Please enable JavaScript.
Coggle requires JavaScript to display documents.
Measuring & Reporting Financial Performance (Demonstrate an…
Measuring & Reporting Financial Performance
Understand the layout of a typical statement of financial performance, and describe its component parts
Format of the Income Statement
Varies depending on
Entity structure (e.g. non‐profit, sole trader, company)
Nature of operations (e.g. manufacturer, retail, service)
layout
Gross profit
refers to the difference between the revenues
from sales and the cost of those sales
Cost of Sales / Cost of Goods Sold
Cost of sales expense is the main expense incurred by many entities – in order to sell goods and generate income, the entity must purchase goods for resale
cost of sales=inventory at beginning of period+purchases-inventory at the end of period
inventory at beginning of period+purchases=available inventory
Supplies expense = Supplies asset at beginning of period + purchases of supplies during period – Supplies asset at end of period
Operating profit
refers to the difference between the revenues
from sales and the cost of those sales
Profit for the period
is Operating profit plus/minus nonoperating
income/expenses and an allowance for tax
note the use of (brackets) to indicate a number that is subtracted. minus signs are not used.
Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement
Classifying Income and Expense
Normally expenses are classified under four main headings
Cost of Sales (or Cost of Goods Sold for a manufacturer)
Usually refers to inventory, but service businesses (e.g. a restaurant) may also categorise some expenses this way
selling and distribution
administration and general
financial
Cash versus Accrual Revenue Recognition 收付实现制vs权责发生制
Accrual accounting
The revenue recognition criteria mean revenue is often
recognised before the related cash is received
Also, cash may be received before revenue is recognised,
e.g. a customer makes a prepayment of cash
Cash Accounting
revenue is recognised at the time when cash flows take place
Recognition of Income
Time Point chosen can have major impact on amount of revenues and profit recognised in a period
Main criteria to recognise
revenue
are
the amount of revenue can be measured reliably
it is probable that the economic benefits will be received
For sales of goods (as opposed to services) also
ownership and control of the items should pass to the buyer
has the income been earned
Long‐term contracts
Some contracts, such as construction contracts, often extend over a long period of time
Broken down into stages to facilitate revenue recognition throughout the contract
Services
Some services may also take years to complete
Similarly, these are broken into stages and revenue is recognised as each stage is completed
Before producing financial statements
Financial statements are produced at a point in time, i.e. the
end of a reporting period
“Balance day” adjustments
update account balances to take account of events that are known but not yet reflected in the accounts: adjusting entries更新帐户余额，以考虑已知但尚未反映在帐户中的事件:调整分录
Adjusting entries include “accruals”
At the start of the next reporting period, some adjusting entries are reversed in order to avoid double‐counting: ”reversing entries”
在下一个报告期开始时，为了避免重复计算，一些调整分录被反转:“反转分录”
Entries required under Accrual Accounting
When the goods are sold or the services are provided
irrespective of whether the cash is received
accounts receivable
Before producing financial statements, adjusting entries are necessary if there is:
income earned but not yet billed (Accrued income)
cash received but income not earned (Unearned income)
Subject to the materiality convention
i.e. what is expedient given the significance of the adjustment考虑到调整的重要性，什么是权宜之计
Expense Recognition
Expenses are included in the income statement when they are incurred rather than when they are paid for.
The matching convention holds that expenses should be matched to the revenue that they helped generate
examples
accounts payable, interest payable, wages payable, etc
The matching convention holds that expenses should be matched
to the revenue that they helped generate
expenses paid for but not incurred in the period (Prepaid Expenses)
expenses incurred but not yet recognized
Some expenses don’t involve cash at all
Subject to the materiality convention
Prepaid expense
cash paid but no expense incurred yet
an asset
It is important to remember that
Total revenue does not usually represent cash received
Total expenses are not the same as cash paid
The profit figure (revenues minus expenses) does not normally represent the net cash generated from operations during a period
Profit is a measure of achievement, or productive effort, rather than a measure of cash generated
Explain the concept of depreciation and its impact on the financial statements
A measure of that portion of the cost (less residual value) of a fixed asset which has been consumed during an accounting period 固定资产在会计期间消耗的成本(减去残值)的一部分
Four factors are considered
the cost (or other value) of the asset
Includes all costs incurred by the business to bring the asset to its required location and make it ready for use
e.g. delivery, installation, legal title, alterations, improvements, etc.
the useful life of the asset
The economic life of the asset determines the expected useful life of the asset for the purpose of calculating depreciation 资产的经济寿命决定了以计算折旧为目的的资产的预期使用寿命
Economic life may be shorter than physical life
the estimated residual value of the asset 资产估计残值
Residual value
Expected value at the end of the useful life of a non‐current asset
the depreciation method
Expected value at the end of the useful life of a non‐current asset
Record Depreciation Expense in Income Statement (reduces Profit)
Add Depreciation amount to Accumulated Depreciation account in Balance Sheet
represents the cumulative amount of depreciation expense on the asset
Accumulated Depreciation account is a contra account
It is deducted from the asset account in the Balance Sheet
Depreciation Methods
Straight‐Line Method (% of cost)
Assumes equal consumption each accounting period over useful life of asset.
Depreciation pa = (Cost – Residual Value) ÷ Useful life
Reducing Balance Method
Assumes fixed proportion of consumption based on a percentage of economic benefits used during a period假设在一个时期内，消费的固定比例是基于经济利益的百分比
Units of production Method
Consumption depends on percentage of total capacity used in the period
Identify the main issues relating to inventory in the context of the income statement and the statement of financial position
Profit Measurement and the
Valuation of Inventory
Cost of inventory
Includes all costs directly related to bringing the inventory into a saleable state
cost of purchase
costs of conversion
other costs
Basis for Transferring the Inventory Cost to Cost of Sales (COS)
First in, first out (FIFO)
Last in, first out (LIFO)
Weighted average cost 加权平均
Inventory
Perpetual inventory system 永续盘存制
maintains continuous records of all inventory movements, records both cost and selling price, and volume
Physical/periodic inventory system 定期盘存制
much simpler than perpetual, does not maintain records of cost of inventory sold, the inventory (asset) account remains unchanged during the year and is updated at end of period following a stock count 不维护库存销售成本记录，库存(资产)帐户在年内保持不变，并在库存盘点结束后更新
Net realisable value (NRV) 可变现净值
(The estimated selling price) - (any further costs necessary to complete the goods + any costs involved in selling and distributing the goods)
Accounting standards require valuing inventory on the basis of
the lower of
cost and net realisable value on an item‐by‐item basis 可变现净值和成本谁低取谁
Inventory valuation and depreciation are good examples of where the ‘consistency convention’ should be applied
Consistency convention
Holds that when a particular method of accounting is selected to deal with a transaction
Should be applied consistently over time
Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and balance sheet
The risk of credit sales is that the customer will not pay the amount due, thus ‘bad debts’ are created and ‘doubtful debts’ when collection is uncertain. Bad debts must be ‘written‐off’ which increases expenses and reduces profit
Allowance for doubtful debts estimated using either the percentage of credit sales or the aged debtors listing approach (increase doubtful debt expense, increase allowance)
When doubtful debt is confirmed to be bad, decrease both
accounts receivable and allowance for doubtful debt accounts
‘Doubtful debts expense’ is sometimes called an ‘impairment loss’ and ‘allowance for doubtful debts’ called an ‘allowance for impairment loss’ “坏账准备”有时被称为“减值损失”和“坏账准备”，被称为“减值损失准备”
Prepare a simple income statement from relevant financial information
Review and interpret the income statement.
Uses & Usefulness of the Income Statement
Analysing sales levels – against history and planned sales for the current/future periods
Investigating gross profit levels in relation to sales in similar businesses
helpful in assessing profitability and margins
Examining the nature and amount of expenses incurred
comparison against history and future
indicator of efficiency of business operations
Analysing net profit levels, for example against previous periods and also in relation to sales
Useful? Remember the role of choice: in accounting methods and in making estimates
nature and purpose of the statement of financial
performance (income statement) and its relationship with the statement of financial position
nature and purpose of the statement of financial
performance (income statement)
The purpose
to measure and report how much profit (wealth) the business has generated over a period
Profit (or loss)
is the difference between the increases in owners’ equity, known as income, and the decreases in owners’ equity, known as expenses
Income
is made up of revenue (from operating activities) and
gains (usually from non‐operating activities)
Expenses
are outflows of resources to generate income
its relationship with the statement of financial position
The two main accounting statements are closely linked but perform different functions
Statement of financial position (Chapter 2) shows ‘snapshot’ at a point in time
Statement of financial performance shows generation of
wealth over a period of time
Links financial position at beginning of period to financial position at end of period
Assuming no Contributions or Drawings/Dividends:
Assets = Liabilities + Opening Equity + Income – Expenses Relationship
+Income – Expenses
Explained on Income Statement
= Profit
Why is there a demand for periodic
performance measures
Valuation (e.g., short term pressure from market)
To evaluate management performance
Reward management (managerial labor market)