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Topic 4 (Income Statement & Statement of Changes in Equity) - Coggle…
Topic 4 (Income Statement & Statement of Changes in Equity)
Income Statement discloses
financial performance
INCOME LESS EXPENSES
The 1st statement in the Income Statement
Reports a
business' performance
for the period
Format: Revenues - Expenses = Net Income
Revenues
are earned for the sale of goods and services. Note that revenues occur when the sale is made. The payment may or may not have been received e.g. sales, service revenue and interest revenue
Expenses
are incurred when a business receives goods and services. Like revenues, payment may or may not have been made e.g. salaries expense, utility expense and interest expense
A format for multi-step income statement is:
Sales revenue - Costs of goods sold = Gross Profit, Operating expenses - Income from operations, -/+ Non-operating items, Income before taxes, - Income taxes = Net Income
Income Statement Components
Costs of goods sold
represents the expense a business incurred to buy or make a product for resale e.g. buys a book for $25, sells for $32. CoGS = $25.
Operating expenses
are the usual expenses incurred in operating a business e.g. salaries, utility expense, depreciation expense
Non-Operating items
are revenue, expenses, gains and losses that do not relate to the company's primary objectives
Income taxes
are computed by multiplying Income before taxes by the income tax rate e.g. Income before taxes is $50,000 x 30%=$15,000
Accrual accounting
This approach recognises incomes and expenses when they have been earned and incurred (whether or not they have been received the money or or money has been paid).
To present users with a more relevant overview of the entity's performance during the period, as the timing can differ from income and expense recognition
Whereas, Cash Accounting
recognises when income when cash is received, and expenses when they have been paid in cash. This can be misrepresentative of when cash is paid in advance, or a delay in payment incurs.
Statement of changes in equity
Outlines how owner's wealth (owner's equity) has been impacted during the accounting period
reports how net income and dividends affected a company's financial position during the period
Format:
Beg. Balance of OE + Contributed Capital + Net income - Net loss - Dividends/Drawings = End. balance of OE
Note: Income statement must be prepared before the Statement of Retained Earnings
Components
Contributed Capital
is the amount of cash (or other assets) provided by the shareholders
Retained Earnings
is the total earnings that have not been distributed to owners as dividends
Order of preparation
Income Statement
: where we receive the
Net Income
Statement of Changes in Equity:
Beginning Retaining Earnings + Net Income - Dividends =
Ending retained earnings
Balance Sheet
: Ending Balance Retained Earnings
Accounting policy choices
; the choice can result in manipulation of an entity's reported profit for the period, known as "earnings management".
Depreciation:
impacts the reported values of non-current assets. Methods include straight-line, reducing (diminishing) balance, output based methods
Doubtful Debts
: Impacts the reported value of collectible receivables. Methods include ages analysis and percentage of credit sales
