Académique Documents
Professionnel Documents
Culture Documents
INCOME STATEMENT
(STATEMENT OF FINANCIAL
PERFORMANCE)
1
Learning Outcomes
Able to: -
Describe income statement.
Discuss income and expenses.
Distinguish cash accounting and
accrual accounting.
Describe and apply balance day
adjustments.
Prepare an income statement,
incorporating adjustments.
2
RELATIONSHIP OF
BALANCE SHEET AND
INCOME STATEMENT
3
Income Statement
What
? Why
? How
?
???
???
??? 4
Income Statement (Contd)
What?
A statement showing the income and expenses of a
business for a particular period of time (usually 12
months period) for the purpose of calculating profit
or loss.
Why?
Income Statement
7
Purpose of Income Statement
Purpose is to measure generation of wealth
over a specific period.
Profit (or Loss) is the difference between
Income and Expenses.
Income:
Revenue (usually from operating
activities) primary
Gains (usually from non-operating
activities)
Expenses:
Outflow of resources to generate income
Atrill,Mclaney, Harvey, Jenner: Accounting 3 Ed 2008 Pearson Educ Australia 8
Usefulness of Income Statement
9
Income
Statement
Income What?
Why?
How?
Income are amounts earned by the
business.
Income
Expenses
Statement
What?
Why?
Expenses
Expenses (Contd)
Statement
Relationship?
Opening Closing
Inventory Inventory
Cost of
Goods
Available
for Sale
Cost of
Purchases
Goods Sold
12
Income
Expenses (Contd)
Statement
COS / COGS
= Gross profit/(loss)
13
HOW DO WE MEASURE Net PROFIT?
Recognising
(recording)
INCOME and
EXPENSE
14
INCOME
Income is only recognised (recorded) in the
accounts when it has been realised.
Very sure
Probability
Reliability
17
Format and Presentation of
Income Statement
How to draft an
Income Statement?
18
HCMC Ltd.
Income Statement for the year ended 31 December 2007
2007 2006
22
CASH FLOWS
Cash versus Accrual Accounting
VERSUS PROFIT (Contd)
Matching Concept
Accrual Accounting
23
Accrual Accounting
Revenue is recognised when an inflow
of future economic benefit is: -
can be
probable. & measured
reliably.
Accrual Accounting
24
Accrual Accounting
Expense is recognised when an
outflow of future economic benefit
is: -
can be
probable. & measured
reliably.
Accrual Accounting
25
CASH and ACCRUAL ACCOUNTING
26
Example
Year 2005 (Accounting Period Jan 1- 31 Dec)
Revenue Earned 500,000
Expenses Incurred 200,000
Profit 300,000
Jan 1 Dec 31
27
However, where the matching process is not exact
because a Receipt or Payment occurs outside the period
but belongs within the period, then there is a need for a
Balance Day Adjustment.
28
Adjustments
Entries made at the end of an accounting period to
ensure that the recognition criteria are followed
for assets, liabilities, revenues and expenses.
Examples: -
Revenue Prepaid
receivable Accrued expenses
expenses
Unearned (Expenses
revenue payable) Bad debts
Closing
inventories Doubtful debts
Depreciation
29
Adjustments
Activity
30
ILLUSTRATION:
RECOGNISE
(record) REVE
NUE
Revenue Unearned
receivable revenue
31
Revenue Receivable
Revenue
receivable
Action?
32
ILLUSTRATION for REVENUE RECEIVABLE
Action?
33
HOW?
30 June
34
Entries:
Statement of Financial Performance / Profit and Loss
for the year ended 30 June 2006
Revenue $850,000
Current Assets
Accounts Receivable $50,000 (adjustment)
35
Unearned Revenue
Unearned
Revenue
Money received but
revenue has not been earned
by providing goods or services.
OR
36
ILLUSTRATION for UNEARNED REVENUE
Action?
37
HOW?
$ 150,000
Cash Received
30 June
38
Entries:
Statement of Financial Performance / Profit and Loss
for the year ended 30 June 2006
Revenue $142,500
Current Liabilities
Unearned Revenue $7,500
39
WHEN DO WE
RECOGNISE E
XPENSES?
Accrued
Prepaid expenses
expenses (Expenses
payable)
Bad debts
Depreciation
Doubtful debts
40
Accrued Expenses
Accrued expenses
(Expenses payable)
Expenses used during the period
but not yet paid for.
30 June
43
Entries:
Statement of Financial Performance / Profit and Loss
for the year ended 30 June 2006
Expenses
Sales Commission Expense $6,000
Current Liabilities
Accrued Expense $1,000
(Sales Commission Payable)
44
Accrued Expenses (Contd)
Exercise
SML Ltd., closes it financial year on 30 June,
paid electricity bills for 11 months of
2007/2008
amounted to 100 million Dong. The bill for
June
2008 amounted to 15 million Dong was only
received on 8 July 2008.
Required:
(a) State the effect of June 2008s bill on
the
Income Statement and Balance 45
Prepaid Expenses
Prepaid expenses
Money paid for goods or services that
have not been received or rendered yet
at that particular accounting period.
46
ILLUSTRATION FOR PREPAID EXPENSES
Action?
47
HOW?
5 x 400 = 2,000
1 x 400 = 400
48
Entries:
Statement of Financial Performance / Profit and Loss
for the year ended 31 December 2006
Expenses
Rent Expense $1,600
(4 x $400)
Current Assets
Prepaid Rent $ 400
(paid in advance)
49
Trade Debtors
Trade debtors (Accounts receivable) are
customers who bought goods on credit and
have not been settled the payments as at
balance sheet date.
Effect on
Income Statement Balance Sheet
Sales on
credit Sales Trade
debtors
Cash receipts
from No Trade
trade debtors effect debtors
Cash
50
Bad and Doubtful Debts
When a trade debtor (TD) fails to settle
the outstanding amounts, the debts is
said to be irrecoverable.
TD may not pay
TD cannot pay or unlikely to pay
(e.g. gone into liquidation) (e.g. may go into liquidation)
xx
53
Depreciation
Depreciation is the loss of value of
WHAT? PPE over time. It is a systematic
allocation of the depreciable amounts
of an asset over its useful life.
Depreciation rate
& HOW?
Depreciation method
54
Depreciation (Contd)
Land
Equipment
Freehold Leasehold
land land Furniture
& fittings Vehicles
55
Depreciation (Contd)
Direct
PPE
Cost = Purchase
price + attributable
cost
56
Depreciation (Contd)
57
Depreciation (Contd)
Depreciation
Effects on Depreciation
Income Statement (Expenses)
Depreciation
(1) Straight line method Method
(2) Reducing balance method
59
Depreciation (Contd)
Calculation of Depreciation
Cost RV
Useful economic life (in years)
OR
(Cost RV) x Useful economic life (in %)
Useful economic life is the depreciation rate! 60
Units of Output or Production
Method
Calculates depreciation based on productive capacity
of the asset and its use over time.
Example:
Cost of machine $22,000
Residual value $2,000
Useful life 4 years
Est. units of total output 200,000
61
Depreciation (Contd)
NBV
= Cost - Accumulated
Depreciation 62
Depreciation (Contd)
Exercise
A machine acquired for A$50,000 is depreciated
at the annual rate of 20%. Using straight line
method and reducing balance method respectively,
calculate the following:
(1) Annual depreciation for the 1st & 2nd
year.
(2) Accumulated depreciation after
3 years of ownership.
(3) NBV after 4 years of ownership.
63
Depreciation (Contd)
Exercise (Contd)
Machine PPE
Depreciation method: -
Straight line
Reducing balance
64
Depreciation (Contd)
Exercise (Contd) Straight line: 20% pa
Year Cost Accumulated Depreciation NBV
Beginning Current End
Y1
Y2
Y3
Y4
65
Depreciation (Contd)
Exercise (Contd) Reducing balance: 20% pa
Year Cost Accumulated Depreciation NBV
Beginning Current End
Y1
Y2
Y3
Y4
66
DEPRECIATION
The reduction in the value of NCA
due to use (wear and tear)
effects of time
obsolescence
67
CONSIDERATIONS:
Method of Depreciation
68
RECORDING:
In the B/S statement
Machine
Less Accumulated depreciation:
Written down value (book value)
Depreciation expense
70
Straight Line Method
Example:
Cost of Machine: $40,000
Estimated Residual Life: $1,024
Estimated useful life: 4 years
71
Reducing Balance Method
%P (1 - n R ) x 100%
C
P = depreciation %
n = Useful life of assets
R = Residual value
C = cost of asset
72
Consider the following
Cost of machine C=$40,000
Rate of depreciation P=20%
Amount of depreciation
74
Mini Quiz (Contd)
Question
36,000 4,000
20,000 2,000
76
Mini Quiz (Contd) True or False
Question
(a) Income measure the outflow of assets or the increase
in liabilities that result from business operations.
78