lesson 4 course 0809 - universidad de sevillapersonal.us.es/cabad/lesson 4 course 0809.pdf · 5 9...

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Financial Accounting 08/09 2ºDE – LESSON 4 © Mª Cristina Abad Navarro, 2008

LESSON 4

Income Statement

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Outline

4.1. Introduction: definition and purpose.4.2. Format of the Income Statement.4.3. Profit or loss from continuing

operations.4.4. Profit or loss from discontinued

operations.

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The annual accounts

Balance SheetIncome StatementStatement of Changes in EquityCash Flow Statement Notes to the Financial Statements

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Income Statement

The income statement (statement of earnings) reports the company’s revenues, expenses, and net profit or net loss for the period

From an economic point of view:

The P&L Account shows, unlike the Balance Sheet, the economic flows generated during a particular period which result in increased firm’s wealth

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Revenues and expenses –Conceptual framework

Increases in equity during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities, other than those relating to contributions from equity participants.

Revenue*

Expense^ Decreases in equity during the accounting period in the form of outflows or depletions of assets or incurrencesof liabilities, other than those relating to distributions to equity participants.

* Encompasses revenues and gains

^Encompasses losses and ordinary expenses

Revenues and expenses will be computed in the income for the year, except when they must be recognized directly in Equity.

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Income Statement – PGC, 2007

Following Spanish Accounting Rules, the Income Statement format is established in the Plan General de Contabilidad (2007), Section III. Annual Accounts:

“The Income Statement shows the income for the year, made of its revenues and expenses, except when they must be recognized directly in equity” (PGC, 2007).

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Link income statement and balance sheet

= Net assets 31/12Share capital 31/12 + Retained profits 31/1231 dec. 20X1

= Decrease NA- Dividend

+ Profit(- Loss)

= Increase NA= Decrease NA

Revenues- Expenses

During 20X1

Income statementfor year 20X1

= Net assets 1/1 (NA)Share capital 1/1 + Retained profits 1/11 jan. 20X1

= Assets – LiabilitiesOwner’s equity

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Format of the Income Statement – IAS 1Expenses should be analyzed either:

– by nature (raw materials, staffing costs, depreciation, etc.) or

– by function (cost of sales, selling, administrative, etc.)

Either on the face of the income statement or in the notes. If an enterprise categorizes by function, additional information on the nature of expenses -- at a minimum depreciation, amortization, and staff costs -- must be disclosed.

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Format of the Income Statement – IAS 1

This was the most common in Europe

Nature Function € ’000 € ’000 Raw materials 1,739 Cost of sales 2,601 Salaries and wages 783 Distribution costs 382

Depreciation 462 Administrative expenses 874

Other costs 873 Total 3,857 Total 3,857

More common in UK and US

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Format of the Income Statement – PGC, 2007

Revenues and expenses are classified according to their natureRevenues and expenses are shown in a listThere are 2 models:– Normal– Abbreviated

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Abbreviated model: The firm has the possibility of formulating abbreviated Income Statement if it complies with 2 of the following criteria during 2 consecutive years:

250Average number of employees not higher than:

22,800,000 €Total net sales revenue amount not higher than:

11,400,000 €Total assets amount not higher than:

ABBREVIATED INCOME

STATEMENTCRITERIA:

Format of the Income Statement – PGC, 2007

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Format of the Income Statement – PGC, 2007 – normal model

A.5) INCOME FOR THE YEAR (A.4 + 18)18. Post-tax income of discontinued operationsB) DISCONTINUED OPERATIONSA.4) INCOME FROM CONTINUING OPERATIONS (A.3 + 17)17. Income taxA.3) INCOME BEFORE TAXES (A.1 + A.2)A.2) FINANCIAL INCOMEFinancial revenues – financial expensesA.1) OPERATING INCOMEOperating revenues – operating expensesA) CONTINUING OPERATIONS

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= Operating Income (A)Operating revenues – Operating expenses

Profit or loss made by a company as a result of its principal trading activity


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= Financial Income (B)Financial revenues – Financial expenses= Operating Income (A)Operating revenues – Operating expenses

Financial flows derived from the managing of financial resources and

financial investments


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A + B = Income before taxes (C)= Financial Income (B)Financial revenues – Financial expenses= Operating Income (A)Operating revenues – Operating expenses


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- Corporate Income TaxIncome from continuing operations (D)


Profit or loss that derive from thenormal activities of the company


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Income for the year (E)+/- Post-tax income from discontinued operations



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Format of the Income Statement – Discontinued operations

A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and a) represents a separate major line of business or

geographical area of operations, b) is part of a single coordinated plan to dispose

of a separate major line of business or geographical area of operations or

c) is a subsidiary acquired exclusively with a view to resale.

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A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In other words, a component of an entity will have been a cash-generating unit or a group of cash-generating units while being held for use. cash generating unit The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

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The post-tax income from discontinued operationsinclude:(i) the post-tax profit or loss of discontinued operations and, (ii) the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.

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The post-tax income from discontinued operationsdoes not include:Revenues and expenses generated by non-current assets classified as held for sale or disposal groups that do not meet the criteria to be considered as discontinued operations.Those revenues and expenses will be recognized in the income statement according to their nature.

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Normal model

Note 200X 200X-1A) CONTINUING OPERATIONS1. Net turnover. a) Sales. b) Services rendered. 2. Change in inventory of finished goods and work-in process. 3. Work performed for own assets. 4. Procurements. a) Consumption of goods for sale. b) Consumption of raw materials and other consumables. c) Work performed by other companies.d) Impairment of goods for sale, raw materials and other consumables.5. Other operating revenues. a) Accesory and other ordinary income.b) Operating subventions included in income for the year. 6. Personnel expenses. a) Wages, salaries and similar expenses. b) Employee welfare expenses. c) Provisions. 7. Other operating expenses. a) Outside services. b) Taxes other than income tax. c) Losses, impairment and change in provisions for trade operations.d) Other operating expenses. 8. Fixed assets depreciation expense. 9. Transfer of grants of non-financial non-current assets and others. 10. Excess of provisions. 11. Impairment and income from disposal of non-current assets. a) Impairment and losses.b) Income from disposals and others. A.1) OPERATING INCOME (1+2+3+4+5+6+7+8+9+10+11) 12. Financial revenues. a) From holdings in equity instruments. a1) Of subsidiaries and associated companies. a2) Of third parties. b) From marketable securities and other financial instruments. b 1) Of subsidiaries and associated companies. b 2) Of third parties. 13. Financial expenses. a) Of subsidiaries and associated companies. b) Of third parties. c) From capitalization of provisions.14. Change in fair value of financial instruments. a) Held for trading and others. b) Transfer to income for the year for available for sale financial instruments. 15. Exchange diferences. 16. Impairment and income from disposal of financial instruments. a) Impairment and losses.b) Income from disposals and others.A.2) FINANCIAL INCOME (12+13+14+15+16) A.3) INCOME BEFORE TAXES (A.1+A.2) 17. Income tax. A.4) INCOME FROM CONTINUING OPERATIONS (A.3+17)B) DISCONTINUED OPERATIONS 18. Post-tax income of discontinued operations. A.5) INCOME FOR THE YEAR (A.4+18)

(Debit) Credit

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1. Net turnover. 2. Change in inventory of finished goods and work-in process. 3. Work performed for own assets. 4. Procurements. 5. Other operating revenues. 6. Personnel expenses. 7. Other operating expenses. 8. Fixed assets depreciation expense. 9. Transfer of grants of non-financial non-current assets and

others. 10. Excess of provisions. 11. Impairment and income from disposal of non-current

assets.

Operating income

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Operating income

1. Net turnover. a) Salesb) Services rendered

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Net turnover: Sales

= (+) Net sales(-) Discounts for volume of sales (“rappels”)

(-) Sales returns(-) Sales discounts for early payments= Sales- Trade discountsSales amount

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= Net sales- Discounts for volume of sales (709)- Sales returns (708)- Sales discounts for early payments (706)

= Sale of goods for sale / finished goods / semi-finished goods/ sub-products and waste materials / containers and packaging (700/1/2/3/4)

- Trade discountsSales amount

Net turnover: Sales

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= Ventas netas- Rappels sobre ventas (709)- Devoluciones de ventas y op. similares (708)- Descuento sobre ventas por pronto pago (706)

= Venta de mercaderías / productos terminados / pdtos. Semiterminados/ subproductos y residuos / envases y embalajes (700/1/2/3/4)

- Descuentos comercialesImporte de la venta

Net turnover: Sales

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= Services rendered+ Services rendered (705)

Net turnover: Services Rendered

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Change in inventory of finishedgoods and work-in process

Change in inventory (+/-)

= Change in inventory of finished goods and work-in process inventory

Change in impairment ofinventory (+/-)

7930. Reversion of impairment offinished goods and work-in process

- 6930. Losses from impairment offinished goods and work-in process

(+/-) 713. Change in inventory ofsubproducts, waste and recoveredmaterials

(+/-) 712. Change in inventory offinished goods

(+/-) 711. Change in inventory of semi-finished goods

(+/-) 710. Change in inventory of work-in process

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Change in inventory of finishedgoods and work-in process

IF > I0 Increase (+) IF < I0 Decrease (-)

Credit( + )

Change in inventories

Debit(- )


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Work performed for own assets

3. Work performed for own assets(Trabajos efectuados por la empresa para el inmovilizado)

GRUPO 73: TRABAJOS REALIZADOS PARA LA EMPRESA

730. Trabajos realizados para el inmovilizado intangible731. Trabajos realizados para el inmovilizado material732. Trabajos realizados en inversiones inmobiliarias733. Trabajos realizados para el inmovilizado material en curso

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Procurements

4. Procurements (Aprovisionamientos)a) Consumption of goods for saleb) Consumption of raw materials and other

consumablesc) Work performed by other companiesd) Impairment of goods for sale, raw

materials and other consumables

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(+) Purchase discounts for early payments

Purchase amount

= (-) Net purchase(+) Discounts for volume of purchases (“rappels”)

(+) Purchase returns

= (-)Purchase expense+ Additional expenses- Trade discounts

Consumption of goods for sale

Initial inventory + Purchases – Final inventory

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- Purchases + (IF - I0)

Purchases +/– Change in inventory

IF > I0 Increase (+) IF < I0 Decrease (-)

Credit( + )


Debit(- )


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+/- Change in inventories (IF - I0) = (-) CONSUMPTION OF GOODS FOR SALE

(+) Purchase discounts for early payments

= (-) Net purchase

Purchase amount

(+) Discounts for volume of purchases (“rappels”)

(+) Purchase returns

= (-) Purchase expense+ Additional expenses- Trade discounts

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= (-) Purchase of goods for sale (600)

Purchase amount

= (-) Consumption of goods for sale

(+) Discounts for volume of purchase of goods for sale (6090)+/- Change in inventory of goods for sale (610)

(+) Purchase returns of goods for sale (6080)(+) Purchase discounts for early payments of goods for sale (6060)

+ Additional expenses- Trade discounts


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= (-) Compra de mercaderías (600)

Importe de la compra

= (-) CONSUMO DE MERCADERÍAS

(+) Rappels por compras de mercaderías (6090)+/- Variación de existencias de mercaderías (610)

(+) Devoluciones de compras de mercaderías (6080)

(+) Descuentos sobre compras por pronto pago de mercaderías (6060)

+ Gastos adicionales- Descuentos comerciales


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= (-) Purchase of raw materials (601)

Purchase amount

= (-) Consumption of raw materials

(+) Discounts for volume of purchase of raw materials (6091)+/- Change in inventory of raw materials (611)

(+) Purchase returns of raw materials (6081)(+) Purchase discounts for early payments of raw materials (6061)

+ Additional expenses- Trade discounts

Consumption of raw materials

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Change in inventoryCLARIFICATION:

3 types of inventories

Purchase No transformation Sale

Purchase Production process

Production process Sale

Commercial (goods for

sale)

Rawmaterials

Finished goods & work

in-process

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Expenses Revenues

Cost of the inventories

consumed / sold

Sales

Profit or loss

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Expenses Revenues

Consumption = Cost of the goods sold =

Purchases – Change in inventories

Sales

Profit or loss

Commercial (goods for

sale)

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Expenses Revenues

Cost of the finished goods

sold

Sales

Profit or loss

Finished goods

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Consumption of raw materials+ Consumption of semi-finished goods+ Other production costs+ Cost of finished goods that we had from previous years- Cost of finished goods produced and not sold

Finished goods

Cost of the finished goods sold:

Change in inventoriesEXPENSE

REVENUE

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In summary, the change in finished goods and work in-process during the period represents an adjustment to production expenses to reflect the fact that either production has increased inventory levels or that sales in excess of production have reduced inventory levels.

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Procurements

4. Procurements (Aprovisionamientos)

c) Work performed by other companies

Work that, being part of the production process, is done by other companies.

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Procurements4. Procurements (Aprovisionamientos)

d) Impairment of goods for sale, raw materials and other consumables.

(-) Losses from impairment of inventory of goods for sale, raw materials and other consumables (6931/6932/6933)(+) Reversion of impairment of inventory of goods for sale, raw materials and other consumables (7931/7932/7933)

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Other operating revenues

5. Other operating revenues

a) Accessory and other ordinary incomee.g. Rent revenue and Service revenue

b) Operating subventionsSubsidy from a government or foundation to compensate operating losses

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Personnel expenses

6. Personnel expenses

a) Wages, salaries and similar expenses

b) Employee welfare expensesc) Provisions

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Other operating expenses7. Other operating expenses

a) Outside services

b) Taxes other than income tax

c) Losses, impairment and change in provisions for trade operations

d) Other operating expenses

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a) Outside servicesGrupo 62: servicios exteriorese.g. Rent expenses (621. Arrendamientos y C.)

Repairs and conservation (622. Reparaciones y C)Services from independent professionals (623. Servicios de p.i.)

Transports (624. Transportes)Insurance expenses (625. Primas de seguros)Bank services (626. Servicios bancarios y sim.)

Advertisement expenses (627. P., P. y RR.PP.)Supplies (628. Suministros)Other services (629. Otros servicios)

Other operating expenses

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c) Losses, impairment and change in provisions for trade operations

(-) 650. Losses for uncollective accounts (-) 694. Losses from impairment of trade accounts receivable

(-) 695. Expense for the provision for trade operations(+) 794. Reversion of impairment of trade accounts receivable(+) 7954. Excess of provision for trade operations

Other operating expenses

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Depreciation expenses

8. Fixed assets depreciation expense

(-) (680) Intangible assets depreciation expense

(-) (681) Tangible assets depreciation expense

(-) (682) Investment property depreciation expense

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Transfer of grants

9. Transfer of grants of non-financial non-current assets and others

(+) (746) Grants, donations and legacies transferred to income for the year

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Excess of long-term provisions

10. Excess of provisions

(+) (7951/2/5/6) Excess of long term provisions (for taxes/for other responsibilities/for environmental actions/for restructuring)

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Impairment and income from disposal of non-current assets

11. Impairment and income from disposal of non-current assets

a) Impairment and losses(-) Losses from impairment of intangible/tangible/investment property

(+) Reversion of impairment of intangible/tangible/inv. property

b) Income from disposals and others(-) Losses from disposal of intangible/tangible/invest. property

(+) Profits from disposal of intangible/tangible/invest. property

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Other rules

“Other income”It will be created when there are exceptional expenses or revenues such as those derived from fires, flooding or penalties.

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Note 200X 200X-1A) CONTINUING OPERATIONS1. Net turnover. a) Sales. b) Services rendered. 2. Change in inventory of finished goods and work-in process. 3. Work performed for own assets. 4. Procurements. a) Consumption of goods for sale. b) Consumption of raw materials and other consumables. c) Work performed by other companies.d) Impairment of goods for sale, raw materials and other consumables.5. Other operating revenues. a) Accesory and other ordinary income.b) Operating subventions included in income for the year. 6. Personnel expenses. a) Wages, salaries and similar expenses. b) Employee welfare expenses. c) Provisions. 7. Other operating expenses. a) Outside services. b) Taxes other than income tax. c) Losses, impairment and change in provisions for trade operations.d) Other operating expenses. 8. Fixed assets depreciation expense. 9. Transfer of grants of non-financial non-current assets and others. 10. Excess of provisions. 11. Impairment and income from disposal of non-current assets. a) Impairment and losses.b) Income from disposals and others. A.1) OPERATING INCOME (1+2+3+4+5+6+7+8+9+10+11)

(Debit) Credit

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Financial Income

12. Financial revenues13. Financial expenses14. Change in fair value of financial

instruments15. Exchange differences16. Impairment and income from

disposal of financial instruments

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12. Financial revenues

a) From holdings in equity instruments

Dividends received

b) From marketable securities and other financial instruments

Interest received from fixed interest securitiesInterest received form long-term and short-term

loans to other companies

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13. Financial expenses

a) Of subsidiaries and associated companies

b) Of third partiesInterest paid for fixed interest securities issued by the company

Interest paid for long-term and short-term loans received from financial institutions

Interest paid for discounting of bills of exchange and factoring operations

c) From capitalization of provisionsInterest from the increase in the book value of the provision from

the review of its value at balance sheet date (increase in the provision due to the passage of time)

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14. Change in fair value of financial instruments

a) Held for trading and others(7630) Profits from held from trading portfolio

- (6630) Losses from held from trading portfolio…

b) Transfer to income for the year for available for sale financial instruments(7632) Profits from valuation at fair value of available for sale financial instruments- (6632) Losses from valuation at fair value of available for sale financial instruments

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15. Exchange differences

(768) Exchange gains

- (668) Exchange losses

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16. Impairment and income from disposal of financial instruments

a) Impairment and losses- 696. Pérdidas por deterioro de participaciones y valores representativos de deuda a largo plazo- 697. Pérdidas por deterioro de créditos a largo plazo- 698. Pérdidas por deterioro de participaciones y valores representativos de deuda a corto plazo- 699. Pérdidas por deterioro de créditos a corto plazo796. Reversión del deterioro deterioro de participaciones y valores representativos de deuda a L/P797. Reversión del deterioro deterioro de créditos a largo plazo798. Reversión del deterioro deterioro de participaciones y valores representativos de deuda a C/P799. Reversión del deterioro deterioro de créditos a corto plazo

b) Income from disposal and others- 666. Pérdidas en participaciones y valores representativos de deuda- 667. Pérdidas de créditos no comerciales- 673. Pérdidas procedentes de participaciones a largo plazo en partes vinculadas- 675. Pérdidas por operaciones con obligaciones propias766. Beneficios en participaciones y valores representativos de deuda773. Beneficios procedentes de participaciones a largo plazo en partes vinculadas775. Beneficios por operaciones con obligaciones propias

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A.2) FINANCIAL INCOME (12+13+14+15+16) b) Income from disposals and others.a) Impairment and losses.16. Impairment and income from disposal of financial instruments. 15. Exchange differences. b) Transfer to income for the year for available for sale financial instruments. a) Held for trading and others. 14. Change in fair value of financial instruments. c) From capitalization of provisions.b) Of third parties. a) Of subsidiaries and associated companies. 13. Financial expenses.

b 2) Of third parties. b 1) Of subsidiaries and associated companies.

b) From marketable securities and other financial instruments. a2) Of third parties. a1) Of subsidiaries and associated companies.

a) From holdings in equity instruments. 12. Financial revenues.

200X-1200XNote

(Debit) Credit

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Profit or loss that derive from thenormal activities of the company


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Income for the year (E)+/- Post-tax income from discontinued operations



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Normal model

Note 200X 200X-1A) CONTINUING OPERATIONS1. Net turnover. a) Sales. b) Services rendered. 2. Change in inventory of finished goods and work-in process. 3. Work performed for own assets. 4. Procurements. a) Consumption of goods for sale. b) Consumption of raw materials and other consumables. c) Work performed by other companies.d) Impairment of goods for sale, raw materials and other consumables.5. Other operating revenues. a) Accesory and other ordinary income.b) Operating subventions included in income for the year. 6. Personnel expenses. a) Wages, salaries and similar expenses. b) Employee welfare expenses. c) Provisions. 7. Other operating expenses. a) Outside services. b) Taxes other than income tax. c) Losses, impairment and change in provisions for trade operations.d) Other operating expenses. 8. Fixed assets depreciation expense. 9. Transfer of grants of non-financial non-current assets and others. 10. Excess of provisions. 11. Impairment and income from disposal of non-current assets. a) Impairment and losses.b) Income from disposals and others. A.1) OPERATING INCOME (1+2+3+4+5+6+7+8+9+10+11) 12. Financial revenues. a) From holdings in equity instruments. a1) Of subsidiaries and associated companies. a2) Of third parties. b) From marketable securities and other financial instruments. b 1) Of subsidiaries and associated companies. b 2) Of third parties. 13. Financial expenses. a) Of subsidiaries and associated companies. b) Of third parties. c) From capitalization of provisions.14. Change in fair value of financial instruments. a) Held for trading and others. b) Transfer to income for the year for available for sale financial instruments. 15. Exchange diferences. 16. Impairment and income from disposal of financial instruments. a) Impairment and losses.b) Income from disposals and others.A.2) FINANCIAL INCOME (12+13+14+15+16) A.3) INCOME BEFORE TAXES (A.1+A.2) 17. Income tax. A.4) INCOME FROM CONTINUING OPERATIONS (A.3+17)B) DISCONTINUED OPERATIONS 18. Post-tax income of discontinued operations. A.5) INCOME FOR THE YEAR (A.4+18)

(Debit) Credit

lesson 4 course 0809 - universidad de sevillapersonal.us.es/cabad/lesson 4 course 0809.pdf · 5 9...

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