Part 3: The Income Statement PDF

# Part 3: The Income Statement ## Understanding accounting information and data early makers em lyon business school # The Income Statement - P&L = profit or loss statement (IFRS). - A part of Comprehensive Income Statement. - The income statement is a summarization of the company's revenue and ex...

# Part 3: The Income Statement ## Understanding accounting information and data early makers em lyon business school # The Income Statement - P&L = profit or loss statement (IFRS). - A part of Comprehensive Income Statement. - The income statement is a summarization of the company's revenue and expense transactions for a period. - Measures the performance of the company over a period of time. - The income statement is like the "film" of the "activity" of the business during a given period. early makers em lyon business school # Calculating Net Income - Over a given period: Revenues - expenses = Net Income - Net income > 0: profit | increase in the book value of the company (enrichment). - Net income < 0: loss | decrease in the book value of the company (impoverishment). early makers em lyon business school # Revenue - Revenue is the price of goods sold and services rendered during an accounting period. - Causes owners' equity to increase - Results in an increase in cash or accounts recievable. - Represents the gross increase in owners' equity resulting from the operation of the business. - Realization Principle: revenue should be recognized at the time goods are delivered or services are rendered. early makers em lyon business school # Expenses Expenses are the costs of the goods and services used up in the process of earning revenue - Examples include the cost of salaries, advertising, rent, utilities, and depreciation of long-term assets. - Causes a decrease in owner's equity. - Results in either a decrease in assets or increase in liabilities (accounts payable) - The Matching Principle: refers to the concept of offsetting expenses against revenue on a basis of cause and effect. - Expenses are incurred for the purpose of producing revenue. - In order to measure net income for a period, revenue should be offset by all the expenses incurred in producing that revenue. early makers em lyon business school # Accrual Basis of Accounting - Accrual basis of accounting has two basic requirements: 1. Revenue is recognized in the period when it is earned. 2. Expenses are recognized in the period when they are incurred. early makers em lyon business school # Net Income and Cash Flows - Revenues and expenses are accounted for when earned or incurred, and not when the related cash flows are recieved or paid out. - Revenues (≠ cash inflows) - Expenses (≠ cash outflows) early makers em lyon business school # Income Statement (French presentation, horizontal format, Expenses by nature) | Expenses | Revenues | |---|---| | **Operating Expenses** | **Operating Revenues** | | Purchases + change in inventories (=COGS) | Sales | | External services | Other Revenues | | Taxes | | | Salary expenses | | | **Financial Expenses** | **Financial Revenues** | | Interest expenses | Interest or share incomes | | Loss on sale of securities | Gain on sale of securities | | Foreign currency transaction losses | Foreign currency transaction gains | | **Extraordinary (or Exceptional) Expenses** | **Extraordinary (or Exceptional) Revenues** | | Thefts | Grants and subsidies | | Fines | | early makers em lyon business school # Income Statement (International Presentation, Vertical Format, Expenses by Function*) | | other possible name | |---|---| | + Revenues | | | - Cost of sales | Gross margin | | = Gross Profit | | | - Distribution expense | Marketing & Selling expense | | - Administrative expense | General & Adm exp | | + Other operating income | | | - Other operating expense | | | = Operation Profit | Earning Before Interest and Tax (EBIT) | | - Finance cost | | | + Finance income | | | +/- Other income/expense | | | = Profit before tax | Earning Before Tax (EBT) | | - Income tax expense | | | = Net Profit | | * International standards accept also the classification of expense by nature. early makers em lyon business school # The Double-Entry Principle - Any movement affecting an element of the balance sheet (A, L, or S/H) necessitates an inverse movement (or movements_ of the same amount in one or more of the other elements of the balance sheet (A, L, or S/H) and/or the income statement (Rev/EXP). - We always have: Total Assets = Total Liabilities (including equity) early makers em lyon business school # The Business Equation | | | | |---|---|---| | Assets | = Liabilities | + Shareholders' equity | | Assets | = Liabilities | + Share capital + Net income | | Assets | = Liabilities | + Share capital + Revenues - Expenses | | Assets | + Expenses | - Liabilities | + Share capital + Revenues | early makers em lyon business school # Links Between the Balance Sheet and the Income Statement - Modifie - Deuxieme niveau - ASSETS = si LIABILITIES + SHAREHOLDERS' EQUITY - Quatrième niveau - Share Capital [Retained] earnings - Cinquième niveau - BALANCE SHEET - transferred to INCOME STATEMENT - Expenses - Balance = net income (if profit; otherwise it would be on the opposite side) - Revenues early makers em lyon business school # Net Income Net Income = Revenues - Expenses - Net Income > 0: proft, enrichment, increase in the book value of the company. - Net income < 0: loss, impoverishment, decrease in the book value of the company early makers em lyon business school # Overnight Auto Service Financial Statements | | | | | | | | |---|---|---|---|---|---|---| | **Assets** | **Gross Value** | **Depreciation** | **Net Book Value** | **Liabilities & Equity** | **Expenses** | **Revenues** | | Cash | | | | Accounts Payable | Wages expense | Repair service revenue | | Accounts recievable | | | 5,420 | | | 12,580 | | | | | 5,400 | | Utilities expense | | | | | | | | Advertising expense | | | | | | | | Total expense | | | | | | | Equity | | Total revenus | | | | | | Net Income | | | | Total Assets | 10,820 | | | Total Liabilities | 2,2 | 12,580 | early makers em lyon business school # Profitability And Liquidity - Liquidity is the ability of the business to pay its debts as they come due. - Critical to the survival of the business. - A business that is not liquid may be forced into bankruptcy by it's creditors. - Profitability refers to a company's ability to generate net income from the business. - Profitable operations increase owner's equity. early makers em lyon business school # Net Income Impact / Cash Impact - Net income impact with immediate cash impact. - Cash sales - Sales increase (Revenus +) / Cash increase (A+) - Net income impact without immediate cash impact - Credit sales - Sales increase (Revenus +) / Account recievable (A+) - Cash impact without Net income impact. - Collection of a customer payment relating to a credit sale - Account recievable decrease (A-) cash increase (A+) - Purchase of fixed assets paid in cash - Fixed assets increase (A+), cash decrease (A-).