Income Statement Part 1 Notes

Income Statement Part-1

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Definition

The income statement is a financial statement of an organization which measures the financial performance of the business for a specified accounting period e.g. one year (Jan-Dec).

In other words

An income statement shows the components of profit or loss, It begins with revenues and ends with profit/ loss for the period after tax. It is also known as statement of earnings or profit & loss (P&L).

Why is it important?

The income statement is a very important documents for the users. The Income statement shows the revenues and expenses of a company for the year. Users of F/S can find a plenty of important information on the income statement including the entity's sales, productivity, gross profit and net profits. Investors can analyse and predict key information about the business.

Lecture Notes

Presentation of Income statement

The suggested (multi step) format is as follows.

Income statement for XYZ for the year ended

31 December 20X1

$

Revenue X

Cost of sales (X)

___

Gross profit X

Other operating income X

Distribution costs (X)

Administrative expenses (X)

___

Profit from operations X

Finance cost (X)

___

Profit before tax X

Income tax expense (X)

___

Net profit for the period X

___

Revenue Recognition

Revenue is the largest single number in the financial statements. It is also a number that attracts a great deal of user attention.

The Matching Principle

The matching principle dictates that revenues must be matched with expenses. Thus, income and expenses are reported when they are earned and incurred, even if no cash transaction has been recorded

The International Accounting Standards Board (IASB) has issued International Financial Reporting Standards (IFRSs) that provide guidance in this area:

IAS 18 – Revenue.

IAS 18 is the IFRS that deals with revenue for the majority of entities

MEANING OF ‘REVENUE’

IAS 18 defines revenue as ‘the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants’

REVENUE RECOGNITION CRITERIA

Following are the recognition principles of Revenues:

1. Sale of goods:

Revenue will be recognised if all of the following circumstances have been fulfilled:

• The substantial risks and rewards of ownership of the goods have been shifted by the seller to the buyer.

• The seller does not control the goods or manage the goods like the owner does.

• The revenue can be measured reliably.

• The costs to the seller in respect of the transaction can be measured reliably.

• It is likely that the economic benefits related with the transaction will flow to the seller

2. Services:

Where the result of services can be estimated reliably, the revenue is recognised gradually, rather than all at once, as is the case for revenue from the sale of goods. The outcome of a transaction can be estimated reliably if all of the following circumstances have been fulfilled:

• The revenue can be measured reliably.

• It is likely that the economic benefits related with the transaction will flow to the seller

• The stage of completion of the transaction...

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