Income Statement

What is Step 1

Write the Skeleton (template)

skeleton (9)

1. revenue

2. cost of sales

3. gross profit

4. operating expenses

5. operating profit

6. finance cost

7. profit before tax

8. tax (if any)

9. gross profit

What is step 2?

add in revenue

where do you find the revenue

sales/revenue straight from trial balance

what is step 3

calculate cost of sales

how do you calculate cost of sales

opening inventory + purchases - closing inventory

what is step 4

calculate gross profit

how do you calculate gross profit

revenue - cost of sales

what is step 5

list operating expenses found

examples of operating expenses (5)

salaries/wages
electricity/water/rent
insurance
bad debts
depreciation

what is step 6

after the operating expenses are listed, apply the relevant adjustments

What are core relevant adjustments

• accrued expenses

• prepaid expenses

• depreciation

• disposal of non-current assets

• bad debts/allowance for doubtful debts

• interest

what do you do with accrued expenses

add to operating expenses

what do you do with prepaid expenses

subtract the payment that is useful for next year from operating expenses

what do you do with unrecorded income

add to the revenue

what do you do to bad debts written off

add to operating expenses

how do you calculate annual depreciation

cost - residual value / useful life

where does disposal of non-current assets go? (profit)

add to ‘other income’ under operating profit “add profit on disposal”

where does disposal of non-current assets go? (loss)

add to ‘other expenses’ under operating profit “less loss on disposal”

Step 7: how do you calculate operating profit

gross profit - operating expenses (+ / - any disposal profit/loss)

what is step 8

subtract finance costs

what do we get after we subtract finance costs

profit before tax

what are the finance costs

interest on loans, bank overdrafts, debentures

what is the last step

subtract tax if any to give us net profit/loss