BUSN1001 Final: Income Statement
Statement of Financial Performance/Income Statement/Profit and Loss Statement
• Measures and reports how much profit the business has generated over a period.
• Profit = Income – Expenses
• Income = Revenue + Gains
o Increases in economic benefits in the form of increases in assets or decreases
in liabilities.
o Results in increases in equity.
o Excludes contributions (i.e. investments) by owners.
o Revenues represent the gross inflows of economic benefits from ordinary
activities, whereas gains represent the net inflows normally from non-ordinary
activities.
Recognition of Revenues
• Revenues - increases in the company's wealth arising from the provision of services or
the sale of goods to customers, eg: sale of goods and services, and the earning of
interest & dividends.
• Revenues increase wealth, so either increases assets or decreases liabilities, and
therefore, increases equity.
• Criteria: Whether the goods or services have been rendered.
Recognition of Expenses
• Decreases in economic benefits in order to earn revenue, eg: COGS,
salaries/electricity/rent expenses, depreciation expense, bad and doubtful debts
expense.
• Expenses decrease wealth, so either decrease assets or increase liabilities, and
therefore decrease equity.
• Excludes distributions to owners or shareholders, i.e. withdrawals, dividends.
• 3 possibilities when recognising expenses in a period:
1. The cash payments are the same as the expenses incurred (benefits used up or
consumed).
2. The cash payments are less than the expenses incurred, or
3. The cash payments exceed the expenses incurred.
Expenses - Timing Issue
• Cost of this year are expenses of this year - salaries/wages paid
• Costs of earlier years and expenses of this year.
o Wholly - cost of inventory purchased last year.
o Partially - depreciation of vehicle.
• Cost incurred this year which are expenses of later years - prepaid advertising.
Statement of Cash Flows
• Shows the receipts and payments of cash during the period.
• Individual transactions are normally split into the following 3 categories:
1. Operating activities - related to the provision of goods and services.
2. Investing activities - related to the acquisition and disposal of certain noncurrent
assets, including property, plant and equipment.
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