ICAEW AF · Chapter 12
Financial statements of sole traders and partnerships MCQs with Answers
11 multiple-choice questions on Financial statements of sole traders and partnerships for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A sole trader's capital at the start of the year was £45,000. During the year the owner introduced a further £5,000, took cash drawings of £19,800 and took goods costing £1,500 for personal use. Profit for the year was £28,600. What is the closing capital?
- A) £57,300
- B) £58,800
- C) £47,300
- D) £52,300
Show answer & explanation
Answer: A) £57,300
Closing capital = opening capital + capital introduced + profit - drawings. Drawings include both the cash £19,800 and the goods £1,500, a total of £21,300. Closing capital = £45,000 + £5,000 + £28,600 - £21,300 = £57,300.
Question 2
A trader's inventory was destroyed and closing inventory must be estimated. Sales for the year were £150,000, and the trader always sells at a mark-up of 25% on cost. Opening inventory was £18,000 and purchases were £121,500. What was the closing inventory?
- A) £1,500
- B) £19,500
- C) £16,500
- D) £27,000
Show answer & explanation
Answer: B) £19,500
A mark-up of 25% on cost means sales are 125% of cost, so cost of sales = £150,000 x 100/125 = £120,000. Closing inventory = opening inventory + purchases - cost of sales = £18,000 + £121,500 - £120,000 = £19,500. Treating 25% as a margin on sales would give cost of sales of £112,500 and the wrong inventory figure.
Question 3
How are a sole trader's drawings presented in the financial statements?
- A) As an expense in the statement of profit or loss
- B) As a deduction from revenue in the statement of profit or loss
- C) As a current liability in the statement of financial position
- D) As a deduction from capital in the statement of financial position
Show answer & explanation
Answer: D) As a deduction from capital in the statement of financial position
Drawings are withdrawals of resources by the owner, not expenses of the business. They are deducted from the owner's capital, together with the addition of profit, in the capital section of the statement of financial position. Treating them as an expense would understate profit.
Question 4
Amir and Beth are in partnership. Their agreement provides for: a salary of £12,000 per year for Amir; interest on capital at 5% per year; and residual profits shared Amir:Beth 3:2. Capital balances are Amir £80,000 and Beth £60,000. Profit for the year is £96,000. What is Amir's total share of the profit?
- A) £57,600
- B) £62,200
- C) £46,200
- D) £66,400
Show answer & explanation
Answer: B) £62,200
Interest on capital: Amir £4,000, Beth £3,000. Residual profit = £96,000 - salary £12,000 - interest £7,000 = £77,000. Amir's share of the residual = 3/5 x £77,000 = £46,200. Amir's total = £12,000 + £4,000 + £46,200 = £62,200.
Question 5
Paula and Quentin share residual profits in the ratio 2:1. Quentin receives a salary of £9,000 per year, and interest is charged on drawings: Paula £900 and Quentin £600. The partnership profit for the year is £54,000. What is Quentin's total share of the profit for the year, after deducting his interest on drawings?
- A) £23,900
- B) £24,500
- C) £23,400
- D) £18,000
Show answer & explanation
Answer: A) £23,900
Interest on drawings is charged to the partners and added to the profit available for appropriation. Residual profit = £54,000 + £900 + £600 - salary £9,000 = £46,500. Quentin's residual share = 1/3 x £46,500 = £15,500. Quentin's total = £9,000 + £15,500 - £600 = £23,900.
Question 6
A partner's current account had a credit balance of £3,400 at the start of the year. Her share of profit for the year was £28,750 and her drawings were £30,500. What is the balance on her current account at the end of the year?
- A) £1,650 credit
- B) £5,150 credit
- C) £1,650 debit
- D) £1,750 debit
Show answer & explanation
Answer: A) £1,650 credit
The current account is credited with the opening balance and the share of profit, and debited with drawings. Closing balance = £3,400 + £28,750 - £30,500 = £1,650 credit. A credit balance means the partnership owes this amount to the partner.
Question 7
Under the Partnership Act 1890, which of the following applies when the partners have made no agreement about the sharing of profits?
- A) Profits are shared in proportion to the hours each partner works
- B) Profits and losses are shared equally, and no partner is entitled to a salary or interest on capital
- C) Profits are shared in proportion to the partners' capital balances
- D) Each partner receives interest on capital at 5% and residual profits are shared equally
Show answer & explanation
Answer: B) Profits and losses are shared equally, and no partner is entitled to a salary or interest on capital
In the absence of an agreement, the Partnership Act 1890 provides that profits and losses are shared equally. No partner is entitled to a salary or to interest on capital, and no interest is charged on drawings. A partner who lends money to the firm beyond their capital is entitled to interest on that loan at 5% per year.
Question 8
Why do many partnerships keep separate capital accounts and current accounts for each partner?
- A) Capital accounts are used only when a partner leaves the partnership
- B) Capital accounts record drawings, while current accounts record profit shares only
- C) Capital accounts record the fixed capital invested, while current accounts record each partner's share of profits, salaries, interest and drawings
- D) Current accounts are required by law to show amounts owed to the bank
Show answer & explanation
Answer: C) Capital accounts record the fixed capital invested, while current accounts record each partner's share of profits, salaries, interest and drawings
Keeping fixed capital accounts shows the long-term capital each partner has agreed to invest, which may be used to calculate interest on capital. Day-to-day movements, such as profit shares, salaries, interest and drawings, go through the current accounts. This separates the permanent investment from the fluctuating balances.
Question 9
A trader does not keep full records. Trade receivables were £6,800 at the start of the year and £7,950 at the end. During the year £92,400 was received from credit customers and debts of £600 were written off as irrecoverable. What were the credit sales for the year?
- A) £93,550
- B) £92,950
- C) £94,150
- D) £91,850
Show answer & explanation
Answer: C) £94,150
Reconstruct the receivables account: opening £6,800 + credit sales = cash received £92,400 + irrecoverable debts £600 + closing £7,950. Credit sales = £92,400 + £600 + £7,950 - £6,800 = £94,150.
Question 10
Rhys and Sian are partners with a 31 December year end. Until 30 June they shared profits equally. From 1 July they agreed to share profits Rhys:Sian 2:1. The profit for the year was £72,000, accruing evenly over the year. There are no salaries or interest. What is Rhys's share of the profit for the year?
- A) £30,000
- B) £36,000
- C) £42,000
- D) £48,000
Show answer & explanation
Answer: C) £42,000
The profit is split into two six-month periods of £36,000 each. January to June, shared equally: Rhys £18,000. July to December, shared 2:1: Rhys 2/3 x £36,000 = £24,000. Rhys's total = £18,000 + £24,000 = £42,000.
Question 11
A sole trader's records show: revenue £210,000; cost of sales £128,000; operating expenses £47,500; interest on a business loan £1,200; drawings £18,000. What is the profit for the year?
- A) £34,500
- B) £82,000
- C) £33,300
- D) £15,300
Show answer & explanation
Answer: C) £33,300
Gross profit = £210,000 - £128,000 = £82,000. Profit for the year = gross profit - operating expenses £47,500 - loan interest £1,200 = £33,300. Drawings are not an expense; they are deducted from capital.