Beruflich Dokumente
Kultur Dokumente
1
Learning Goals - Income Statement
Revenue Vs Gains, Expenses Vs Losses
Expenditure and Expense
Product cost and Period Cost
Flow of costs perpetual and periodic
Understanding and computation of :
Net Sales, Purchase and Sales Returns, Purchase and Sales
discounts, Freight Costs, COGS, Gross Profit, Operating
Expenses, Operating Profit, Non-operating Activities, EBIT,
Interest Expense, EBT, Tax Expense, Net Income, Income for
equity holders
Income Statement Hindalco, Infosys
Earning Per Share (EPS) Basic and Diluted
2
Revenues and Expenses
Revenues: Expenses:
Economic resources earned by an entity Resources consumed in the process of
during a given accounting period generating revenue during a given accounting
period
These result from core operating (earning)
These are incurred in the process of creating
activities or ordinary activities of an entity revenues & involve decrease in economic
It involves gross inflow or increase in benefits in the form of :
economic benefits in the form of Outflow or consumption of assets or
Inflow or enhancement of assets Incurrence of liabilities or
(A/R) or A combination of both
Settlement of liabilities or Example: Cost of goods sold, rent expense
Gains :
Increases in Equity
Result from peripheral or incidental transactions (i.e. other than those which
generate revenue or are new contribution by owners)
Might be beyond entitys control (change in Market Value of an investment)
Described by the source , Measured at Net amounts, Realizability
Example: Gain on sale of equipment
Expected to be non-recurring
Includes Non-reciprocal transactions like compensation received on winning a case
4
Expenses and Losses
Expenses:
Decreases Equity (not by way of distribution to owners)
Result from core operations of the entity
Are resources consumed or used in the process of generating revenue
Losses:
Decreases Equity
Results from peripheral or incidental transactions (i.e. other than those generating
expenses for earning revenue or distribution to owners)
Opposite of Gains: Source, Net Amount, Recognized when Loss is evident (lost a
lawsuit and fine is payable)
Includes Non-reciprocal transactions like loss by fire
5
Revenue Recognition Principle
1. Persuasive Evidence of an arrangement between buyer and seller
Contract with the buyer : Simple delivery of the product just before the year end,
without evidence of a prior order not a revenue
2. Product has been delivered/ service has been rendered
A Ltd received advance payment of Rs 50,000 for delivery of goods not yet produced
- should recognize the amount as unearned revenue (CL) till the goods are delivered
3. Price is determined or determinable (revenue can be measured reliably)
Precludes recognition if price depends upon contingency
4. Collectability is reasonable certain : How much ? (economic benefits probable to flow in)
The buyer has not become insolvent : Has the ability to pay REALIZABILITY
The buyer is not deliberately escaping payment by fleeing : Has the intention to pay
Uncertainty till embargo imposed on remittance to the sellers country not lifted
postpone revenue till collectability is certain
Recognize only to the extent, ultimate collection from customer is reasonably assured
IFRS: When significant risks & rewards of ownership of the goods have been passed, No
control on the goods sold, Amount of revenue and expected associated costs can be
measured reliably, economic benefits probable to flow in
6
Expense Recognition
Expense Recognition :
Expenses need to be matched with the revenue in the period when the
company makes efforts to generate those revenues
Let the expenses follow the revenues
Also referred to as Matching Principle
7
Are Cost, Expenditure and Expense same ?
Expenditure : Cost of all goods and services acquired during the year
Results in decrease in assets (Cash) or increase in liability (on credit - A/P) associated
with cost incurrence
Apply Matching Principle, the associated cost is either an asset or an expense
If cost benefits future periods Asset In BS (Capital expenditure)
Otherwise Expense in IS (Revenue expenditure)
Expense: is an item of cost applicable to current accounting period, benefits have expired
8
Capital and Revenue Expenditure
Two companies C and E started with cash and equity share capital of Rs 1000
Capitalize Rs 900; SLM Dep, UL=3, RV=0 Expense Rs 900 in year 1
C E
Year 1 2 3 Year 1 2 3
Revenue 1500 1500 1500 Revenue 1500 1500 1500
Cash Exp 500 500 500 Cash Exp 1400 500 500
Depn 300 300 300 Depn 0 0 0
PBT 700 700 700 PBT 100 1000 1000
Tax @30% 210 210 210 30 300 300
PAT 490 490 490 70 700 700
Retained Retained
Earnings 490 980 1470 Earnings 70 770 1470
Share Capital 1000 1000 1000 1000 1000 1000
Shareholders'
Equity 1490 1980 2470 1070 1770 2470
9
Recognition of Expense
A cost is an expense for the year in case of either of the three situations:
It has cause and effect relationship with revenues for the year
Direct Matching : Cost of goods sold, commission to sales person
It relates to the activities for the accounting period which might have no direct
cause and effect relation with sales volume for the period
Office Salary, Other Administrative Expenses, Advertising Expense, Training
Expense
Association with revenue can only be broadly or indirectly determined (like
systematic and rational allocation of cost of Plant bought during the current or
previous periods)
Even if cant be associated with operations of a period, it can be an expense if
It cant be associated with future revenues and therefore is recognised in the
immediate period (like inventory assessed obsolete, Loss due to fire)
There is no future economic benefits from it to meet asset recognition criteria
(like, outcome of research might be uncertain, difficult to measure reliably)
10
Income Statement: US GAAP and IFRS
Two ways of grouping income statement items (particularly operating and other
expenses)
by Function
by Nature
Classification by nature identifies costs and expenses in terms of their character,
leads to descriptions such as salaries and wages, raw materials consumed,
depreciation expense, utilities expense etc.
Classification by function presents the expenses in terms of the purpose of the
expenditure, such as for manufacturing, administration, selling & distribution etc
Note that finance costs, tax expense must be identified separately regardless of
which classification is employed.
19
Multiple-Step IS : Infosys
12-07-2017 IIMC 2015 Prof. Arpita Ghosh
20
Types of companies and their Operations
Merchandising or Trading Companies Retailer or Wholesaler
Buy and Sell products in the same form in which acquired
Merchandise Inventory: Cost of goods acquired but not sold
Manufacturing Companies
Converts raw material and purchased parts into finished goods
Makes and Sells products
Three types of Inventories RM, WIP, FG
Service Companies
Do not sell a physical product
Furnishes intangible services rather than tangible products
Example: Hotels, Legal firms
Might have some material inventories
like service of the plumber, Job in progress, but no FG
21
Multistep Income Statements : Components
Service Merchandising/ Manufacturing
Revenues Net Sales
minus
Cost of Goods Sold
minus
Not used in a equals
Service business
Step 1: Gross Profit
minus
Operating Expenses Operating Expenses
equals equals
Operating
Step 1: Income from Operations Income Step 2: Income from Operations
plus or minus plus or minus
Other Revenues and Expenses Non-Operating Other Revenues and Expenses
minus minus
Interest Expense Interest Expense
equals equals
Step 2: Inc. Bef. Income Taxes EBT Step 3: Inc. Before Income Taxes
minus minus
Income Taxes Expense Income Taxes Expense
equals equals
Step 3: Net Income PAT Step 4: Net Income 22
Gross Sales and Net Sales
Gross sales equal the total cash sales and total credit sales during a given
accounting period
Revenue is recorded when earned under Revenue recognition rule
Revenue is recognized even though cash may not be collected until the
following accounting period
Net Sales - Amount of sales and trends in net sales over time are used to analyze a
companys progress
Payment Terms: n/15/EOM: Payment due in 15 days from the end of the month
Gross Sales (Cash and Credit sales) 1,20,000 Sales Returns and Allowances Dr
Less: Taxes, If any (like Excise Duty) 20,000 Accounts Receivables Cr.
Less: Sales Returns and Allowances 600
Sales Discount eg. 1/10, n/30:
Net Sales 99,400 Buyer gets 1% discount if pays in 10 days,
o.w. he can pay full amt in 30 days
Trade Discount Cash Dr. 990
Sales Discount Dr. 10
Hindalco Trade Receivables Cr 1,000
23. Revenue from Operations: 3/31/2016 3/31/2015
Sale of Products 36,364.28 36,438.59 INFOSYS As at March 31,
Other Operating Revenues 395.62 430.62 2.18 Revenue from operations 2017 2016
Gross Revenue from Operations 36,759.90 36,869.21 Revenue from software services 59,257 53,334
2,442.24 2,344.18 Revenue from software products 32 649
Less: Excise Duty
59,289 53,983
Net Revenue from Operations 34,317.66 34,525.03
Cost of Goods Purchased : Merchandising company
Purchase Price * Quantity Purchased
Exclude: Purchase Returns & Allowances and Purchase Discounts
= Net Purchases
Include: Freight in, Taxes (like Customs duty, Road Taxes) Transit Insurance,
Handling Charges (Unloading etc)
= Cost of Goods Purchased ( or Net Cost of Purchase)
24
Freight Costs Terms of Sale
Pool of goods
Less: Ending inventory available to sell
during the period
Cost of Goods
Available for Sale
Outs Cost of Goods Sold Ending Inventory
29
Product Cost and Period Cost
Product costs
Are connected with production of goods
Includes Material cost, Labour cost and other costs incurred to convert the RM
into Finished Goods
Also called Inventoriable Cost
Added to Inventory (assets) till the products are sold
Charged to IS as and when goods are sold (Matching Principle)
Cause and Effect relation with Sales, Important for ascertaining Gross Profits
Do not have an impact on income until the product has been sold
Period Costs
Are costs associated with a given accounting period which are expenses in the
period in which they are incurred
Can not be traced to any revenue transaction during the period, No Cause & Effect
relationship with Revenues
General costs of being in the business like General and Administrative Expenses
What if there is difference of opinion in classifying a cost like Production Administration
as Period cost or Product cost ?
30
Merchandising Operations - Flow of Costs
Perpetual System Periodic System
Maintain detailed records of the cost of Do not keep detailed records of the
each inventory purchase and sale. goods on hand.
Records continuously show inventory No Running account of changes in
that should be on hand. inventory as and when sales occur
32
Gross Profits
Cost of Goods Sold (COGS) :
Aggregate of cost of purchase or production of units sold and cost
incurred to bring them to the location and condition of sales
Matched with Revenues generated during the period, Product Cost
Gross Profits
= Net Sales Cost of Goods Sold
Hindalco
26. Cost of Materials Consumed 31-03-2016 31-03-2015
Copper Concentrate 13,231.19 16,155.19
Alumina 2,218.61 1,255.78
Bauxite 258.76 234.3
Caustic Soda 497.23 515.85
Calcined Petroleum Coke 928.45 784.81
Rock Phosphate 484.97 417.39
Anode 522.52 380.57
Others 1,078.81 1,347.49
19,220.54 21,091.38
Less: Transfer to Capital Work-in-Progress 11.09 35.09
19,209.45 21,056.29
Selling Expenses
Store Rent, Salary, travel
expenses of Sales staff, Sales
Commission, Delivery Expense
Promoting sales, Advertising
Freight out expense (FOB-D),
Deprectn. on store equipment
General & Administrative Expenses
Accounting, Personnel (Salaries)
Credit & Collections
Office rent, Dep on Office Equipm
Expenses related to overall
operations (Stationery, Telephone)
General Occupancy Expenses: Rent,
Utilities, Insurance (To be allocated:
Selling and Gen & Admn Expenses)
Operating Income: Gross Profit - Operating Expenses
35
35
28. Employee Benefits Expenses 31-03-2016 31-03-2015
Salaries and Wages 1,377.29 1,251.64
Hindalco Contribution to Provident and other Funds 175.36 227.99 Factory or
Employee Share-Based Payments 6.91 7.22 Admin?
Employee Welfare 146.46 135.71
1,706.02 1,622.56
Less: Transfer to Capital Work-in-Progress 7.96 33.08
1,698.06 1,589.48
29. Power and Fuel 31-03-2016 31-03-2015
Power and Fuel 6,549.29 5,270.09 Factory or
Less: Transfer to Capital Work-in-Progress 41.23 69.32 Admin?
6,508.06 5,200.77
548
Admin?
Rates and Taxes 23.13 23.27 Share-based payments to employees (Refer to 107Note 2.12) 7
Rent 53.65 38.46 Staff welfare 86 101
30,944 28,207
Insurance 121.84 106.76
Cost of software packages and others
Payments to Auditors - (a) 5.06 4.46 For own use 729 663
Research and Development 19.44 23.46 Third-party items bought for service delivery506
to clients 386
Freight and Forwarding Expenses (Net) - (b) 607.24 607.12 1235 1049
Provision for Doubtful Loans, Advances and Receivables (Net) -7.7 48.73 Other expenses
Power and fuel 180 179
Bad Loans, Advances and Receivables written off/(written back) (Net) 23.41 2.8
Brand and marketing 276 229
Prior Period Items (Net) 1.87 -0.62 Operating lease payments 284 175
Donation - (c) 6.16 18.36 Rates and taxes 118 99
Directors' Fees and Commission 2.25 4.19 Repairs and maintenance 1,073 873
Loss on assets held for sale -2.25 8.36 Consumables 31 28
Insurance 45 48
(Gain)/Loss on Change in Fair Value of Derivatives (Net) 13.26 -29.29 Provision for post-sales client support and warranties
84 18
Cost of own Manufactured Products Capitalized/Used -22.6 -21.23 Commission to non-whole-time directors 9 8
Miscellaneous Expenses - (d) 1,339.63 1,224.67 Impairment loss recognized (reversed) on financial
140 assets-45
Statutory audit fees 2 2
3,399.41 3,186.40
Contributions towards corporate social responsibility
215 202
Less: Transfer to Capital Work-in-Progress 8.66 29.28 Others 89 107
3,390.75 3,157.12 2546 1923
Earnings Before Interest and Taxes (EBIT)
= Operating Income
+ Other Revenues and Gains
Other Expenses and Losses
38
Other Revenues and Expenses: Non- operating Activities
24. Other Income: 31-03-2016 31-03-2015 2.19 Other income 2017 2016
Interest Income
Hindalco
Hindalco
30. Finance Costs 31-03-2016 31-03-2015
Interest Expenses - (a) 2,328.07 2,415.65
Other Borrowing Costs 17.55 13.69
Loss on Foreign Curreny Transactions and Translation (Net) 29.14 20.39
2,374.76 2,449.73
Less: Income on Specific Borrowing - (b) - 2.37
Net income Bottom line is what remains of the gross margin after
operating expenses are deducted,
other revenues and expenses are added or deducted, and
income taxes expense are deducted
Represents earnings that accrue to stockholders
Amount transferred to Retained Earnings from IS
Hindalco
35. Tax Expenses 31-03-2016 31-03-2015
Current Tax 119.63 321.52
MAT Crdeit Entitlement - (a) -119.63 -602.97
Deferred Tax - (b) & 125.36 636.48
Tax adjustments for earlier years (Net) - -33.28
125.36 321.75
Net income = Income before income taxes (EBT) Income taxes expense
PAT = EBIT Interest Expense Income taxes expense 41
Income
Statement
Presentation
Measures the
extent by which
selling price covers
all expenses
Show
separately
as finance
cost
42
Income Statement 20XX
Multiple Step Income Statement
Sales Revenue
Continuation 20XX
Gross Sales (Price per unit * Units sold)
Less: Taxes, Sales Returns
OPERATING PROFIT
or Profit from Operations
Net Sales ***
Add: Other Income (Non-Operating- **
Less: Cost of Goods Sold (COGS) : like Gain on sale of equipment)
Raw Material Consumed (includes Interest Income)
(Opening + Purchases(Net of returns + Freight In) Less: **
Closing) Other Expenses (Non-Operating)
Direct Labour Cost EBIT
(Earnings Before Interest and Taxes )
Manufacturing Expenses (related to Factory) Less: Interest Expense
Adjustment for WIP EBT (Earnings Before Tax)
(Add: Opening WIP Less: closing WIP)
Less: Income Tax
Adjustment for FG
(Add: Opening FG, Less: closing FG) PAT
(Earnings or Profits After Tax)
COGS ***
or (Net Income or Net Profits)
GROSS PROFIT
Add: Other Operating Income (if any) ** Less: Dividend to Preference SH
Less: Operating Expenses (SG&A) ** Profits Available to Equity SHs
OPERATING PROFIT EPS 43
Missing Figures
E-5-7 (page 221) YANIK NUNNEZ
Yanik Nunez
44
Missing Figures
E-5-7 (page 221) YANIK NUNNEZ
Yanik Nunez
45
KAFFEN COMPANY
Income Statement
For the Six Months Ended April 30, 2014 E 4-6, Page 173
Revenues
Repair services
(Cash $32,150 + Accrued $540) $32,690
Expenses
Salaries and Wages expense KAFFEN COMPANY
(cash $2,600 + accrued $420) 3,020 Balance Sheet as on April30, 2014
Rent expense Assets
(Payment $1,225 Prepaid $175) 1050 Current Assets
Utilities expense 970 Cash $27,780
Depreciation expense [$9,200 Accounts receivable 540
*6/48] 1150
Prepaid rent 175
Advertising expense 375 6,565
Total current assets $28,495
Profit before tax (PBT) $26,125
Property, plant, and equipment
Income tax expense 10,000
Equipment 9,200
Net income $16,125
Less: Accumulated
depreciationequipment 1,150 8,050
Total assets $36,545
Liabilities and Stockholders Equity
Current Liabilities
Salaries and wages payable $420
Stockholders equity
Common stock $20,000
Retained earnings 16,125 $36,125
Total stockholders equity
Total liabilities and
46
stockholders equity $36,545
Assignment Questions for Chemalite Case:
2. Recording of the some of these transactions would have involved you making one or
more assumptions. Identify such transactions and explain the assumptions.
4. Explain the change in cash. How much of the total change in cash is related to
operations? How much is related to financing? How much is related to investing?
5. Use 3) and 4) above to help perplexed Alexander explain to the stockholders why
Chemalites bank account did not support Alexanders feeling that things were going
well.
48
Comprehensive Income
All changes in the equity (or Net Assets) of the company due to transactions
with non-owners
Transactions that affect stockholders equity, but are not stock
transactions
Comprehensive Income (CI)
= Net income + Other Comprehensive Income (OCI):
49
Extra: Other Comprehensive Income India
( REVISED Sch III of companies Act 2013 )
Other Comprehensive Income shall be classified into
50
Discontinued Operations
A component of an entity that has been disposed of, or is classified as held for sale
Represents a separate major line of business or geographical area of
operations
Is part of a single coordinated disposal plan
Extraordinary Gains or Losses (Not there in Indian format as per revised IS format)
Income or expenses that arise from events which are
Unusual in nature, Infrequent in occurrence
Clearly distinct and not related to ordinary business of the entity
Examples: Uninsured losses from a major casualty (Earthquake, Volcano,
Tornado), Losses from expropriation by foreign government
US GAAP recognizes the concept, IFRS has withdrawn it
Exceptional Items:
Items of Revenue or expense which are of such size, nature or incidence that
their disclosure is relevant to explain the performance of the entity for the period.
Example: Restructuring charges
51
Additional Exercise: Missing Figures
52
Solution to Additional Exercise: Missing Figures
53