Measuring financial performance

Learning Objectives
Define and explain the terms income, revenue and expenses
Explain the relationship between the income statement, the statement of
changes in equity and the balance sheet
Analyse and classify balance sheet and income statement transactions onto
a worksheet
Prepare a simplified statement of comprehensive income
Explain the role of and prepare a statement of changes in equity (not
addressed in the lecture and will not be examined)
Explain the meaning and purposes of consolidated financial statements

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Administration

Accounting Questions
to your tutor,
Wattle bulletin board - student questions + answers
Sorry, but cant do email from 600 students.
(Last tutorial enrolments, changes due to schedule changes Tej Kala)

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Record Transactions for April 2012
8 Cash sales of $30 000; COGS = $12 000.
9 Credit sales of $40 000; COGS = $16 000.
10 $8000 payments to accounts payable.
11 $20 000 wages paid for first 2 weeks of April.
12 Received invoice for $2000 for an advertisement
on April 5.
13 Received $25 000 from accounts receivable.
14 At end of month: $18 000 wages is owing for last 2
weeks of the month. Due to be paid on May 1.
 LRM Ltd

Transaction Analysis - Worksheet

Assets = Liabilities + Shareholders Equity

Accounts Land and Accounts Notes Wages Share
Cash Inventory Equip Loans Revenue Expenses Dividends
receivable building payable payable payable Capital
Bal. 140,000 55,000 300,000 90,000 15,000 70,000 300,000 200,000
8 30,000 (12,000) 30,000 (12,000)

9 40,000 (16,000) 40,000 (16,000)

10 (8,000) (8,000)

11 (20,000) (20,000)

12 2,000 (2,000)

13 25,000 (25,000)

14 18,000 (18,000)

Total 167,000 15,000 27,000 300,000 90,000 =9,000 70,000 18,000 300,000 200,000 70,000 (68,000)
599,000 =599,000
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Prepare a Simple Income Statement
LRM Ltd
Income Statement for the month ended 30 April 2012

Sales 70,000
Cost of goods sold 28,000
Gross profit 42,000
Operating expenses
Wages 38,000
Advertising 2,000 40,000
Net profit 2,000

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Interpretation of the income statement:
Net profit before tax $ 2,000
Largest expense is wages
Gross margin 42,000/70,000 = 60%
Return on sales 2,000/70,000 = 2.8%

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The Income Statement
The purpose of the income statement is to measure and report
how much profit (wealth) the business has generated over a
period. Also known as profit or loss statement, statement of
financial performance.
Profit (or loss) = Income - Expenses
profit and cash are not the same
Profit is a measure of the increase in wealth during the period
rather than of cash generated

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Link between the balance sheet and the income
statement Increasing the owners equity
Balance sheet
Assets = Liability + Shareholders Equity

Assets = Liab. + Capital + Opening Ret. Profit + Revenue Expenses

Dividends

Income statement
Performance
Making profits from sales so lets start
there

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Recording credit sale - revenue
Debit (increase asset) Accounts Receivable
Credit (increase revenue) Sales

Assets = Liab. + Capital + Opening Ret. Profit + Revenue Expenses

Div
Accounts Receivable (asset) = Sales (revenue)

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Recording cost of goods sold -expense
(perpetual system)
Debit (increase expense) Cost of Goods Sold
Credit (decrease asset) Inventory

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Recording cost of goods sold -expense
(periodic system)
Count stock at end;
Cost of goods= Beginning+ Purchases- Ending
Then:
Debit (increase expense) Cost of Goods Sold
Credit (decrease asset) Inventory (beginning amount)
Credit (decrease temp/expense) Purchases
Debit (increase asset) Inventory (ending amount)

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Income Statement - Concepts

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Income
Income = Revenue + Gains
increases in economic benefits
in the form of increases in assets or decreases in
liabilities
Results in increases in equity
Excludes contributions (i.e. investments) by owners

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Revenue v Gains
Revenues represent the gross inflows of economic benefits from ordinary
activities
Gains represent the net inflows normally from non-ordinary activities

A bookstore sells a book for $100, The cost of the book is $80. The revenue
from sale of books is: $100

A bookstore sells its car for $20,000. The carrying amount of the car is $18,000.
The gain on sale of car is: $2,000

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Revenue recognition problem
calculate
Paris theIts revenue?
Ltd is a retailer. financial year ends on 30 June
1. On 30 June 2014 Paris Ltd receives an order for 280 books at a
price of $100 each. The total cost of the books is $25,000.
2. On the receipt of the order an invoice is issued and revenue is
recorded; The customer has not made payment for the order.
3. At the same time a delivery outward note is sent down to the
dispatch section
4. However because a stocktake is taking place the goods are not sent
out until 3 July 2014

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 Format of the income statement
Two basic formats based on the method used for
classifying expenses:
Descriptive format: classify expenses according to
their nature. Normally used by service businesses.
Functional format: classify expenses according to
their function. Used by retailing and manufacturing
firms.
For external reporting, the reporting cycle is normally
one year.
For internal functions, it is common for profit figures to
be prepared on a monthly basis

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Functional Format e.g. retailer:
Income Statement
Yipu Ltd
For the year ended 30 June 2011

Sales revenue x
Cost of sales (x)
Gross profit x
Other income x
Rent expense (x)
Wage expense (x)
Profit before income tax expense x
Income tax expense (x)
Profit after income tax expense x

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Descriptive format
Income Statement
Yipu Ltd
For the year ended 30 June 2011

Sales revenue x
Other income x
Total income x
Cost of sales (x)
Rent expense (x)
Wage expense (x)
Total expenses x
Profit before income tax expense x
Income tax expense (x)
Profit after income tax expense x

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 Other comprehensive income
comprises particular items of income and expenses
that are not recognised in profit or loss.
The components include:
a. Changes in revaluation surplus
b. Actuarial gains and losses on defined benefit plans
c. Gains and losses from translating the financial
statements of foreign operation
d. Gains and measures on remeasuring available-for-
sale financial assets
e. The effective portion of gains and losses on hedging
instruments

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JB Hi Fi

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Consolidated financial statements
Definitions
A group is a parent and its subsidiary.
A parent is an entity that has one or more subsidiaries.
A subsidiary is an entity that is controlled by another entity (i.e., the
parent).
Control is the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities.
Non-controlling interest (Minority interest): is the equity in a
subsidiary not attributable, directly or indirectly, to a parent. It arises
when the subsidiary is not wholly-owned by the parent.

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Consolidated financial statements
Consolidated financial statements are the financial
statements of a group presented as those of a single
economic entity.
AASB 127 requires a parent to present consolidated
financial statements in which it consolidates its
investments in subsidiaries.

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 Elimination of intragroup balances
An example
In 2010 Parent Amanda Ltd lends Subsidiary Lila
Ltd $1 million:
At year end an asset Loan to Subsidiary Lila
Ltd of $1 million appears in the balance
sheet of Amanda Ltd
At year end a liability Loan from Parent
Amanda Ltd of $1 million appears in the
balance sheet of Lila Ltd

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Draw the relationship

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Draw the relationship

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Problem previous semester exam

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Next Week
Assumes read chapter 4
Adding complexity to our knowledge of
accounting

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