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Preparation of Company Statement of Profit or Loss

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Question 1Question →

When preparing a company's Statement of Profit or Loss, financial accountants present line items and key profit figures in a standardized vertical structure. How should the following financial deductions and intermediate totals be ordered from the top of the statement down to the final profit for the year?

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Answer

The correct presentation sequence in a company Statement of Profit or Loss is: (1) Deducting Cost of Sales from Revenue to compute Gross Profit, (2) Subtracting operating expenses from Gross Profit to obtain Profit from Operations, (3) Deducting finance costs (such as debenture interest) to determine Profit Before Tax, and (4) Subtracting corporate income tax expense from Profit Before Tax to arrive at Profit After Tax.
The standard vertical format of a company's Statement of Profit or Loss follows a logical sequence: Revenue minus Cost of Sales yields Gross Profit; deducting operating expenses gives Profit from Operations; deducting finance costs like debenture interest yields Profit Before Tax; and subtracting income tax expense gives Profit After Tax.

Step-by-Step Solution

1
Determine the initial gross profit section calculation.
Cost of Sales is subtracted from Revenue to determine Gross Profit.
Standard accounting rules require reporting trading gross profitability prior to administrative and distribution overheads.
2
Calculate the operating profit figure.
Operating expenses are deducted from Gross Profit to arrive at Profit from Operations.
Administrative, selling, and distribution expenses reflect core operational performance.
3
Deduct non-operational financing charges.
Finance costs like debenture interest are subtracted from Profit from Operations to yield Profit Before Tax.
Debenture interest represents a cost of long-term financing rather than an operational expense.
4
Account for corporate tax obligations.
Income tax provision is subtracted from Profit Before Tax to produce Profit After Tax.
Taxation applies to taxable earnings after finance expenses have been deducted.

Key Concept

Structure of Company Statement of Profit or Loss
Question 2Question →

Kano Allied Products Plc extracted the following balances from its trial balance for the year ended 31 December 2025:

- Gross Profit: ₦500,000
- Rent paid: ₦60,000
- Salaries paid: ₦90,000
- Existing Provision for Doubtful Debts: ₦12,000
- Trade Receivables: ₦160,000

Additional information at year-end:
1. Rent paid includes ₦10,000 prepaid for the next accounting year.
2. Salaries of ₦10,000 are accrued and unpaid.
3. Provision for doubtful debts is to be adjusted to 5% of Trade Receivables.

What is the net profit before taxation to be reported in the Statement of Profit or Loss?

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Answer: ₦354,000

Answer

The net profit before taxation to be reported in the Statement of Profit or Loss is ₦354,000.
The correct profit calculation accounts for prepaid rent by deducting ₦10,000 from rent paid (giving ₦50,000) and adding accrued salaries of ₦10,000 to salaries paid (giving ₦100,000), yielding ₦150,000 in total operating expenses. The required provision for doubtful debts is 5% of ₦160,000 = ₦8,000. Since the existing provision is ₦12,000, there is a reduction of ₦4,000, which is added as income to Gross Profit. Thus, Net Profit = ₦500,000 + ₦4,000 - ₦150,000 = ₦354,000.

Step-by-Step Solution

1
Calculate the adjusted Rent expense for the current period.
Rent expense = ₦60,000 - ₦10,000 (prepaid) = ₦50,000.
Prepaid expenses relate to future periods and must be deducted from cash paid.
2
Calculate the adjusted Salaries expense for the current period.
Salaries expense = ₦90,000 + ₦10,000 (accrued) = ₦100,000.
Accrued expenses represent incurred costs not yet paid and must be added.
3
Determine total operating expenses.
Total operating expenses = ₦50,000 + ₦100,000 = ₦150,000.
Sum of adjusted rent and salaries expenses.
4
Calculate the required provision for doubtful debts and compare it with the existing provision.
New provision = 5% of ₦160,000 = ₦8,000. Existing provision = ₦12,000. Reduction in provision = ₦12,000 - ₦8,000 = ₦4,000 (Income).
A decrease in provision for doubtful debts is credited to the Statement of Profit or Loss as income.
5
Compute Net Profit before taxation.
Net profit = Gross Profit (₦500,000) + Provision Reduction (₦4,000) - Operating Expenses (₦150,000) = ₦354,000.
Net profit is gross profit plus other income minus operating expenses.

Key Concept

Preparation of Company Statement of Profit or Loss with End-of-Year Adjustments
Question 3Question →

In what chronological order should the following steps and figures be derived when preparing a company's Statement of Profit or Loss (Income Statement) in accordance with standard accounting principles?

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Answer

The correct presentation sequence is: 1) Gross Profit calculation, 2) Operating Profit calculation, 3) Profit Before Taxation calculation, 4) Profit After Tax calculation, and 5) Determination of Retained Profit for the year.
The Statement of Profit or Loss follows a standard vertical presentation sequence: Trading section (Turnover minus Cost of Sales gives Gross Profit), followed by the Profit or Loss section (Gross Profit minus Operating Expenses gives Operating Profit), deducting Finance Costs to yield Profit Before Tax, deducting Tax Provision to give Profit After Tax, and finally appropriating dividends and reserves to find Retained Earnings.

Step-by-Step Solution

1
Calculate Gross Profit
Gross Profit = Revenue - Cost of Sales
Trading performance is determined first by deducting direct costs from sales revenue.
2
Calculate Operating Profit (EBIT)
Operating Profit = Gross Profit + Other Income - Operating Expenses
Administrative and distribution overheads are deducted from gross profit to get operating profit.
3
Calculate Profit Before Taxation (PBT)
Profit Before Tax = Operating Profit - Finance Costs (Debenture Interest)
Finance expenses are non-operating costs that reduce operating profit to derive pre-tax earnings.
4
Calculate Profit After Tax (PAT)
Profit After Tax = Profit Before Tax - Corporate Income Tax Provision
Tax liabilities are calculated based on pre-tax earnings and deducted to show net income.
5
Calculate Retained Earnings carried forward
Retained Profit = Profit After Tax - Appropriations (Dividends & Reserves Transfers)
Distributions to shareholders and internal reserve allocations are deducted from net profit to obtain retained earnings.

Key Concept

Structure and Preparation Sequence of Company Final Accounts (Statement of Profit or Loss)
Estimated Time:2m 0s
Question 4Question →

Zentith Global Plc had a gross profit of ₦120,000 for the financial year ended 31 December 2025. Total administrative expenses paid during the year amounted to ₦35,000, which excludes an accrued electricity bill of ₦5,000 at the end of the year. What is the net profit before taxation for the year?

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Answer: ₦80,000

Answer

The net profit before taxation is ₦80,000.
Under the accruals concept, expenses incurred during the financial period must be recognized regardless of whether payment has been made. The accrued electricity expense of ₦5,000 is added to the ₦35,000 expenses paid, bringing total administrative expenses to ₦40,000. Subtracting total expenses of ₦40,000 from the gross profit of ₦120,000 yields the correct net profit before taxation of ₦80,000.

Step-by-Step Solution

1
Calculate total administrative expenses including accruals
Total Expenses = ₦35,000 + ₦5,000 = ₦40,000
Accrued expenses incurred during the accounting period must be added to expenses paid under the accruals concept.
2
Deduct total expenses from gross profit to find net profit before tax
Net Profit = ₦120,000 - ₦40,000 = ₦80,000
Net profit is calculated by subtracting total operating expenses from gross profit.

Key Concept

Accrual principle adjustment in Company Statement of Profit or Loss
Question 5Question →

Apex Trading Company Plc extracted the following financial balances for the year ended 31 December 2025:

- Gross profit: ₦850,000
- Salaries and wages: ₦180,000
- Rent and rates paid: ₦60,000 (including ₦10,000 prepaid for the next financial year)
- Debenture interest paid: ₦15,000 (the total annual interest expense due is ₦25,000)
- Provision for corporate taxation: ₦110,000

What is the net profit after taxation for the company?

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Answer: ₦485,000

Answer

The net profit after taxation for the company is ��485,000.
The net profit after taxation is computed by deducting all relevant operating expenses and finance costs adjusted for accruals and prepayments from gross profit, followed by the deduction of corporate taxation. Adjusted rent expense is ₦50,000 (₦60,000 - ₦10,000 prepayment), and total debenture interest charged is ₦25,000. Total expenses equal ₦255,000 (₦180,000 + ₦50,000 + ₦25,000). Deducting ₦255,000 from gross profit of ₦850,000 gives a net profit before tax of ₦595,000. Finally, subtracting the ₦110,000 tax provision leaves ₦485,000.

Step-by-Step Solution

1
Calculate adjusted rent expense
₦60,000 - ₦10,000 = ₦50,000
Prepaid rent must be subtracted from rent paid to arrive at the actual expense incurred for the accounting period.
2
Determine total debenture interest expense
₦25,000
The full annual interest accrued must be recognized in the statement of profit or loss regardless of cash paid.
3
Calculate net profit before taxation
₦850,000 - (₦180,000 + ₦50,000 + ₦25,000) = ₦595,000
Deduct total operating expenses (salaries, adjusted rent, and debenture interest) from gross profit.
4
Calculate net profit after taxation
₦595,000 - ₦110,000 = ₦485,000
Deduct corporate taxation provision from net profit before tax to get the final net profit after tax.

Key Concept

Preparation of Company Statement of Profit or Loss
Question 6Question →

Lekki Heights Maritime Plc extracted the following financial details for the year ended 31 December 2025:

• Gross Profit: ₦1,450,000
• Rent and Rates paid: ₦180,000 (includes ₦30,000 paid in advance for 2026)
• Salaries and Wages paid: ₦420,000
• Outstanding Salaries and Wages at year-end: ₦40,000
• 10% Debentures of ₦500,000 (interest unpaid for the entire year)
• Estimated Corporate Income Tax: ₦120,000

What is the net profit after tax to be reported in the company's Statement of Profit or Loss for the year ended 31 December 2025?

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Answer: ₦670,000

Answer

The net profit after tax to be reported is ₦670,000.
The net profit after tax of ₦670,000 is correctly determined by deducting total operating expenses (adjusted rent of ₦150,000 and adjusted salaries of ₦460,000), finance costs (debenture interest of ₦50,000), and corporate taxation (₦120,000) from the gross profit of ₦1,450,000.

Step-by-Step Solution

1
Calculate adjusted Rent and Rates expense
₦180,000 - ₦30,000 (prepayment) = ₦150,000
Prepaid expenses must be deducted from cash paid to reflect the accurate expense for the current period.
2
Calculate adjusted Salaries and Wages expense
₦420,000 + ₦40,000 (accrual) = ₦460,000
Accrued expenses incurred but not yet paid at year-end must be added to cash paid.
3
Calculate Debenture Interest expense
10% of ₦500,000 = ₦50,000
Interest on debentures is a financial charge to the profit or loss account regardless of whether paid or unpaid.
4
Compute total expenses and Net Profit before Tax
Total Expenses = ₦150,000 + ₦460,000 + ₦50,000 = ₦660,000. Net Profit before Tax = ₦1,450,000 - ₦660,000 = ₦790,000
Deduct total allowable expenses from gross profit to get net profit before tax.
5
Deduct Corporate Income Tax to arrive at Net Profit after Tax
₦790,000 - ₦120,000 = ₦670,000
Taxation provision is deducted from net profit before tax to arrive at the final profit for the year.

Key Concept

Calculation of Net Profit After Tax incorporating adjustments for accruals, prepayments, debenture interest, and corporate tax.
Question 7Question →

Sahara Energy Works Plc extracted the following trial balance figures and notes for the financial year ended 31 December 2025:

- Gross profit: ₦2,450,000
- Administrative and distribution expenses paid: ₦680,000
- 10% Debentures (issued 1 January 2025): ₦1,000,000
- Debenture interest paid: ₦40,000
- Trade debtors: ₦600,000
- Existing provision for doubtful debts: ₦25,000

Additional Information at 31 December 2025:
1. Administrative expenses paid include ₦30,000 for prepaid insurance.
2. Audit fees of ₦50,000 remain accrued and unpaid.
3. The provision for doubtful debts is to be adjusted to 5%5\% of trade debtors.
4. Corporate income tax rate is estimated at 30%30\% on profit before tax.

What is the Net Profit after Tax for Sahara Energy Works Plc for the year ended 31 December 2025?

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Answer: 1151500

Answer

The Net Profit after Tax for Sahara Energy Works Plc is ���1,151,500.
To calculate the Net Profit after Tax, first compute adjusted operating expenses: base expenses of ₦680,000 minus prepaid insurance of ₦30,000 plus accrued audit fees of ₦50,000 plus the increase in doubtful debts provision of ₦5,000 (₦30,000 required minus ₦25,000 existing), yielding ₦705,000. Subtracting this from Gross Profit (₦2,450,000) gives Operating Profit of ₦1,745,000. Next, deduct the total annual debenture interest expense of ₦100,000 (10% of ₦1,000,000) to arrive at Profit before Tax of ₦1,645,000. Finally, deduct corporate tax of 30% (₦493,500) from ₦1,645,000 to obtain Net Profit after Tax equal to ₦1,151,500.

Step-by-Step Solution

1
Calculate the total operating expenses incorporating adjustments for prepayments, accruals, and doubtful debt provisions.
Total operating expenses = ₦680,000 - ₦30,000 + ₦50,000 + (5% of ₦600,000 - ₦25,000) = ₦705,000.
Prepaid expenses are deducted from cash paid, accrued expenses are added, and the increase in provision for doubtful debts (₦30,000 - ₦25,000 = ₦5,000) is charged as an operating expense.
2
Deduct operating expenses from gross profit to find operating profit (profit before interest and tax).
Operating profit = ₦2,450,000 - ₦705,000 = ₦1,745,000.
Gross profit less total operating expenses yields the operating profit for the reporting period.
3
Determine full finance cost (debenture interest) and profit before taxation.
Debenture interest expense = 10% of ₦1,000,000 = ₦100,000. Profit before tax = ₦1,745,000 - ₦100,000 = ₦1,645,000.
The Statement of Profit or Loss must charge the full nominal debenture interest expense incurred for the year (10%×₦1,000,000=₦100,00010\% \times ₦1,000,000 = ₦100,000), regardless of the amount actually paid (₦40,000).
4
Calculate taxation and determine Net Profit after Tax.
Taxation = 30% of ₦1,645,000 = ₦493,500. Net profit after tax = ₦1,645,000 - ₦493,500 = ₦1,151,500.
Tax rate applies to profit before tax. Deducting taxation from profit before tax yields the final net profit after tax.

Key Concept

Preparation of Company Statement of Profit or Loss with Multi-Step Adjustments (Accruals, Prepayments, Debenture Interest, and Taxation)
Question 8Question →

Oceanic Commerce Plc earned a gross profit of ₦1,200,000 for the financial year ended 31 December 2025. During the year, the company incurred total administrative and distribution expenses of ₦450,000 and paid ₦50,000 as interest on debentures. Calculate the net profit before taxation for the year in Naira (₦).

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Answer: 700000

Answer

The net profit before taxation for the year is ₦700,000.
Net profit before taxation is derived by taking the gross profit of ₦1,200,000 and deducting both operating expenses (₦450,000) and debenture interest (₦50,000), leaving a net profit before tax of ₦700,000.

Step-by-Step Solution

1
Calculate operating profit by deducting administrative and distribution expenses from gross profit.
₦1,200,000 - ₦450,000 = ₦750,000
Operating profit measures earnings from core operations before finance expenses.
2
Deduct debenture interest from operating profit to arrive at net profit before tax.
₦750,000 - ₦50,000 = ₦700,000
Debenture interest is a mandatory finance cost charged against profit in the Statement of Profit or Loss.

Key Concept

Net Profit Determination in Company Statement of Profit or Loss
Estimated Time:1m 0s
Question 9Question →

Enugu Global Ventures Plc extracted the following financial details for the year ended 31 December 2025:

- Gross profit: ₦3,200,000
- Rent and rates paid: ₦400,000
- Salaries and wages paid: ₦800,000
- Carriage outwards: ₦100,000
- Existing provision for doubtful debts: ₦30,000

Additional information at year-end:
1. Rent paid includes ₦40,000 prepaid for the next accounting period.
2. Salaries and wages of ₦60,000 remain accrued and unpaid.
3. The provision for doubtful debts is to be adjusted to a total of ₦80,000.

What is the net profit of the company for the year ended 31 December 2025?

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Answer: ₦1,830,000

Answer

The net profit for the year ended 31 December 2025 is ₦1,830,000.
The correct answer of ₦1,830,000 is derived by deducting total operating expenses of ₦1,370,000 from the gross profit of ₦3,200,000. Total operating expenses comprise Rent of ₦360,000 (₦400,000 paid less ₦40,000 prepayment), Salaries of ₦860,000 (₦800,000 paid plus ₦60,000 accrued), Carriage Outwards of ₦100,000, and an increase in Provision for Doubtful Debts of ₦50,000 (₦80,000 required less ₦30,000 existing).

Step-by-Step Solution

1
Calculate adjusted Rent and Rates expense
₦400,000 - ₦40,000 (prepayment) = ₦360,000
Prepaid expenses must be deducted because they relate to the future accounting period.
2
Calculate adjusted Salaries and Wages expense
₦800,000 + ₦60,000 (accrual) = ₦860,000
Accrued expenses must be added because they relate to the current accounting period.
3
Calculate increase in Provision for Doubtful Debts
₦80,000 (new provision) - ₦30,000 (existing provision) = ₦50,000
Only the net increase in provision is charged as an expense to the Statement of Profit or Loss.
4
Sum total operating expenses
₦360,000 (Rent) + ₦860,000 (Salaries) + ₦100,000 (Carriage Outwards) + ₦50,000 (Increase in Provision) = ₦1,370,000
Carriage outwards is a selling and distribution expense and must be included in operating expenses.
5
Calculate Net Profit
₦3,200,000 (Gross Profit) - ₦1,370,000 (Total Expenses) = ₦1,830,000
Net profit is determined by subtracting total operating expenses from gross profit.

Key Concept

Preparation of Company Statement of Profit or Loss with End-of-Year Adjustments
Question 10Question →

Kano Industrial Alliance Plc provided the following extracts from its financial records for the year ended 31 December 2025:

• Gross profit: ₦2,500,000
• Salaries and wages: ₦600,000
• Rent paid: ₦240,000
• Carriage outwards: ₦50,000
• 10% Debentures: ₦1,000,000
• Debenture interest paid: ₦60,000

Additional information:
1. Rent prepaid at 31 December 2025 amounted to ₦40,000.
2. Provision for doubtful debts is to be increased by ₦10,000.

What is the net profit before taxation for the year ended 31 December 2025?

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Answer: ₦1,540,000

Answer

The net profit before taxation for the year ended 31 December 2025 is ₦1,540,000.
To arrive at the correct net profit before taxation, all expenses for the year must be correctly adjusted according to accrual accounting concepts. Rent expense is adjusted for prepayment (₦240,000 paid - ₦40,000 prepaid = ₦200,000). Total debenture interest payable for the year must be charged in full (10% of ₦1,000,000 = ₦100,000), even though only ₦60,000 was paid. Adding salaries (₦600,000), carriage outwards (₦50,000), and the increase in provision for doubtful debts (₦10,000) gives total expenses of ₦960,000. Subtracting total expenses from gross profit (₦2,500,000 - ₦960,000) gives a net profit before taxation of ₦1,540,000.

Step-by-Step Solution

1
Calculate the rent expense for the current period
Rent expense = ₦240,000 (paid) - ₦40,000 (prepaid) = ₦200,000
Prepaid expenses relate to the next financial year and must be deducted from cash paid.
2
Calculate the total annual debenture interest expense
Debenture interest = 10% × ₦1,000,000 = ₦100,000
Under the accrual basis, the full interest charge for the accounting period must be recognized, regardless of the amount paid.
3
Sum all administrative, selling, and financial expenses
Total expenses = ₦600,000 (Salaries) + ₦200,000 (Rent) + ₦50,000 (Carriage outwards) + ₦100,000 (Debenture interest) + ₦10,000 (Increase in provision for doubtful debts) = ₦960,000
All operational expenses and accrued financing charges must be aggregated to determine total overhead expenses.
4
Deduct total expenses from gross profit to find net profit before taxation
Net profit before taxation = ₦2,500,000 - ₦960,000 = ₦1,540,000
Net profit before taxation is derived by subtracting all allowable administrative, selling, distribution, and finance expenses from gross profit.

Key Concept

Preparation of Company Statement of Profit or Loss with End-of-Year Adjustments
Estimated Time:2m 0s
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