Accounting Online Program Certification Practice Test

What should be the prepaid and statement of financial position figures for insurance in the year's financial statements?

1. PP £9,500, SFP £36,700

2. PP £8,200, SFP £38,000

3. PP £36,700, SFP £9,500

4. PP £38,000, SFP £8,200

The correct answer is: PP £9,500, SFP £36,700

The correct answer provides a clear representation of how prepaid insurance is recorded and reflected in the financial statements. The prepaid figure of £9,500 indicates the amount that has been paid for insurance coverage that has not yet been used up. This amount is classified as a current asset on the statement of financial position (SFP), as it represents a future economic benefit to the entity. The figure of £36,700 in the statement of financial position likely represents the total insurance expense recognized for the period, which can include both the prepaid amount and any insurance expenses that have been incurred during the year. It's important to understand that the SFP shows the financial position of a company at a specific point in time, capturing all assets, liabilities, and equity. Therefore, in this case, the prepaid insurance amount relates to coverage that provides benefits beyond the current reporting period, while the statement of financial position figure captures both the used and prepaid components. This alignment is essential for accurately presenting the company’s liquidity and asset management regarding insurance costs. Understanding these distinctions is crucial in accounting practices, as it helps ensure that financial statements accurately reflect the company's resources and obligations.