Practice Questions: Introduction and the Vertical Form

Deepak Traders Ltd Revenue statement for the year ended 31 March 2027, in vertical form

Working note: cost of goods sold

The three figures asked for.

The five decisions in this question, and each carries a mark.

1. Preliminary expenses of Rs 20,000 are deducted from proprietors' funds, not shown as an asset. They are a fictitious asset.
2. Preference capital is inside proprietors' funds.
3. Carriage inward is in cost of goods sold; carriage outward is a selling expense. They are on opposite sides of the gross profit line.
4. Dividend received, profit on sale of furniture and loss by fire are all non-operating, so they sit below operating profit.
5. Debenture interest has a line of its own below profit before interest and tax, not among the operating expenses.

Answer 2

(a) Statement of trend percentages, 2023 = 100

The comment, which is the ten marks.

Sales have doubled in four years and so has net profit, which means the profit margin has been held while the business grew. That is the strongest thing the table says.

But the two did not move together throughout. Between 2023 and 2025 sales rose 40 per cent while profit rose only 20 per cent, so the margin was falling in the early years. From 2025 the profit trend gains on the sales trend, and by 2027 it has caught up, so whatever was squeezing the margin was corrected.

Assets rose 75 per cent against sales of 100 per cent, so the business is producing more sales from each rupee of assets than it was in 2023. That is an improvement in asset utilisation and it is favourable.

Taken together the three trends show growth that has become more efficient, and the year to watch is 2025, where the direction of the margin changed.

(b) Analysis breaks the statements up and establishes relationships; it produces a figure. Computing that sales in 2027 stand at a trend of 200 is analysis.

Interpretation says what the relationship means; it produces a judgment. Saying that because assets rose only to 175 while sales rose to 200 the company is using its assets better than it did is interpretation.

Answer 3

(a) Financial accounting compared with management accounting

And the sentence to open with: every difference below the first follows from it, because reporting to outsiders is what makes the form compulsory, the period statutory and the figure auditable.

(b) Answers in one or two sentences

1. Deducted from proprietors' funds, because they are a fictitious asset and not an asset at all.

2. No, it is a current liability, unless the question states that the arrangement is permanent.

3. Profit before interest and tax, because capital employed includes the lenders' money and the interest is the reward of that money, so it must not yet be deducted.

4. Define the problem, identify the alternatives, collect the relevant data, evaluate the alternatives, select a course, and implement and review it.

5. It must be a future cost, and it must differ between the alternatives.

6. The common size statement, because it relates items within one statement rather than the same item across periods.

7. When the ratio pairs a flow from the revenue statement with a stock from the balance sheet, such as cost of goods sold with stock, and the question gives both the opening and the closing figure.

Marking yourself