(W3) The Statement of Profit & Loss

What is cash on delivery payment?

Services and goods paid at the time the services are consumed or goods received

What are payments in arrears?

Services consumed and goods delivered and paid for at a later time

Why can’t we use cash flows to calculate profit?

Profit follows the accrual accounting principle, this records revenues and expenses when they are earned or incurred, rather than when money actually changes hands

Give an example showing why we cant use cash flows to calculate meaningful profits for a period

• Firm completes a £5,000 project in December but doesn't receive the payment until January.

• £5,000 is still recorded as December revenue because that is when it was earned. Simultaneously, they must record any associated expenses—such as a £2,000 subcontractor fee—in December as well.

• Even though the firm's bank account hasn't increased yet, their financial statement for December will show a £3,000 profit.

• This method provides a more accurate analysis of company’s performance during a specific timeframe, preventing the "distortions" that occur when large cash payments or expenses happen to fall into different months.

What is the issue regarding cash flows?

• Only track the physical movement of liquid capital, fail to account for non - cash items like depreciation

• Do not distinguish between long-term capital investments and day-to-day operating costs

What is the accrual principle?

Revenues should be recognised when earned regarless of when paid for

What are the IFRS revenue recognition requirements?

• Rights to all economic benefits from a product or a service, and responsibilites for any risks, have been transferred from a the seller to the buyer without recourse

• The amount of revenue and associated costs can be measures reliably

What are period costs? Give examples

Costs that cannot easily be matched with revenues

• Corporate overheads - The costs ofrunning the business

• Manufacturing overheads - Transformed into product costs