The Statement of Profit or Loss Practice Quiz (11 questions)

All questions and answers

1. What does a statement of profit or loss report to show a business’s financial performance?

Cash receipts and payments over a period, for suppliers and customers
Revenue and expenses over a period, for interested parties such as investors and lenders
Assets and liabilities at a specific date, for interested parties such as investors and lenders
Production volumes and staffing levels at a specific date, for employees and managers

Revenue and expenses over a period, for interested parties such as investors and lenders

Explanation

It reports revenue and expenses across a period so interested parties can assess financial performance. A statement of financial position instead reports assets and liabilities at a point in time.

2. A business buys goods made by another company and resells them, while also providing repair services. Which description best fits its commercial activity?

It combines trading goods with providing services
It provides services while manufacturing goods for direct sale
It trades in goods and manufactures them for sale to traders
It manufactures goods for direct sale and provides services

It combines trading goods with providing services

Explanation

Commercial activity can combine trading goods made by another business with providing services. Manufacturing goods for sale is a separate activity and is not part of this scenario.

3. A shop sells goods to customers during a month. What does its revenue measure?

The cost of purchasing or manufacturing goods
The amount of cash invested by the business owners
The surplus remaining after expenses are deducted
The amount of goods or services sold

The amount of goods or services sold

Explanation

Revenue, also called sales or turnover, measures the amount of goods or services sold. The surplus after expenditure is deducted is profit, not revenue.

4. After deducting the cost of goods sold, a business calculates gross profit; after deducting all its expenses, it calculates net profit. What distinguishes the two figures?

Gross profit measures sales, while net profit measures expenditure
Gross profit deducts direct costs, while net profit deducts all expenses
Gross profit measures cash received, while net profit measures cash paid
Gross profit deducts all expenses, while net profit deducts direct costs

Gross profit deducts direct costs, while net profit deducts all expenses

Explanation

Gross profit is revenue less direct costs or cost of sales, while net profit is what remains after all expenses are deducted. Deducting all expenses at the gross-profit stage would confuse it with net profit.

5. What does the accrual principle require when recording business transactions?

Record revenues at the end of the year and expenses when suppliers are paid.
Record revenues when goods are ordered and expenses when invoices are issued.
Record revenues when earned and expenses when incurred, regardless of when cash moves.
Record revenues when cash is received and expenses when cash is paid.

Record revenues when earned and expenses when incurred, regardless of when cash moves.

Explanation

The accrual principle assigns revenues and expenses to the period in which they are earned or incurred, rather than the period when payment occurs. Recording them based on cash received or paid is the cash-based approach, not accrual accounting.

6. Mary buys a cooker for £135 and sells it for £195. What is the gross profit on this transaction?

£135
£60
£330
£195

£60

Explanation

The gross profit is the selling price minus the cooker’s purchase cost, giving £60. The £135 figure is the cost itself, not the surplus earned from the sale.

7. What is the role of categorizing business expenses into premises, selling and distribution, administration, and finance costs?

To distinguish goods available for resale from goods remaining in inventory
To identify which sales returns should be deducted from purchases
To separate amounts owed by customers from cash already received
To organize different types of expenditure for clearer analysis of the business

To organize different types of expenditure for clearer analysis of the business

Explanation

Grouping expenses by their nature makes the business’s expenditure easier to analyze. Inventory categories, customer balances, and returns are separate accounting concerns rather than the purpose of these expense categories.

8. How do trade discounts differ from financial discounts in business transactions?

Trade discounts apply to supplier purchases, while financial discounts apply to customer sales returns.
Trade discounts reward purchases such as large-volume orders, while financial discounts encourage prompt payment.
Trade discounts encourage prompt payment, while financial discounts reward regular customers buying large volumes.
Trade discounts reduce delivery charges, while financial discounts reduce the cost of goods returned.

Trade discounts reward purchases such as large-volume orders, while financial discounts encourage prompt payment.

Explanation

Trade discounts are offered for reasons such as regular or high-volume purchasing, whereas financial discounts are intended to encourage prompt payment. The reverse pairing is incorrect because it assigns each discount’s purpose to the other category.

9. Why can a service business with no inventory movements generally prepare a statement of profit or loss without a trading account?

It has no cost-of-sales inventory calculation to show, so profit is generally determined from revenue less expenses.
Its service transactions are recorded only when cash changes hands, so no profit calculation is needed.
Its service revenue is treated as an owner contribution, so expenses are reported separately from profit.
Its operating expenses are added to inventory, so the trading account is replaced by a statement of financial position.

It has no cost-of-sales inventory calculation to show, so profit is generally determined from revenue less expenses.

Explanation

A trading account is unnecessary when there are no inventory movements to account for, and the statement of profit or loss generally compares revenue with expenses. Treating service revenue as an owner contribution is incorrect because revenue remains part of the business’s performance calculation.

10. A business owner is reviewing the results for the year to decide how much profit to distribute and whether to change operations. How can the profit figure help with these decisions?

It can identify which goods must be manufactured rather than purchased.
It can determine the selling prices charged by competing businesses.
It can show how much cash customers will pay in the following year.
It can guide decisions about distributions, reinvestment, and operational changes.

It can guide decisions about distributions, reinvestment, and operational changes.

Explanation

A profit figure helps owners and managers decide how much profit to distribute or reinvest and whether operational changes are needed. It does not, by itself, determine competitors’ prices or future customer payments.

11. Which description best characterizes a business loss?

The amount of goods or services sold during a period
A surplus that occurs when revenue exceeds direct costs
The cost incurred to purchase or manufacture goods
A deficit that occurs when expenditure exceeds revenue

A deficit that occurs when expenditure exceeds revenue

Explanation

A loss arises when expenditure is greater than revenue. A surplus after direct costs describes gross profit, not a loss.

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What does a statement of profit or loss report over a period?

A business’s revenue and expenses, showing its financial performance to interested parties.

What is revenue?

The amount of goods or services sold.

How can a profit figure guide owners and managers?

It helps them decide how much profit to distribute or reinvest and whether operational changes are needed.

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