03.income statement abm

8/9/2019 03.Income Statement ABM

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INCOME STATEMENT


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INTRODUCTION

Income statement is also called the profit and

loss account

It is the accounting report which summarises

the revenues, expenses and the difference

between them (or net income) for anaccounting period.


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BASIC CONCEPTS

1. Accounting period concept

2. Accrual concept

3. Realisation concept

4. Matching concept

5. Materiality concept


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Accounting Period Concept

To know the results of business operations and

financial position of the firm periodically

For external reporting is usually one year.

It is referred to as the financial year

Chosen mainly on the basis of the business

characteristics of the firm & tax considerations.


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Accounting Period Concept

Expenditure:An asset or service is acquired

Expense: It represents expired cost


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Accrual Concept

Income measured by changes in the owners' equity

arising from the operations of the business

Increase in owners' equity arising from the business

operations - Revenue

Decrease in owners' equity - Expense

Revenues > Expenses - Income

Expenses > Revenues - Loss


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Realisation Concept

Revenue is deemed to be earned only

when it is realised.

It realised when goods are shipped or

delivered to the customer

Not when a sales order is received or a

contract signed or goods manufactured.


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Matching Concept

Expenses are matched to

revenues.


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Materiality Concept

Maintaining the accounting records involves time

and expense, the accountant is usually concerned

with events which are material.

Eg. The accountant may assume that minor

purchases are consumed in the year of purchase

and not make an attempt to record the balance asan asset at the end of the year.


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Gross Sales

(-) Sales Return

Net Sales

(-) Cost ofGoods Sold

Gross Profit

(-) Operating Expenses

Operating Profit

(+/-) Non-Operating Surplus / Deficit

Profit Before interest & Tax (EBIT)

(-) Interest

(-) Taxes

Profit after tax

(-) Dividends

Retained Earnings

Income StatementIncome Statement(1.1.04(1.1.04 -- 31.12.04)31.12.04)


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CONTENTS

OF INCOME STATEMENT

Net sales

Cost of goods sold

Gross profit

Operating expenses

Operating profit

Non-operating surplus / deficit


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Contd.,

Profit before interest and tax (PBIT)

InterestProfit before tax (PBT / EBIT)

Tax

P

rofit after tax (P

AT

)


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Net sales

Sales - sales inwards - excise duty

Sales: Sum of the invoice price of goods

sold and services rendered during theperiod

Sales inwards: Represent the invoice

value of goods returned by the

customers.Excise duty: Refers to the amount paid

to the government.


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Cost of goods sold

It is the sum of costs incurred formanufacturing the goods sold during the

accounting period

It consists of direct material cost, direct

labour cost and factory overheads

Cost of goods produced in the accountingyear need not be equal to the cost of goods

sold during the same period


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Gross profit

Difference between net sales andcost of goods sold


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Operating expenses

Consist of

General administrative expenses

Selling & distribution expenses,

Depreciation.


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Operating profit

Difference between gross profit &

operating expenses.

It reflects operating performance

Not affected by

Non-operating gains / losses

Financial leverage

Tax factor


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Non-operating surplus

Gains arising from sources other than normal

operations of the business.

Components areIncome from investments

Gains from disposal of assets.

Non-operating deficit represents losses from

activities unrelated to the normal operations of the

firm.


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Profit before interest and taxes

(PBIT)Sum of operating profit & non-operating surplus /

deficit.

Also referred as earnings before interest and

taxes (EBIT)

Measure of profit which is not influenced byfinancial leverage and the tax factor.


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Interest

The expense incurred for

Borrowed funds

ie. Term loans

Debentures /B

ondsPublic deposits

Working capital advances.


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Profit before tax

Obtained by deducting interest fromprofits before interest and taxes.

Tax represents the income tax payable

on the taxable profit of the year.


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Profit after tax

Difference between the profit before taxand tax for the year.


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Dividends

Dividends represent the amount

earmarked for distribution to

Equity shareholders and

Preference shares


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Retained earnings

Retained earnings are the surplus

after the dividend


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Gross Sales

(-) Sales Return

Net Sales

(-) Cost ofGoods Sold

Gross Profit

(-) Operating Expenses

Operating Profit

(+/-)Non-Operating Surplus / Deficit

Profit Before interest & Tax (EBIT)

(-) Interest

(-) Taxes

Profit after tax

(-) Dividends

Retained Earnings

Income StatementIncome Statement(1.1.04(1.1.04 -- 31.12.04)31.12.04)

03.income statement abm

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