VCE Accounting Practice Exam 3
Financial Statements – Income Statement and Balance Sheet
✎ Complete ALL questions on paper before reading the model answers below. No notes. Approximately 1 minute per mark. Model answers appear after the STOP divider.
SHORT ANSWER QUESTIONS (4 marks each)
Question 1 (4 marks)
Explain the purpose of the income statement and list its key sections.
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Question 2 (4 marks)
Calculate COGS, Gross Profit and Net Profit:
Gross Sales $95,000; Sales Returns $3,000; Opening Inventory $10,000; Purchases $52,000; Purchase Returns $2,000; Closing Inventory $8,000; Wages $18,000; Rent $9,000; Depreciation $3,500; Interest Income $800
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Question 3 (4 marks)
Explain depreciation and how it is calculated using the straight-line method.
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Question 4 (4 marks)
Prepare Income Statement for Hassan’s Hardware year ended 30 June:
Gross Sales $140K; Sales Returns $4K; Opening Inventory $12K; Purchases $78K; Purchase Returns $3K; Closing Inventory $14K; Wages $28K; Rent $12K; Insurance $2K; Depreciation $5K; Interest Income $1,500
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Question 5 (4 marks)
Explain current ratio and working capital. Calculate: CA $42,000; CL $14,000.
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Question 6 (4 marks)
Explain depreciation. What factors affect the depreciation charge?
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Question 7 (4 marks)
Calculate net profit for Walker’s Cafe:
Sales $180K; Returns $2K; Opening Inv $8K; Purchases $95K; Purch Returns $4K; Closing Inv $11K; Wages $35K; Rent $18K; Depr $4K; Insurance $2.5K; Interest Income $1.2K
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Question 8 (4 marks)
Explain the difference between an expense and drawings. Why does the distinction matter?
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EXTENDED RESPONSE QUESTIONS
Extended Response 1: Income Statement Analysis
Question 9 (5 marks)
Extended Response 1: Income Statement Analysis (a)
Explain GPM and NPM. Calculate: Net Sales $200K; COGS $130K; Total Expenses $45K. Interpret results.
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Extended Response 1: Income Statement Analysis
Question 10 (3 marks)
Extended Response 1: Income Statement Analysis (b)
How can a business have high GPM but low NPM?
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Extended Response 2: Balance Sheet Analysis
Question 11 (4 marks)
Extended Response 2: Balance Sheet Analysis (a)
Distinguish current and non-current items. Why is classification important?
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Extended Response 2: Balance Sheet Analysis
Question 12 (4 marks)
Extended Response 2: Balance Sheet Analysis (b)
Calculate and interpret: CA $35K; CL $25K; Total Assets $95K; Total Liabilities $55K.
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▼ STOP — Complete ALL questions above before reading model answers below ▼
MODEL ANSWERS — SHORT ANSWER
✦ Model Answer – Question 1 (4 marks)
Purpose: reports financial performance over a period – shows profit or loss. Used by owners, managers and creditors.
Key sections: 1. Revenue – Net Sales + Other Income; 2. COGS – Opening + Net Purchases – Closing Inventory; 3. Gross Profit – Net Sales – COGS; 4. Operating Expenses – wages, rent, depreciation etc; 5. Net Profit – Gross Profit + Other Income – Expenses.
✦ Model Answer – Question 2 (4 marks)
Net Sales=$92,000; Net Purchases=$50,000; COGS=$10K+$50K-$8K=$52,000; Gross Profit=$40,000; Total Income=$40,800; Total Expenses=$30,500; Net Profit=$10,300
✦ Model Answer – Question 3 (4 marks)
Depreciation: systematic allocation of asset cost over useful life. Why necessary: matching; accrual basis; accurate asset values; accurate profit.
Straight-line: Annual Depreciation = (Cost – Residual Value) / Useful Life. Example: $25K cost; $5K residual; 4 years → $5,000/year. Carrying value Year 2 = $25K – $10K = $15K.
✦ Model Answer – Question 4 (4 marks)
Net Sales=$136K; Net Purchases=$75K; COGS=$73K; Gross Profit=$63K; Total Income=$64,500; Total Expenses=$47K; NET PROFIT=$17,500
✦ Model Answer – Question 5 (4 marks)
Working Capital = $42,000 – $14,000 = $28,000. Positive buffer – can meet short-term obligations.
Current Ratio = $42,000 / $14,000 = 3.0:1. Strong liquidity – $3 current assets per $1 liability. Benchmark 1.5-2:1.
✦ Model Answer – Question 6 (4 marks)
Depreciation: allocation of asset cost over useful life (matching; accrual; accurate values; accurate profit).
Factors: (1) Asset cost; (2) Estimated useful life; (3) Residual value; (4) Method chosen (straight-line vs diminishing balance).
✦ Model Answer – Question 7 (4 marks)
Net Sales=$178K; COGS=$88K; Gross Profit=$90K; Total Income=$91.2K; Expenses=$59.5K; NET PROFIT=$31,700
✦ Model Answer – Question 8 (4 marks)
Expense: cost incurred in earning revenue – reduces OE through income statement. Drawings: owner withdrawal for personal use – not a business expense; reduces OE directly.
Why matters: (1) Profit measurement – recording drawings as expenses understates profit; (2) Entity assumption – personal costs not in business accounts; (3) Tax – personal expenses not deductible.
MODEL ANSWERS — EXTENDED RESPONSE
✦ Model Answer – Question 9 (5 marks)
GPM = $70K/$200K x100 = 35%; NPM = $25K/$200K x100 = 12.5%.
GPM (35%): $0.35 retained per $1 sales after goods cost. NPM (12.5%): $0.125 per dollar is net profit. Gap of 22.5 pp = operating expenses consuming 22.5 cents per dollar – monitor for cost control.
✦ Model Answer – Question 10 (3 marks)
When high trading margins are eroded by high operating expenses. GPM 50% but expenses 47% of sales → NPM only 3%. Suggests cost control problem: excessive wages, high rent, inefficient processes. Management should analyse each expense as % of sales and identify where costs can be reduced.
✦ Model Answer – Question 11 (4 marks)
Current assets: converted to cash within 12 months (cash, AR, inventory, prepaid). Current liabilities: due within 12 months (AP, GST, accrued wages). Non-current assets: benefit >12 months (equipment, vehicles, buildings). Non-current liabilities: due after 12 months (mortgages, long-term loans).
Why important: (1) Liquidity assessment – current ratio requires correct classification; (2) Solvency analysis; (3) Matching – NCA should be financed by long-term sources; (4) Cash management – know which obligations fall due within 12 months.
✦ Model Answer – Question 12 (4 marks)
Current Ratio = $35K/$25K = 1.4:1 – below ideal 2:1; limited liquidity buffer.
Working Capital = $35K-$25K = $10K – positive but modest; could be eroded quickly.
Debt Ratio = $55K/$95K = 57.9% – creditors finance more than half of assets; moderately high risk.
OE = $95K-$55K = $40K.
