Lecture 2 Income Statement

Income Statement

A financial statement that summarises revenues and expenses for a period and shows net profit or net loss.

Purpose of Income Statement

To measure business performance and profitability.

Income Statement Reports

Performance over a period of time.

Statement of Financial Position Reports

Financial position at a specific date.

Net Profit Formula

Revenue minus Expenses.

Net Loss

Occurs when Expenses exceed Revenue.

Revenue

Income earned from selling goods or providing services.

Revenue Example

Sales revenue, service revenue, catering revenue.

Expenses

Costs incurred to generate revenue.

Expenses Examples

Rent, wages, utilities, advertising and supplies.

Revenue vs Income

Revenue is total earnings; income (net profit) is what remains after deducting expenses.

Gross Profit Formula

Sales Revenue minus Cost of Goods Sold (COGS).

Cost of Goods Sold (COGS)

Cost of inventory sold during the accounting period.

COGS Formula

Opening Inventory plus Purchases minus Closing Inventory.

Opening Inventory

Inventory available at the beginning of the period.

Closing Inventory

Inventory remaining unsold at the end of the period.

Purchases

Inventory bought for resale during the period.

Gross Profit

Profit earned before deducting operating expenses.

Net Profit

Profit remaining after deducting all expenses.

Income Statement Heading Contains

Business Name, Income Statement, For the Year Ended Date.

Income Statement Date Format

For the year ended 31 December 20X5.

Revenue Increases

Net Profit and Equity.

Expenses Decrease

Net Profit and Equity.

Accounting Equation Expanded

Assets = Liabilities + Capital + Revenue

Why Prepare an Income Statement

To determine whether the business is profitable.

Users of Income Statement

Owners, managers, investors, lenders and suppliers.

Owners Use Income Statement For

Evaluating business performance.

Managers Use Income Statement For

Cost control and decision making.

Banks Use Income Statement For

Assessing loan repayment ability.

Investors Use Income Statement For

Evaluating profitability and returns.

Revenue Recognition

Revenue is recognised when earned, not when cash is received.

Accrual Basis

Income and expenses are recorded when earned or incurred.

Service Business

Mainly earns revenue from providing services.

Retail Business

Buys and resells goods to customers.

Retail Business Uses

Cost of Goods Sold (COGS).

Service Business Usually Uses

Service revenue and operating expenses.

Example Gross Profit Calculation

Sales RM45,000 and COGS RM25,500 gives Gross Profit RM19,500.

Relationship Between Financial Statements

Net Profit from Income Statement increases Equity in Statement of Financial Position.

Profitability

Ability of a business to generate profit.

Higher Revenue Does Not Always Mean Higher Profit

Expenses may also be high.

Bottom Line

Another term for Net Profit.