Income Statement Lecture Slides: IFRS Financial Accounting PDF

IFRS Income Statement (Profit and Loss Account) ‘A Financial History book’ Lecture 3  The purpose of the Income statement Information a summary of the results of a business's trading activities during a given accounting year shows...

IFRS Income Statement (Profit and Loss Account) ‘A Financial History book’ Lecture 3  The purpose of the Income statement Information a summary of the results of a business's trading activities during a given accounting year shows the profit or loss for the year. Role to enable users, such as the owner(s), to evaluate the financial performance of a business.  Format: IFRS Income statement Sales revenue - Cost of sales = Gross profit + other income - distribution costs - administrative expenses -other expenses = Operating profit 3  Format continued – Finance costs + Finance income = Profit on ordinary activities before taxation. - taxation = Profit on ordinary activities for the period 4  Cost of Sales Direct costs. Costs that are linked directly to the product or service. Direct materials. Direct labour. Direct overheads. 5 Cost of Sales Calculation Opening Inventories Plus Purchases Minus Closing Inventories 6 Calculation for Cost of Sales Example: A company has opening inventory of £2,000, purchases are £25,000 and closing inventory is £5,000. Calculate cost of sales. 7  Other Expenditure/Overheads These are also called Indirect overheads. They are split into distribution, administration and other expenses. Costs that keep the company running on a day to day basis. Do not include expenditure on capital for example non-current assets. 8  Some examples of distribution costs and administrative expenses Distribution costs: All the costs of operating a warehouse and the selling function – depreciation of fork-lift trucks, warehouse wages, carriage outwards, motor expenses for delivery vehicles, advertising, bad debts, provision for bad debts, discount allowed. Administrative expenses: Auditors fees & expenses, directors remuneration, office salaries, rent & rates, light & heat, telephone & postage, discount received. 9  Finance costs/income When we borrow money the capital amount borrowed is shown as a liability on the Statement of financial position. The interest expense is shown as an expense on the Income statement as part of finance costs. When we invest money in the bank the amount invested is shown as an asset on the Statement of financial position. Interest income is shown as income on the Income statement as part of finance income. 10  Taxation The government take a percentage of all corporate profit. This can vary depending on the size of the business. Corporation tax changes every year in the budget. 11  Income statement Example Sales revenue £40,000 Purchases £12,000 Opening inventories £1,500 Closing inventories £1,600 Other income £850 Distribution expenses £150 Other expenses £16,500 Depreciation for the year £500 Interest expense £20 Interest income £15 Corporation tax £150 12 Income statement Example Sales revenue - Cost of sales = Gross profit + other income - distribution costs - administrative expenses -other expenses = Operating profit 13  Income statement Example cont – finance costs + finance income = Profit on ordinary activities before taxation. - taxation = Profit for the period. 14 When should we recognise income? A Manufacturing firm sells goods on credit - at which point should the revenue be recognised? When the goods are produced. When the order is received from customer. When goods are delivered to and accepted by customer. When cash is received from customer. 15  The Realisation Convention Designed to solve the revenue recognition problem. Sales should only be recognised when they have been realised. I.e. when: The activities to generate the revenue are substantially complete (delivery goods, carrying out of repairs) 16  Earned and incurred Earned (revenue recognition or realisation 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. When should we recognise expenses? (1) I invite a management accountant to come and talk to you in October 2023. He charges me £500 but only presents his bill in February 2024. The financial year end for the university is December 2023. Will the expense of £500 be included in the accounts for 2023 or 2024? 18  When do we recognise expenses? (2) THE MATCHING CONVENTION Expenses should be matched to revenues that they helped to generate. In other words expenses must be taken in to account in the same Income Statement in which the associated sale is recognised. 19  Reading Read Chapter 3 in Atrill & McLaney’s Accounting & Finance for Non-specialists 20