Prepare a limited company’s statement of profit or loss and financial position
Present company performance, assets, equity and liabilities in a coherent set of statements using the information and reporting rules supplied.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons map all five Topic 3.1 objectives: financial-statement purpose; partnership changes; clubs and societies; manufacturing accounts; and limited-company financial statements and notes. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 adjustment and statement skills: apply accruals, distinguish capital from revenue, reconcile balances, and keep each entity's owners' funds separate from income and cash.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A company has assets $180,000 and liabilities $65,000. What is total equity?
What you will learn
- Prepare a company statement of profit or loss
- Prepare a company statement of financial position
- Reconcile company profit and reserves to equity
Prepare performance for the reporting period
A company statement of profit or loss reports revenue and expenses over the period. A useful sequence is revenue less cost of sales for gross profit, then operating expenses for operating profit, then finance costs and tax where applicable to reach profit for the year. Use the required headings and classifications in the question and relevant reporting requirements.
Share dividends are distributions of equity, not operating expenses in profit or loss. Profit for the year increases retained earnings before distributions and other reserve movements. Keep the accounting-period result distinct from the cash paid to shareholders.
Present the reporting-date position
A statement of financial position presents assets, equity and liabilities at a date. Classify non-current and current assets, then equity and non-current/current liabilities according to the required format. Ordinary share capital and reserves are components of equity; debentures and trade payables are liabilities.
Check that total assets equal total equity and liabilities. Trace retained earnings from opening balances through profit, dividends and transfers; use the statement of changes in equity where required. A balanced statement is necessary but does not prove every classification is correct.
Pause and explain
A five-year debenture is most appropriately classified as what?
Worked example
A company has revenue $200,000, cost of sales $118,000, operating expenses $47,000, finance cost $5,000 and tax $6,000. Calculate gross profit, operating profit and profit for the year.
Show the worked solution
- Gross profit = $200,000 − $118,000 = $82,000.
- Operating profit = $82,000 − $47,000 = $35,000.
- Profit for the year = $35,000 − $5,000 − $6,000 = $24,000.
Answer Gross profit $82,000; operating profit $35,000; profit for the year $24,000.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Revenue is $320,000; cost of sales $190,000; operating expenses $76,000; finance cost $8,000; tax $9,000. Calculate gross profit, operating profit and profit for the year.
Give me a hint
Move down the statement in order and deduct each category once.
Compare my reasoning
- Gross profit = $320,000 − $190,000 = $130,000.
- Operating profit = $130,000 − $76,000 = $54,000.
- Profit for the year = $54,000 − $8,000 − $9,000 = $37,000.
Gross profit $130,000; operating profit $54,000; profit for the year $37,000.
Look for these in your work
- Gross profit calculated
- Operating expenses deducted
- Finance and tax deducted
A company reports non-current assets $145,000, current assets $58,000, ordinary share capital $80,000, retained earnings $42,000 and non-current liabilities $30,000. Find current liabilities needed to balance the statement of financial position.
Give me a hint
Calculate total assets and compare with known equity and liabilities.
Compare my reasoning
- Total assets = $145,000 + $58,000 = $203,000.
- Known equity = $80,000 + $42,000 = $122,000.
- Current liabilities = $203,000 − $122,000 − $30,000 = $51,000.
Current liabilities are $51,000, assuming the provided classifications and balances are complete.
Look for these in your work
- Assets totalled
- Equity totalled
- Residual liability calculated
A company has strong profit but also large final dividends and a new debenture. Explain why a lender should inspect both profit or loss and financial-position information before offering another loan.
Give me a hint
Consider repayment capacity, cash obligations and financial risk, not only accounting profit.
Compare my reasoning
- Profit or loss gives evidence about period performance, but does not show all cash receipts or payments.
- The statement of financial position shows debt, equity, current assets and liabilities at a date.
- Review the cash-flow statement, debt terms and future forecasts as well, since dividends and borrowing affect cash and repayment capacity differently.
The lender should assess performance, liquidity and leverage together. Profit is not cash, and new debt plus dividend distributions can affect future repayment risk; statement users need notes and cash-flow evidence too.
Look for these in your work
- Profit limitation stated
- Debt and liquidity assessed
- Further evidence recommended
Common mistakes
- Deducting dividends as an expense in profit or loss
- Putting debentures in equity because they are long-term finance
What can you explain now?
Where is a dividend distribution normally recorded?
Compare with the explanation
As an equity movement, not an expense in profit or loss
A dividend distributes earnings to owners after profit is calculated.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
State the accounting equation and explain where a company's dividend distribution is reflected.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.