The Income Statement
by Binam Ghimire
1
Learning Objectives
1.
2.
3.
4.
5.
Gross Profit and the Trading Performance
Net Profit
The Recognition of Items in the Income Statement
IAS1 Presentation of the Income Statement
Analysis of Performance
Introduction
 As we have previously stated:
Performance is the ability of an enterprise to earn a
profit on the resources that have been invested in it.
The IFRS Framework states that information about
performance is primarily provided in an Income
Statement
 Let’s start by looking at a very simple example…
Income Statement of F Clothes UK for the year ending 31st
December 20xx.
Sales
Less Cost of Goods Sold
Opening Inventory
+ Purchases
less Closing Inventory
Gross Profit
Less Expenses
Wages
Admin Expenses
Rent
Electricity
Gas
Net Profit
160,000
15,000
75,000
90,000
10,000 80,000
80,000
50,000
12,000
10,000
3,000
2,000 77,000
3,000
Performance Evaluation
 they are able to sell goods profitably
 their Gross Margin is 50%, i.e. Gross Profit as a
percentage of Sales:
Gross Profit X100 =
80,000 x 100 =
50%
Sales
160,000
 indicating that what they bought for £80, they were able
to sell for £160, a 100% mark up.
 Not bad, they either buy well or sell well, which is what
the Gross Margin and Gross Profit examine - the
companies trading performance
 the business generate a Net Profit, let us say a profit
after all expenses, of £ 3,000 and a Net Margin of
1.875%:
Net Profit
x 100 =
3,000 x 100 = 1.875%
Sales
160,000
 Clearly expenses and in particular Wages eat up most of
the trading (Gross) profit.
 Whether 1.875% is good or bad depends the previous
years performance, the type of business and who is
receiving the wages !
Income Statement
Definitions
 Income.
Income is increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases of liabilities
that result in increases in equity, other than those
relating to contributions from equity participants.
 Expense.
Expenses are decreases in economic benefits during
the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those
relating to distributions to equity participants.
Income
 The definition of income encompasses both revenue and gains.
 Revenue arises in the course of the ordinary activities of an
enterprise and is referred to by a variety of different names
including:
sales,
fees,
interest,
dividends,
royalties and
rent.
 Gains represent other items that meet the definition of income
and may, or may not, arise in the course of the ordinary activities
of an enterprise.
Gains represent increases in economic benefits and as such
are no different in nature from revenue. Hence, they are not
regarded as constituting a separate element in the IASC
Framework.
Expenses
 The definition of expenses encompasses losses as well as those
expenses that arise in the course of the ordinary activities of
the enterprise.
 Expenses that arise in the course of the ordinary activities of the
enterprise include, for example, cost of sales, wages and
depreciation.
 They usually take the form of an outflow or depletion of assets
such as cash and cash equivalents, inventory, property, plant and
equipment.
 Losses represent other items that meet the definition of expenses
and may, or may not, arise in the course of the ordinary
activities of the enterprise. Losses represent decreases in
economic benefits and as such they are no different in nature
from other expenses. Hence, they are not regarded as a separate
element in this Framework.
Recognition of the Elements of Financial
Statements
Income
 when an increase in future economic benefits related to
an increase in an asset or a decrease of a liability has
arisen that can be measured reliably.
 this means, that recognition of income occurs
simultaneously with the recognition of increases in
assets or decreases in liabilities (for example, the net
increase in assets arising on a sale of goods or services
or the decrease in liabilities arising from the waiver of a
debt payable).
Recognition of the Elements of Financial
Statements
Expenses
 when a decrease in future economic benefits related to
a decrease in an asset or an increase of a liability has
arisen that can be measured reliably.
 this means, in effect, that recognition of expenses
occurs simultaneously with the recognition of an
increase in liabilities or a decrease in assets (for
example, the accrual of employee entitlements or the
depreciation of equipment).
IAS 1 Presentation of Financial Statements
The Income Statement









Minimum Income Statement Items
(a) revenue;
(b) finance costs;
(c) share of the profit or loss of associates and joint ventures
accounted for using the equity method;
(d) a single amount comprising the total of (i) the post-tax profit or
loss of discontinued operations and (ii) the post-tax gain or loss
recognised on the disposal of the assets or disposal group(s)
constituting the discontinued operation; and;
(e) tax expense; and
(f) profit or loss.
(i) profit or loss attributable to minority interest; and
(ii) profit or loss attributable to equity holders of the parent.
IAS 1 Presentation of Financial Statements
 Additional line items may be needed to fairly present the enterprise's
results of operations
 Extraordinary Items
 No items may be presented on the face of the income statement
or in the notes as "extraordinary items".
 If Material..
 Certain items must be disclosed either on the face of the income
statement or in the notes, if material, including:
(a) write-downs of inventories to net realisable value or of
property, plant
and
equipment to recoverable amount,
as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any
provisions for the
costs of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinuing operations;
(f) litigation settlements; and
(g) other reversals of provisions
IAS 1 Presentation of Financial Statements
 Expenses
 Expenses should be analysed either by nature (raw
materials, staffing costs, depreciation, etc.) or by
function (cost of sales, selling, administrative, etc.)
either on the face of the income statement or in the
notes.
 If an enterprise categorises by function, additional
information on the nature of expenses -- at a minimum
depreciation, amortisation, and staff costs -- must be
disclosed.
Example
 Let’s examine Exhibit 2.2
 What does it show ?
 Before we leave this session take a look at the
Income Statement of Tesco what does it show ?
 Calculate their Gross Margin & Net Margin
 Gross Margin
Gross Profit X 100 =
8.3%
Sales
 Net Margin (after Tax)
Net Profit
X 100 =
4.4%
Sales
 Good or Bad ?
5,060 x 100 =
60,931
2,671 x 100 =
60,931
Summary
 Performance is the ability of an enterprise to earn a profit on the
resources that have been invested in it.
 The IFRS Framework states that information about performance is
primarily provided in an Income Statement
 The Performance can (in part) be analysed with reference to the
Gross and Net Margin BUT these differ depending upon the nature
of the business
 In fact, the whole financial statement can differ as we
shall now see…
Common Size Statements
Income Statement
Company
1
2
3
4
5
6
7
8
9
10
11
12
13
Profit
Statement
Sales Revenue
Service &
Other revenue
Total Revenue
Cost of goods
Sold
Operating
Expenses
Research &
Development
Interest
Tax
Total Expenses
Net Income
100% 100% 100%
100%
100%
96.4
%
100%
16.2
%
83.8 100% 100%
2.2%
%
100% 100% 100% 100% 100% 100% 100% 100%
58.9
%
33.0
%
69.2
%
20.2
%
57.2
%
29.7
%
0.9%
0.8%
1.3%
3.2%
3.6%
5.3%
97.7
%
2.3
%
95.1
%
4.9
%
93.9
%
6.1
%
93.0
%
7.0
%
97.8
%
16.9
%
33.3
%
12.5
%
11.9
%
74.6
%
25.4
%
12.2
%
67.8
%
78.9
%
1.8%
83.9
%
16.1 100% 100%
%
100% 100% 100%
85.9
%
61.4
%
11.8
%
78.1
%
11.7
%
1.9%
3.0%
4.2%
6.7%
6.7%
7.0%
4.8%
8.0%
1.2%
88.5
%
11.5
%
87.8
%
12.2
%
93.7
%
6.3
%
85.4
%
14.6
%
97.7
%
2.3
%
23.7
%
53.1
%
100
%
100
%
77.9
%
30.0
%
17.6
%
1.5% 1.5.%
47.5
%
8.1
%
85.6
%
14.4
%
78.3
%
21.7
%
97.0
%
3.0
%
Common Size Statements
Balance Sheet
Balance
Sheet
Fixed
Assets
Stock
Debtors
Cash &
Securities
Other
Assets
Total
Assets
Current
Liabilities
Long
Term
Debt
Other
Liabilities
Sharehold
er Equity
2
1
3
4
5
6
7
8
9
10
11
3.5
9.1
40.1
41.9
23.1
60.0
123.9
125.8
136.1
21.1
12.7
9.3
17.2
0.4
2.3
22.4
1.2
10.0
13.0
8.3
0.3
3.4
9.0
61.0
22.6
15.9
25.8
2.1
0.9
4.1
1.9
12.3
0.4
0.6
4.2
2.5
5.1
111.7
18.8
2.2
2.3
3.7
17.9
4.9
10.5
4.9
9.3
19.1
25.6
27.7
31.5
77.4
81.8
101.4
134.8
135.9
149.9
162.5
182.3
8.0
10.5
26.1
23.3
15.0
32.4
9.6
32.5
14.9
135.5
9.1
4.8
27.4
39.4
32.5
47.1
6.5
0.6
2.6
13.3
17.3
8.2
44.1
13.8
24.8
19.7
20.4
39.6
40.4
86.4
37.7
58.7
40.8
84.7
15.5
27.7
31.5
77.4
81.8
101.4
134.8
135.9
149.9
162.5
182.3
12
13
23.8
118.8
15.5
21.2
181.
1
11.0
3.6
520.0
528.6
273.4
57.1
397.8
101.3
1121.
1
984.5
238.4
44.2
239.
1
21.3
10
217.
8
239.
1
58.1
82.5
397.
8
1121.
1
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Kelly Services
Lands End
ToysRUs
Hershey Foods Corp
Microsoft
Walt Disney
Circus Circus
Burlington.
McDonalds
Ford Motor Company
Biogen
Tele-communications
J.P. Morgan
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