Question
The adjusted trial balance of Velora Trading at December 31, 2025 is shown below.
| Account | Debit | Credit |
|---|
| Cash | 39,000 | |
| Accounts Receivable | 31,000 | |
| Inventory | 42,000 | |
| Prepaid Insurance | 3,000 | |
| Equipment | 85,000 | |
| Accumulated Depreciation - Equipment | | 25,000 |
| Accounts Payable | | 27,500 |
| Salaries Payable | | 4,000 |
| Notes Payable (due 2029) | | 15,000 |
| Share Capital - Ordinary | | 80,000 |
| Retained Earnings (January 1) | | 30,600 |
| Sales Revenue | | 210,000 |
| Sales Returns and Allowances | 6,000 | |
| Cost of Goods Sold | 118,000 | |
| Salaries and Wages Expense | 36,000 | |
| Rent Expense | 12,000 | |
| Depreciation Expense | 8,500 | |
| Insurance Expense | 2,600 | |
| Interest Expense | 1,500 | |
| Income Tax Expense | 7,500 | _____ |
| Total | 392,100 | 392,100 |
Instructions:
- Prepare a multi-step income statement for the year ended December 31, 2025.
- Prepare a classified statement of financial position at December 31, 2025. (Retained earnings must be updated for the year's net income; no dividends were declared.)
Statements in this challenge
- Income StatementIncome Statement
- Statement of Financial PositionBalance Sheet
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 1 — Presentation of Financial Statements
A multi-step statement earns its name from the subtotals: net sales less cost of sales gives gross profit, less operating expenses gives operating profit, and only then do non-operating items, finance costs and tax appear. Decide for every line whether it belongs above or below the operating-profit line before you place it.
Common mistakes
- Burying interest expense or investment income inside operating expenses — they sit below operating profit.
- Netting sales returns and discounts against nothing, or omitting them so revenue is reported gross rather than net.
- Presenting income tax expense as an operating expense instead of a separate deduction after pre-tax profit.
Further readingIncome statement vs balance sheet