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Questions and Answers
What is the purpose of the income statement?
What is the purpose of the income statement?
To provide a summary of a business's trading activities during a given accounting year, showing the profit or loss for the year, and to enable users to evaluate the financial performance of a business.
In the IFRS Income Statement format, which of the following is deducted from sales revenue to arrive at gross profit?
In the IFRS Income Statement format, which of the following is deducted from sales revenue to arrive at gross profit?
- Other income
- Distribution costs
- Administrative expenses
- Cost of sales (correct)
In the IFRS Income Statement format, what is calculated after deducting distribution costs, administrative expenses, and other expenses from gross profit and other income?
In the IFRS Income Statement format, what is calculated after deducting distribution costs, administrative expenses, and other expenses from gross profit and other income?
- Gross profit
- Operating profit (correct)
- Profit for the period
- Profit on ordinary activities
Which of the following is added to finance costs when calculating the profit on ordinary activities before taxation in the IFRS format?
Which of the following is added to finance costs when calculating the profit on ordinary activities before taxation in the IFRS format?
Which of the options is an example of a direct cost included in cost of sales?
Which of the options is an example of a direct cost included in cost of sales?
The cost of sales calculation is: Opening Inventories _______ Purchases Minus Closing Inventories.
The cost of sales calculation is: Opening Inventories _______ Purchases Minus Closing Inventories.
A company has opening inventory of £2,000, purchases of £25,000 and closing inventory of £5,000. What is cost of sales?
A company has opening inventory of £2,000, purchases of £25,000 and closing inventory of £5,000. What is cost of sales?
Other expenditures/overheads are also called direct overheads
Other expenditures/overheads are also called direct overheads
Which of the following is included in distribution costs?
Which of the following is included in distribution costs?
Which of the following is an example of an administrative expense?
Which of the following is an example of an administrative expense?
When we borrow money the captial amount borrowed is shown as an asset on the Statement of financial position.
When we borrow money the captial amount borrowed is shown as an asset on the Statement of financial position.
Interest expense is shown as an expense on the Income statement as part of finance costs.
Interest expense is shown as an expense on the Income statement as part of finance costs.
What happens to corporation tax in the budget every year?
What happens to corporation tax in the budget every year?
A Manufacturing firm sells goods on credit - at which point should the revenue be recognised, according to this lecture?
A Manufacturing firm sells goods on credit - at which point should the revenue be recognised, according to this lecture?
Sales should only be recognised when they have been what?
Sales should only be recognised when they have been what?
What is deemed to have taken place at the point in time at which the goods are delivered or services provided, and not when the proceeds of sales are received?
What is deemed to have taken place at the point in time at which the goods are delivered or services provided, and not when the proceeds of sales are received?
According to the lecture, when are goods and services deemed to have been purchased?
According to the lecture, when are goods and services deemed to have been purchased?
When should the £500 expense to the management consultant be included in the accounts?
When should the £500 expense to the management consultant be included in the accounts?
What convention means expenses should be matched to revenues that they helped to generate?
What convention means expenses should be matched to revenues that they helped to generate?
Flashcards
Income Statement Purpose
Income Statement Purpose
A summary of a business's trading activities during an accounting year, showing profit or loss.
Role of Income Statement
Role of Income Statement
Enables users to evaluate the financial performance of a business.
Gross Profit
Gross Profit
Sales revenue minus the cost of sales.
Cost of Sales
Cost of Sales
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Cost of Sales Calculation
Cost of Sales Calculation
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Overhead Expenses
Overhead Expenses
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Distribution Costs
Distribution Costs
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Administrative Expenses
Administrative Expenses
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Finance Costs
Finance Costs
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Finance Income
Finance Income
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Taxation
Taxation
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Revenue Recognition Point
Revenue Recognition Point
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The Realisation Convention
The Realisation Convention
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Earned (Revenue Recognition)
Earned (Revenue Recognition)
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Incurred (Expense Recognition)
Incurred (Expense Recognition)
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The Matching Convention
The Matching Convention
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Calculate Gross Profit
Calculate Gross Profit
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Operating Profit
Operating Profit
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Profit Before Taxation
Profit Before Taxation
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Profit for the Period
Profit for the Period
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Types of Direct Costs
Types of Direct Costs
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Examples of Distribution Costs
Examples of Distribution Costs
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Examples of Administrative Expenses
Examples of Administrative Expenses
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Where to Report Interest Expense
Where to Report Interest Expense
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Where to Report Interest Income
Where to Report Interest Income
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Examples of Distribution Costs
Examples of Distribution Costs
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When is Revenue Recognized?
When is Revenue Recognized?
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What are Overheads?
What are Overheads?
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Costs for the Selling Function
Costs for the Selling Function
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Further Reading
Further Reading
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Study Notes
- The income statement summarizes a business's trading activities and shows the profit or loss for the year.
- It enables users, like owners, to evaluate a business's financial performance.
IFRS Income Statement Format
- Sales revenue
- Cost of sales
- Gross profit
- Other income
- Distribution costs
- Administrative expenses
- Other expenses
- Operating profit
- Finance costs
- Finance income
- Profit on ordinary activities before taxation
- Taxation
- Profit on ordinary activities for the period
Cost of Sales
- These are direct costs.
- Costs linked directly to the production of a product or service.
- Includes direct materials, direct labor, and direct overheads.
Cost of Sales Calculation
- Calculated as: Opening Inventories + Purchases - Closing Inventories
Other Expenditure/Overheads
- These are also called indirect overheads.
- They split into distribution, administration, and other expenses.
- These costs keep the company operating on a day-to-day basis.
- Excludes expenditure on capital assets, like non-current assets.
Examples of Costs
- Distribution costs include warehouse operating costs, depreciation of forklifts, warehouse wages, carriage outwards, motor vehicle expenses, advertising, bad debts, provision for bad debts, and discounts allowed.
- Administrative expenses include auditor's fees, director's remuneration, office salaries, rent & rates, light & heat, telephone & postage, and discounts received.
Finance Costs/Income
- When money is borrowed, the capital amount is a liability on the Statement of financial position.
- Interest expense is an expense on the Income statement as part of finance costs.
- Invested money is an asset on the Statement of financial position.
- Interest income is income on the Income statement as part of finance income.
Taxation
- Governments take a percentage of all corporate profit, also known as corporation tax.
- This percentage varies based on the size of the business and changes yearly in the budget.
Income Statement Example (Values)
- Sales revenue is £40,000
- Purchases are £12,000
- Opening inventories are £1,500
- Closing inventories are £1,600
- Other income is £850
- Distribution expenses are £150
- Other expenses are £16,500
- Depreciation for the year is £500
- Interest expense is £20
- Interest income is £15
- Corporation tax is £150
Recognizing Income
- For a manufacturing firm selling goods on credit, revenue is recognized when goods are delivered to and accepted by the customer.
The Realization Convention
- It is designed to solve the revenue recognition problem.
- Sales should only be recognized once they have been realized.
- This means when activities to generate revenue are substantially complete, such as delivery of goods or carrying out repairs.
Earned vs. Incurred
- Earned (revenue recognition or realization concept): a sale is deemed to have taken place at the point in time at which the goods are delivered or services provided, and not when the proceeds of sales are received.
- Incurred: goods and services are deemed to have been purchased on the date they are received and not when payment is made.
Recognizing Expenses
- Expenses are recognized when they are incurred, not when the bill is received or paid.
The Matching Convention
- Expenses should be matched to the revenues they helped to generate.
- Expenses must be taken into account in the same Income Statement where the associated sale is recognized.
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Description
Explore the income statement's role in assessing financial performance. Understand the IFRS format, cost of sales calculation (opening inventories + purchases - closing inventories), and the breakdown of overheads into distribution, administration, and other expenses.
