1 - Basic Accounting Concept-Income Statement

7/31/2019 1 - Basic Accounting Concept-Income Statement

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Philippine Christian UniversityMasters in Business Administration

Management Accounting

Report on:

INCOME STATEMENT

Reported by:

Group 1Nur-Warith H. Caluang

Mary Grace B. MarasiganMaileen R. Marcial


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Income Statement

Summary of the revenues and the expenses ofan accounting period

Profit and loss statement, statement of

earnings or statement of operations Shows the items that account for most of the

movement in retained earnings

Reports the results of operations and indicatesreasons for the entitys profitability (or lackthereof)


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Components of Income Statement

a.REVENUE

Gross Sales

Sales returns and allowances

Sales discount (cash discount)

Trade discounts

Other revenues


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b. COST OF SALES

Manufacturing cost of goods sold

Cost of services provided

Decrease in inventory (manufacturing)

c. GROSS MARGIN/GROSS PROFIT


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d. EXPENSES

Selling, General & Administrativeexpenses

FASB separate disclosure for: R&D expense; and

Interest expense

e. INCOME BEFORE INCOME TAX

f. NET INCOME/(NET LOSS)


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Illustration of Income Statement


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Statement of Retained Earnings

Affected by:

net income or net loss; and

dividends declared or paid; or withdrawal (owners equity single

proprietorship

Shows the relationship of Balance Sheet andIncome Statement


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Income Statement Percentages

a. Gross margin = gross margin/net sales

average margin obtained on products sold

b. Profit margin = net income/net sales average net profit obtained from selling

products or services


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Other concepts of Income

a. Accrual vs. Cash basis

b. Income Tax accounting

usually similar but not identical with the

amount measured in accordance with GAAP familiarity with the principal tax rules which

would permit the recognition of expenses thatcould lower the taxable income

Accrual Cash

Revenue Earned Cash receipts

Expenses Incurred Cash disbursements


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Other concepts of Income

c. Economic income

Is a mixture of true income and the cost of usingshareholders capital

Difference between the value of a business at the end of

the accounting period and its value at the beginning of theperiod, after proper adjustments for transactions withowners (i.e. APIC and dividends)

d. Pro-forma earnings

asif earnings or projected earnings net income plus certain unusual or one-time charges, such

as restructuring charges and merger-related costs


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Accounting and Changing Prices

Nature of the problem

In case of price increase due to inflation,

nonmonetary assets measured at historical

costs may not be appropriately valued

Two proposed solutions:

1. Constant Dollar Accounting

2. Current cost accounting


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Constant Dollar Accounting

All balance sheet and income statement items

are adjusted by a general price index to their

purchasing power equivalent as of a common

date

Was discontinued as the inflation began to fall

in 1984


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Constant Dollar Accounting

Example:

31-Dec-02 31-Dec-03 Increase

Inventory

(nominal amount) 100,000.00 100,000.00 -

Price Index 300 330 10%


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Current Cost Accounting

Cost of replacing specific assets at their replacementcost

Inventory cost of:

a. purchasing goods of the same kind and quantity, or

b. acquiring the resources needed to produce suchgoods

PPE - cost of acquiring the same service potential asembodied in the assets owned. (i.e. cost of replicating

the capacity of the specific fixed assets) Discontinued in December 1986 due to the

requirement to report supplementary current costinformation.

Documents

1 - Basic Accounting Concept-Income Statement