Question

Choose the correct option in the following questions :
1. The financial statements consist of:
(i) Trial balance
(ii) Profit and loss account
(iii) Balance sheet
(iv) (i) & (iii)
(v) (ii) & (iii)
2. Choose the correct chronological order of ascertainment of the
following profits from the profit and loss account :
(i) Operating Profit, Net Profit, Gross Profit
(ii) Operating Profit, Gross Profit, Net Profit
(iii) Gross Profit, Operating Profit, Net Profit
(iv) Gross Profit, Net Profit, Operating Profit
3. While calculating operating profit, the following are not taken
into account.
(i) Normal transactions
(ii) Abnormal items
(iii) Expenses of a purely financial nature
(iv) (ii) & (iii)
(v) (i) & (iii)
4. Which of the following is correct :
(i) [tex] Operating Profit = Operating profit – Non-operating expenses – Non-operating
incomes [/tex]
(ii) $Operating profit = Net profit + Non-operating Expenses + Non-operating incomes$
(iii) $Operating profit = Net profit + Non-operating Expenses – Non-operating incomes$
(iv) $Operating profit = Net profit – Non-operating Expenses + Non-operating incomes$

Answer 1

The following are the correct options:

1. v)

2.iii)

3.iii)

4.iv)

Explanation:

1. Answer is option v) i.e Profit and Loss Account and Balance Sheet.

Financial statements are written records of an organisation's monetary/non-monetary transactions which represent the organisation's business activities and financial performance/position in the market.

Financial statements include Statement of Profit and Loss,Balance sheet,Cash flow statements and Notes to accounts of such statements.

There are multiple users of financial statements such as Government,Stakeholders/Investors,Auditors,Accountants,Firms,etc. who use such statements for their own understanding of the organisation's business progress in the market and usage.

2. Answer is iii) i.e Gross profit -> Operating profit -> Net profit.

Gross Profit is calculated first from the Profit and Loss account as if we look at the definition of Gross Profit;which is,profit attained by the company/organisation/manufacturer after deducting the costs associated with the production/manufacturing of the product.

It can be calculated by using the following equation:

Gross Profit= Gross Revenue/Total Revenue - Cost of Goods sold(COGS)

COGS= Opening stock + Raw material Purchased + Direct expenses incurred - Closing stock

Please make sure to ask if you need any further explanation on calculation of COGS,as there are a lot of things/items which have been excluded to make the answer easy to understand.

Now,after calculating Gross profit,our next step is to calculate Operating profit which is nothing but Gross Profit - Operating costs/expenses such as employee salary/payroll,sales commission to sales agents,etc.

Now,to the final step,which is Net Profit which can be calculated as follows:

Net profit = Operating profit - Total expenses incurred such as Sales and distribution expenses,Office and Administration costs,etc.

3. Answer is iii) Expenses of a purely financial nature.

While calculating Operating profit,Expenses of purely financial nature are not included.Only operating incomes and expenses are taken.

4. Answer is iii).

Here,we are just going in reverse.

Therefore,Operating profit = Net profit + Non-operating expenses - Non-operating incomes.