Income statement
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Transcript of Income statement
Aqhuman financial training & coachingwww.aqhuman.com
Financial Awareness
Income Statement
Aqhuman financial training & coachingwww.aqhuman.com
The Income Statement
Let us build a format: Revenue (sales, turnover) 500Cost of sales (100)Gross profit 400Operating costs (100)Operating profit 300
Aqhuman financial training & coachingwww.aqhuman.com
The Income Statement
Let us build a format: Revenue (sales, turnover) 500Cost of sales (100)Gross profit 400Operating costs (100)Operating profit 300
Recall that we speak of “above the line”; this represents the
operational activities of the business
Aqhuman financial training & coachingwww.aqhuman.com
The Income Statement
Let us build a format: Revenue (sales, turnover) 500Cost of sales (100)Gross profit 400Operating costs (100)Operating profit 300Interest ( 50)Profit before tax 250Taxation ( 75)Profit attributable to shareholders 175
Below the line refers to “treasury” matters;
dealing with tax planning and financing.
The International income statement
finishes here:
Aqhuman financial training & coachingwww.aqhuman.com
The Income Statement
Let us build a format: Revenue (sales, turnover) 500Cost of sales (100)Gross profit 400Operating costs (100)Operating profit 300Interest ( 50)Profit before tax 250Taxation ( 75)Profit attributable to shareholders 175Dividends (100)Retained earnings 75
Whereas the UK gaap profit and loss account continues to show the
dividend. Under IAS this information is shown in
the notes.
Aqhuman financial training & coachingwww.aqhuman.com
Revenue recognition (or when is a sale a sale?)
Above is a flight booking transaction. When does the airline count this as a sale (that is, recognise the sale in its income statement)?
10 Feb: booked 10 March: paid 30 March: year end
10 April: tickets arrive
10 May: fly
Aqhuman financial training & coachingwww.aqhuman.com
Revenue recognition (or when is a sale a sale?)
Above is a flight booking transaction. When does the airline count this as a sale (that is, recognise the sale in its income statement)?
When the flight is taken; a sale is a sale when the goods or services are delivered. Note: it does NOT follow the cash, that is why we have a separate cash flow statement.
10 Feb: booked 10 March: paid 30 March: year end
10 April: tickets arrive
10 May: fly
x
Aqhuman financial training & coachingwww.aqhuman.com
Revenue recognition
So it is important to get the salein the right year as the costsgo in the same year. Sales in
the wrong year + costs in the wrongYear = profit in the wrong year!
Aqhuman financial training & coachingwww.aqhuman.com
Revenue recognition: another example
A landlord collects the rent quarterly in advance; £100,000 on 24th March 2011. His year end is the 31st March 2011. How much rent goes in the income statement for the year end 31 March 2011?
Aqhuman financial training & coachingwww.aqhuman.com
Revenue recognition: another example
A landlord collects the rent quarterly in advance; £100,000 on 24th March 2011 . His year end is the 31st March 2011. How much rent goes in the income statement for the year end 31 March 2011?
7 days worth (say £8,000). The cash flow for that year is £100,000; the amount received.
The remaining £92,000 is shown on the balance sheet as a liability (“deferred income”); the tenant has paid
for something they have yet to receive.
Aqhuman financial training & coachingwww.aqhuman.com
Costs
Revenue (sales, turnover) 500Cost of sales (100)Gross profit 400Operating costs (100)Operating profit 300
What is the difference between these two types
of cost?
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Costs
A cost of sale is closely associated with the company’s product, for example...
raw material, production labour, factory costs
Aqhuman financial training & coaching
Costs
A cost of sale is closely associated with the company’s product, for example...
raw material, production labour, factory costs
Whereas operating costs are more remote, such as...
human resources, accounting, legal, IT
Aqhuman financial training & coaching
Cost of sales and the matching principle
A retailer buys 100 tins of beans at £1 a tin. In the year he sells 20 for £3 a tin each. What is his profit?
Sales (20 x £3) 60Cost of sales (20 x £1) (20) Profit 40
Aqhuman financial training & coaching
Cost of sales and the matching principle
A retailer buys 100 tins of beans at £1 a tin. In the year he sells 20 for £3 a tin each. What is his profit?
Sales (20 x £3) 60Cost of sales (20 x £1) (20) Profit 40
We have sold 20 so we only bring in the cost of 20. This is the matching principle. Note that the retailer’s cash flow is £100 but the p&l cost is only £20
Aqhuman financial training & coachingwww.aqhuman.com
Costs and assets
Recall that the retailer spent (cash)Of this £20 was taken as a cost tothe income statement
What does the remaining represent?
£100
(£20)
£80
Aqhuman financial training & coachingwww.aqhuman.com
Costs and assets
Recall that the retailer spent (cash)Of this £20 was taken as a cost tothe income statement
What does the remaining represent?
This is, of course, stock (or inventory)and will appear as an asset on the balance sheet
£100
(£20)
£80
Aqhuman financial training & coachingwww.aqhuman.com
Cost and assets
Cash expenditure £100£20 cost £80 assetincome statement balance sheet
Costs are expenditure where the benefit has been received (the retailer bought the tins in order to sell them; 20 have been sold, so there is no further benefit to come from those).
Aqhuman financial training & coachingwww.aqhuman.com
Cost and assets
Cash expenditure £100£20 cost £80 assetincome statement balance sheet
Costs are expenditure where the benefit has been received (the retailer bought the tins in order to sell them; 20 have been sold, so there is no further benefit to come from those).
Assets represent expenditure where the benefit is yet to come (there are 80 unsold tins; the benefit will arise when the retailer sells them)
Aqhuman financial training & coachingwww.aqhuman.com
DepreciationYou buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it.
Balance 10sheet
Income statement
Cash flow (10)
Today
Today; all of the benefit of owning the equipment lies
in the future. So the expenditure is entirely an
asset
Aqhuman financial training & coachingwww.aqhuman.com
DepreciationYou buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it.
Balance 10 10Sheet (2)
8Income Statement (2)
Cash flow (10)
Today
A year later 1/5th of the expected benefit has been
used; so 1/5th of the spend is now a cost. This is
depreciation
1
Aqhuman financial training & coachingwww.aqhuman.com
DepreciationYou buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it.
Balance 10 10Sheet (2)
8Income Statement (2)
Cash flow (10)
Today 1 2
10 10 10 10(4) (6) (8) (10) 6 4 2 -
(2) (2) (2) (2)
3 4 5
Aqhuman financial training & coachingwww.aqhuman.com
Dividend policy
What factors do the directors of a business use to decide the level of dividends?
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Dividend policy
What factors do the directors of a business use to decide the level of dividends?
Investment for growth (and thereforethe maturity of the business)
Has the company made a profit?Does it have the cash to make the payment?
What dividend yields are the shareholders expecting?Does it need to reduce gearing?
Aqhuman financial training & coachingwww.aqhuman.com
Retained earnings (or profits)
Revenue (sales, turnover) 500Cost of sales (100)Gross profit 400Operating costs (100)Operating profit 300Interest ( 50)Profit before tax 250Taxation ( 75)Profit attributable to shareholder 175Dividends (100)
Retained earnings 75
These profits here belong
to the shareholders
Aqhuman financial training & coachingwww.aqhuman.com
Retained earnings (or profits)
Revenue (sales, turnover) 500Cost of sales (100)Gross profit 400Operating costs (100)Operating profit 300Interest ( 50)Profit before tax 250Taxation ( 75)Profit attributable to shareholder 175Dividends (100)
Retained earnings 75
The dividends represent the
amount that the shareholders
withdraw
Aqhuman financial training & coachingwww.aqhuman.com
Retained earnings (or profits)
Revenue (sales, turnover) 500Cost of sales (100)Gross profit 400Operating costs (100)Operating profit 300Interest ( 50)Profit before tax 250Taxation ( 75)Profit attributable to shareholder 175Dividends (100)
Retained earnings 75
Which leaves the retained earnings; the shareholders’ profits that they choose to
leave behind in the business. By leaving the profits behind
they have increased their investment, or equity
Aqhuman financial training & coachingwww.aqhuman.com
Income statement; summary
•Sales are sales when the goods or service are delivered•Costs represent expenditure where the benefit has been received (for example cost of sales where the sale has been made)•Profit does not follow the cash (hence profitable companies fail all the time; insolvency is entirely a cash matter) •Dividends decisions are driven by cash flow and shareholder expectations
Aqhuman financial training & coachingwww.aqhuman.com
Aqhuman Financial Training
Aqhuman’s principal is Kevin Amor, FCA. Kevin qualified as a chartered accountant with PWC. He spent 12 years working in commerce at financial controller/director level. Kevin now has more than 12 years experience in financial training. He trains managers at all levels and gives 1 to 1 financial coaching to senior executives.He also teaches corporate finance andaccounting for a number of business schools’ MBA programmes.