the requirement to see how far the statement must go. Some questions want only the trading section up to gross profit. Others want the full profit for the year, and a few add a statement of financial position.

Underline the closing date. Then scan the trial balance and tick each item as you place it, so nothing is used twice or forgotten. This is the most reliable way to avoid leaving out an expense such as insurance or an income such as rent received.

Carriage is the classic trap. Carriage inwards, the cost of bringing goods into the business, is added to purchases and belongs in cost of sales. Carriage outwards, the cost of delivering goods to customers, is an expense shown after gross profit.

Mixing them up shifts gross profit and costs you marks in both sections. Returns inwards reduce revenue. Returns outwards reduce purchases.

Discount allowed is an expense and discount received is income. Say each item's nature to yourself before you write it down.

Adjustments carry the higher marks. For accruals, add the amount owing to the expense. It later appears as a current liability.

For prepayments, subtract the amount paid in advance from the expense. It becomes a current asset. Depreciation is an expense.

If the question gives a rate, calculate it. For example, 20% on a cost of RM10,000 is a RM2,000 charge. Irrecoverable debts written off are an expense.

A change in the allowance for doubtful debts is an expense if it increases and income if it decreases. Do the adjustment in the margin and bring only the adjusted figure into the statement.

Layout earns quiet marks. Use two money columns, with subtotals such as total expenses in the inner column and the running result in the outer column. Keep one figure per line and label every line.

Closing inventory is subtracted within the cost of sales working, not listed as income. It also appears later as a current asset. Income other than sales, such as rent received or commission received, is added after gross profit.

Check your result. For a normal trader, gross profit must be positive. If it is negative, you probably mishandled inventory or carriage.

Profit for the year equals gross profit plus other income minus total expenses. Compare each figure with the trial balance to catch a transposed number, such as RM4,500 written as RM5,400.

If time is short, place every item in the right section first. Classification marks are more numerous than arithmetic marks.

If you lose marks on carriage, returns or adjustments, one of our teachers can go through your answers with you and show you where the marks are slipping. Book a trial class