Intro to Financial Accounts and Income statement terminology

What are the major Financial statements

1. Income statement

2. Statement of financial Positions (Balance Sheet) (SOFP)

3. Statement of Cash Flows (SOCE)

What does an Income Statement do?

The income statement records the income and expenses of an entity (i.e the performance of the entity) over a certain period of time;

year, quarter or month.

What does the Statement of Financial Position / Balance Sheet do?

The Balance Sheet/ SOFP

• Records the assets, liabilities and capital of the entity at a particular point in time - i.e what the business owns and what it owes.

• Note - the Income statement records the results over a period of time, e.g. a year

• whereas

• - The Balance Sheet records the position at a particular point in time, - at a certain date and time.

Income statement terminology - Revenue/ Sales Revenue

The revenue/sales earned by the business.

• This will mostly come from the sales of the business, i.e. goods sold or services provided.

Income statement terminology - Cost of sales

This is the cost of the goods which have been sold

• It generally won’t be relevant of a service industry e.g. a veterinary practice, dog grooming business , airline, accounting firm

Income Statement terminology - Operating Expenses

Operating expenses are often split into two main categories of Distribution expenses and Administration expenses

• Operating expenses are costs incurred in the running of the business;

• Salaries, rent, insurance, light and heat, stationary, promotions, expenses specific to an industry e.g.; animal vaccines, animal shampoo, fuel for airlines.

Income Statement Terminology - Other Gains/ Losses

Other gains/losses are items not derived from the main trading of the business, e.g. redundancy payments, restructuring costs, losses on revaluation assets

Income Statement Terminology - Finance gains / losses

Finance gains or losses are: Interest charges related to the finance of the business, or Interest received from deposits held.

How do you measure profit ( or loss) for the period?

Total revenue for the period

less

Cost of sales & total expenses incurred in generating that revenue

Give an example of the main headings of an Income statement

Sales revenue

less

Cost of sales

equals

Gross profit

less

Operating profit

plus/minus

Other gains/losses

plus/minus

Finance gains/expenses

equals

Profit before tax

What are the uses of the Income Statement?

The income statement helps in providing information on:

• How effective the business has been in generating wealth

• How the profit was derived