Sole trader financial statements

Topic 16: Sole Trader Financial Statements — 50 Hard MCQs

1. A sole trader has the following information.

Item	$
sales	280 000
sales returns	12 000
opening inventory	35 000
purchases	162 000
purchases returns	6000
carriage inwards	4000
closing inventory	42 000

What is the gross profit?

A $103 000
B $111 000
C $115 000
D $127 000

2. A sole trader’s gross profit is $115 000. Expenses are wages $38 000, rent paid $20 000 including $4000 prepaid, insurance owing $1500, depreciation $12 000. Discount received is $2000.

What is the profit for the year?

A $35 500
B $49 500
C $51 500
D $53 500

3. A business has sales $360 000. Sales returns are $18 000. Gross profit margin is 30%.

What is cost of sales?

A $102 600
B $239 400
C $252 000
D $257 400

4. Sales revenue is $420 000. The business applies a mark-up of 40% on cost.

What is gross profit?

A $120 000
B $168 000
C $300 000
D $588 000

5. A sole trader has opening capital $86 000. Profit for the year is $34 000. Drawings are $18 000 and additional capital introduced is $12 000.

What is closing capital?

A $90 000
B $102 000
C $114 000
D $150 000

6. A sole trader’s opening capital is $75 000 and closing capital is $92 000. During the year, drawings were $23 000 and additional capital introduced was $8000.

What was profit for the year?

A $2000
B $17 000
C $32 000
D $48 000

7. A business has sales $500 000, opening inventory $60 000, purchases $310 000 and closing inventory $75 000.

What is the gross profit margin?

A 41%
B 59%
C 69%
D 73%

8. A sole trader has the following balances.

Item	$
revenue	180 000
cost of sales	108 000
administrative expenses	34 000
selling expenses	18 000
finance costs	4000
discount received	1500

What is profit for the year?

A $15 500
B $17 500
C $19 500
D $21 500

9. A trader’s purchases were $95 000. Purchase returns were $4000. Carriage inwards was $2500. Opening inventory was $18 000 and closing inventory was $22 000.

What was cost of sales?

A $89 500
B $91 500
C $93 500
D $97 500

10. Closing inventory was incorrectly overstated by $7000.

What is the effect on the income statement?

A gross profit overstated by $7000
B gross profit understated by $7000
C cost of sales overstated by $7000
D profit unaffected

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Opening inventory was incorrectly overstated by $5000.

What is the effect on the current year’s profit?

A profit overstated by $5000
B profit understated by $5000
C profit overstated by $10 000
D no effect

12. A business paid rent of $24 000 during the year. Rent prepaid at the start was $3000 and rent owing at the end was $2000.

What rent expense is shown in the income statement?

A $19 000
B $23 000
C $25 000
D $29 000

13. A business paid wages of $52 000 during the year. Wages owing at the start were $4400 and wages owing at the end were $6100.

What wages expense is shown in the income statement?

A $50 300
B $52 000
C $53 700
D $62 500

14. A business paid insurance of $15 600 during the year. Insurance prepaid at the start was $1800 and insurance prepaid at the end was $2400.

What insurance expense is shown?

A $13 200
B $15 000
C $15 600
D $16 200

15. A sole trader has a motor vehicle costing $36 000. Accumulated depreciation at the start of the year was $13 500. Depreciation is charged at 25% per annum on cost.

What is the carrying value at the end of the year?

A $9000
B $13 500
C $22 500
D $13 500

16. A business has equipment costing $80 000. Accumulated depreciation at the start of the year was $30 000. Depreciation is charged at 20% using reducing balance.

What depreciation is charged for the year?

A $10 000
B $16 000
C $20 000
D $50 000

17. A sole trader has trade receivables of $54 000. A debt of $3000 is written off. An allowance of 5% of remaining receivables is required.

What amount is shown as net trade receivables?

A $48 450
B $51 000
C $51 300
D $54 000

18. A sole trader has trade receivables of $80 000. Existing allowance for irrecoverable debts is $3400. A new allowance of 4% of trade receivables is required.

What is the effect on profit?

A profit increases by $200
B profit decreases by $200
C profit increases by $3200
D profit decreases by $3400

19. A business writes off an irrecoverable debt of $1800 and increases its allowance for irrecoverable debts by $600.

What is the total charge to the income statement?

A $600
B $1200
C $1800
D $2400

20. A sole trader has non-current assets $96 000, accumulated depreciation $28 000, inventory $35 000, trade receivables $24 000, allowance for irrecoverable debts $1200, bank overdraft $7000 and trade payables $19 000.

What is capital?

A $95 800
B $96 800
C $107 000
D $123 000

21. A statement of financial position shows capital at the end of the year as $124 000. During the year, profit was $29 000, drawings were $17 000 and capital introduced was $6000.

What was opening capital?

A $94 000
B $106 000
C $112 000
D $118 000

22. Which item is not shown in a sole trader’s income statement?

A carriage outwards
B depreciation expense
C drawings
D discount received

23. Which item is included in cost of sales?

A carriage inwards
B carriage outwards
C discount allowed
D rent expense

24. Which item is deducted from gross profit to calculate profit for the year?

A sales returns
B closing inventory
C purchases returns
D depreciation expense

25. Which item increases gross profit?

A increase in sales returns
B increase in purchases returns
C increase in carriage inwards
D decrease in closing inventory

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. A sole trader has revenue $240 000 and cost of sales $156 000.

What is the mark-up?

A 35%
B 53.85%
C 65%
D 84%

27. A business has gross profit $72 000 and cost of sales $180 000.

What is the gross profit margin?

A 28.57%
B 40%
C 60%
D 72%

28. A business has gross profit margin of 25% and gross profit of $60 000.

What is sales revenue?

A $80 000
B $180 000
C $240 000
D $300 000

29. A business has mark-up of 331/3% and gross profit of $45 000.

What is sales revenue?

A $90 000
B $135 000
C $180 000
D $195 000

30. A business has sales $400 000 and gross profit $160 000. Opening inventory was $50 000 and closing inventory was $70 000.

What were purchases?

A $200 000
B $220 000
C $260 000
D $280 000

31. A business has sales $310 000, sales returns $10 000, purchases $190 000, purchases returns $8000, opening inventory $34 000 and closing inventory $44 000.

What is gross profit?

A $118 000
B $120 000
C $126 000
D $128 000

32. A sole trader’s profit before depreciation is $64 000. Depreciation on equipment is $11 000. Depreciation on motor vehicles is $8000.

What is profit for the year?

A $45 000
B $53 000
C $56 000
D $83 000

33. A business mistakenly treats drawings of $5000 as wages expense.

What is the effect on profit and capital?

A profit understated and drawings understated
B profit overstated and drawings overstated
C profit understated and assets overstated
D profit unaffected and capital unaffected

34. Goods costing $2200 taken by the owner for personal use were not recorded.

What is the effect on profit and capital?

A profit overstated and capital overstated
B profit overstated and capital understated
C profit understated and capital overstated
D profit unaffected and capital understated

35. A sole trader includes capital introduced of $10 000 as sales revenue.

What is the effect?

A profit overstated and capital correctly stated
B profit understated and capital overstated
C profit overstated and capital understated
D profit unaffected and capital understated

36. A sole trader includes loan received of $20 000 as revenue.

What is the effect?

A profit overstated and liabilities understated
B profit understated and liabilities overstated
C profit overstated and assets understated
D profit unaffected and liabilities understated

37. A business has the following balances.

Item	$
profit before adjustments	42 000
accrued expenses omitted	3000
prepaid expenses omitted	1200
accrued income omitted	800
income received in advance omitted	1500

What is corrected profit?

A $39 500
B $40 700
C $41 500
D $44 500

38. A sole trader has gross profit $90 000. Operating expenses are $54 000. Loan interest is $5000. Commission income is $4000.

What is profit for the year?

A $31 000
B $35 000
C $40 000
D $45 000

39. A business sells a machine for $17 000. Its carrying value is $21 000. No entry has been made for the disposal result.

What adjustment is required in the income statement?

A add $4000 profit
B deduct $4000 loss
C add $17 000 revenue
D deduct $21 000 expense

40. A business sells equipment for $26 000. Its carrying value is $19 000.

How is this shown in the income statement?

A $7000 profit on disposal
B $7000 loss on disposal
C $26 000 sales revenue
D $19 000 depreciation

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A sole trader has the following statement of financial position balances.

Item	$
non-current assets at carrying value	140 000
inventory	36 000
trade receivables	28 000
bank	7000
trade payables	24 000
loan repayable in 5 years	50 000
accrued expenses	3000

What is capital?

A $84 000
B $134 000
C $137 000
D $211 000

42. A business has current assets $68 000, current liabilities $41 000, non-current assets $120 000 and non-current liabilities $52 000.

What is capital?

A $95 000
B $120 000
C $147 000
D $281 000

43. A sole trader’s income statement shows profit for the year of $38 000. However, closing inventory was understated by $6000 and depreciation was understated by $2500.

What is corrected profit?

A $29 500
B $34 500
C $41 500
D $46 500

44. A sole trader’s draft profit is $51 000. Accrued rent of $4000 was omitted, prepaid insurance of $1500 was omitted, and closing inventory was overstated by $3000.

What is corrected profit?

A $45 500
B $47 500
C $49 500
D $59 500

45. A business has opening capital $100 000. Assets increased by $36 000 and liabilities increased by $11 000 during the year. The owner introduced capital of $9000 and made drawings of $14 000.

What was profit for the year?

A $16 000
B $25 000
C $30 000
D $50 000

46. A business has closing capital $88 000. Opening capital was $74 000. During the year the owner introduced a motor vehicle valued at $12 000 and withdrew cash of $9000.

What was profit for the year?

A $11 000
B $14 000
C $21 000
D $35 000

47. A business has sales $600 000. Gross profit margin is 35%. Expenses are 22% of sales. Other income is $12 000.

What is profit for the year?

A $78 000
B $90 000
C $120 000
D $222 000

48. A business has sales $180 000. Mark-up is 50%. Expenses are $44 000.

What is profit for the year?

A $16 000
B $44 000
C $60 000
D $76 000

49. A sole trader’s profit is $28 000 after incorrectly including a bank loan received of $15 000 as income and omitting accrued wages of $3000.

What is corrected profit?

A $10 000
B $13 000
C $16 000
D $46 000

50. Which statement about a sole trader’s financial statements is correct?

A Drawings are deducted as an expense in the income statement.
B Capital introduced is added to revenue in the income statement.
C Profit increases capital in the statement of financial position.
D A bank overdraft is shown as a non-current asset.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. C — $115 000

• Net sales = 280 000 – 12 000 = $268 000

• Net purchases = 162 000 – 6000 = $156 000

• Cost of sales = opening inventory + net purchases + carriage inwards – closing inventory

• = 35 000 + 156 000 + 4000 – 42 000

• = $153 000

• Gross profit = 268 000 – 153 000

• = $115 000

2. B — $49 500

• Gross profit = $115 000

• Wages = $38 000

• Rent expense = 20 000 – 4000 prepaid = $16 000

• Insurance owing = $1500

• Depreciation = $12 000

• Discount received = income, so add $2000

• Profit = 115 000 – 38 000 – 16 000 – 1500 – 12 000 + 2000

• = $49 500

3. B — $239 400

• Net sales = 360 000 – 18 000 = $342 000

• Gross profit margin = 30%

• Cost of sales = 70% of net sales

• = 342 000 × 70%

• = $239 400

4. A — $120 000

• Mark-up = 40% on cost

• Sales = 140% of cost

• Cost = 420 000 / 1.4 = $300 000

• Gross profit = 420 000 – 300 000

• = $120 000

5. C — $114 000

• Closing capital = opening capital + profit + capital introduced – drawings

• = 86 000 + 34 000 + 12 000 – 18 000

• = $114 000

6. C — $32 000

• Closing capital = opening capital + profit + capital introduced – drawings

• 92 000 = 75 000 + profit + 8000 – 23 000

• 92 000 = 60 000 + profit

• Profit = $32 000

7. A — 41%

• Cost of sales = 60 000 + 310 000 – 75 000

• = $295 000

• Gross profit = 500 000 – 295 000

• = $205 000

• Gross profit margin = 205 000 / 500 000 × 100

• = 41%

8. B — $17 500

• Gross profit = revenue – cost of sales

• = 180 000 – 108 000 = $72 000

• Profit = 72 000 – 34 000 – 18 000 – 4000 + 1500

• = $17 500

9. A — $89 500

• Net purchases = 95 000 – 4000 = $91 000

• Cost of sales = opening inventory + net purchases + carriage inwards – closing inventory

• = 18 000 + 91 000 + 2500 – 22 000

• = $89 500

10. A — gross profit overstated by $7000

• Closing inventory is deducted from cost of sales.

• If closing inventory is overstated:

  • cost of sales is understated

  • gross profit is overstated

• Gross profit is overstated by $7000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. B — profit understated by $5000

• Opening inventory is added to cost of sales.

• If opening inventory is overstated:

  • cost of sales is overstated

  • profit is understated

• Profit is understated by $5000

12. D — $29 000

• Rent expense = rent paid + opening prepayment + closing accrual

• = 24 000 + 3000 + 2000

• = $29 000

13. C — $53 700

• Wages expense = wages paid – opening wages owing + closing wages owing

• = 52 000 – 4400 + 6100

• = $53 700

14. B — $15 000

• Insurance expense = insurance paid + opening prepayment – closing prepayment

• = 15 600 + 1800 – 2400

• = $15 000

15. B or D — $13 500

• Depreciation for year = 25% × 36 000 = $9000

• Accumulated depreciation at end = 13 500 + 9000 = $22 500

• Carrying value = 36 000 – 22 500

• = $13 500

• Options B and D are identical, so the MCQ has a duplicate correct option.

16. A — $10 000

• Reducing balance depreciation is based on carrying value.

• Carrying value at start = 80 000 – 30 000 = $50 000

• Depreciation = 20% × 50 000

• = $10 000

17. A — $48 450

• Trade receivables after write-off = 54 000 – 3000 = $51 000

• Allowance = 5% × 51 000 = $2550

• Net trade receivables = 51 000 – 2550

• = $48 450

18. A — profit increases by $200

• Required allowance = 4% × 80 000 = $3200

• Existing allowance = $3400

• Allowance decreases by $200

• Decrease in allowance increases profit by $200

19. D — $2400

• Irrecoverable debt written off = $1800

• Increase in allowance = $600

• Total income statement charge = 1800 + 600

• = $2400

20. No correct option — correct answer is $99 800

• Non-current assets at carrying value = 96 000 – 28 000 = $68 000

• Net trade receivables = 24 000 – 1200 = $22 800

• Total assets = 68 000 + 35 000 + 22 800 = $125 800

• Liabilities = 7000 + 19 000 = $26 000

• Capital = 125 800 – 26 000

• = $99 800

• The option set needs correction.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. B — $106 000

• Closing capital = opening capital + profit + capital introduced – drawings

• 124 000 = opening capital + 29 000 + 6000 – 17 000

• 124 000 = opening capital + 18 000

• Opening capital = $106 000

22. C — drawings

• Drawings are not expenses.

• They are deducted from capital in the statement of financial position.

• Carriage outwards, depreciation and discount received are income statement items.

23. A — carriage inwards

• Carriage inwards is part of the cost of bringing purchases into the business.

• It is included in cost of sales.

• Carriage outwards is a selling/distribution expense.

24. D — depreciation expense

• Depreciation is an operating expense.

• It is deducted from gross profit to calculate profit for the year.

25. B — increase in purchases returns

• Purchases returns reduce net purchases.

• Lower net purchases reduce cost of sales.

• Lower cost of sales increases gross profit.

26. B — 53.85%

• Gross profit = revenue – cost of sales

• = 240 000 – 156 000 = $84 000

• Mark-up = gross profit / cost of sales × 100

• = 84 000 / 156 000 × 100

• = 53.85%

27. A — 28.57%

• Sales = gross profit + cost of sales

• = 72 000 + 180 000 = $252 000

• Gross profit margin = 72 000 / 252 000 × 100

• = 28.57%

28. C — $240 000

• Gross profit margin = gross profit / sales × 100

• 25% = 60 000 / sales

• Sales = 60 000 / 0.25

• = $240 000

29. C — $180 000

• Mark-up = 331/3% means profit is 1/3 of cost.

• If gross profit = $45 000, cost = 45 000 × 3 = $135 000

• Sales = cost + gross profit

• = 135 000 + 45 000

• = $180 000

30. C — $260 000

• Cost of sales = sales – gross profit

• = 400 000 – 160 000 = $240 000

• Purchases = cost of sales – opening inventory + closing inventory

• = 240 000 – 50 000 + 70 000

• = $260 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. D — $128 000

• Net sales = 310 000 – 10 000 = $300 000

• Net purchases = 190 000 – 8000 = $182 000

• Cost of sales = 34 000 + 182 000 – 44 000

• = $172 000

• Gross profit = 300 000 – 172 000

• = $128 000

32. A — $45 000

• Profit before depreciation = $64 000

• Total depreciation = 11 000 + 8000 = $19 000

• Profit for the year = 64 000 – 19 000

• = $45 000

33. A — profit understated and drawings understated

• Drawings are not expenses.

• Treating drawings as wages makes expenses too high.

• Profit is understated.

• Drawings are understated because they were not recorded correctly.

34. C — profit understated and capital overstated

• Goods taken by owner should be:

  • debit drawings

  • credit purchases

• If not recorded:

  • purchases/cost of sales are overstated

  • profit is understated

  • drawings are understated, so capital is overstated

• This one is a proper little trap.

35. A — profit overstated and capital correctly stated

• Capital introduced should increase capital, not sales.

• Recording it as sales overstates profit.

• However, when profit is transferred to capital, the final total capital may still be correct because capital introduced was not separately credited.

36. A — profit overstated and liabilities understated

• A bank loan is a liability, not revenue.

• If recorded as revenue:

  • income is overstated

  • profit is overstated

  • liabilities are understated

37. A — $39 500

• Draft profit = $42 000

• Less accrued expenses omitted = $3000

• Add prepaid expenses omitted = $1200

• Add accrued income omitted = $800

• Less income received in advance omitted = $1500

• Corrected profit = 42 000 – 3000 + 1200 + 800 – 1500

• = $39 500

38. B — $35 000

• Profit = gross profit – operating expenses – loan interest + commission income

• = 90 000 – 54 000 – 5000 + 4000

• = $35 000

39. B — deduct $4000 loss

• Carrying value = $21 000

• Sale proceeds = $17 000

• Loss on disposal = 21 000 – 17 000

• = $4000

• The loss is deducted in the income statement.

40. A — $7000 profit on disposal

• Sale proceeds = $26 000

• Carrying value = $19 000

• Profit on disposal = 26 000 – 19 000

• = $7000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. B — $134 000

• Total assets = 140 000 + 36 000 + 28 000 + 7000

• = $211 000

• Total liabilities = 24 000 + 50 000 + 3000

• = $77 000

• Capital = 211 000 – 77 000

• = $134 000

42. A — $95 000

• Total assets = current assets + non-current assets

• = 68 000 + 120 000 = $188 000

• Total liabilities = current liabilities + non-current liabilities

• = 41 000 + 52 000 = $93 000

• Capital = 188 000 – 93 000

• = $95 000

43. C — $41 500

• Draft profit = $38 000

• Closing inventory understated means profit understated, so add $6000

• Depreciation understated means profit overstated, so subtract $2500

• Corrected profit = 38 000 + 6000 – 2500

• = $41 500

44. A — $45 500

• Draft profit = $51 000

• Accrued rent omitted = subtract $4000

• Prepaid insurance omitted = add $1500

• Closing inventory overstated = subtract $3000

• Corrected profit = 51 000 – 4000 + 1500 – 3000

• = $45 500

45. C — $30 000

• Assets increased by $36 000

• Liabilities increased by $11 000

• Capital increased by 36 000 – 11 000 = $25 000

• Capital increase = profit + capital introduced – drawings

• 25 000 = profit + 9000 – 14 000

• 25 000 = profit – 5000

• Profit = $30 000

46. A — $11 000

• Closing capital = opening capital + profit + capital introduced – drawings

• 88 000 = 74 000 + profit + 12 000 – 9000

• 88 000 = 77 000 + profit

• Profit = $11 000

47. B — $90 000

• Gross profit = 35% × 600 000 = $210 000

• Expenses = 22% × 600 000 = $132 000

• Other income = $12 000

• Profit = 210 000 – 132 000 + 12 000

• = $90 000

48. A — $16 000

• Mark-up = 50%, so sales = 150% of cost

• Cost of sales = 180 000 / 1.5 = $120 000

• Gross profit = 180 000 – 120 000 = $60 000

• Profit = 60 000 – 44 000

• = $16 000

49. A — $10 000

• Draft profit = $28 000

• Bank loan wrongly included as income = subtract $15 000

• Accrued wages omitted = subtract $3000

• Corrected profit = 28 000 – 15 000 – 3000

• = $10 000

50. C — Profit increases capital in the statement of financial position

• Profit increases owner’s capital.

• Drawings reduce capital, not income statement profit.

• Capital introduced is added to capital, not revenue.

• Bank overdraft is a current liability.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.