Finance Assignment Help With Income Statement

1.2. Income Statement:

The income statement presents the information about the performance of the firm over a period of time. It reports the economic results of the business entity by matching sales revenue inflows, and expense outflows to show the results of operations—net income or net loss. This statement is also referred to as Profit & Loss account. Its value increases substantially if it is compared with benchmarks such as budget, prior month or prior year.

Thus the components of the income statement can be listed as follows:

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  1. Revenues: These are cash inflows which the firm earns or expects to earn by delivering, producing or rendering any service or goods which the firm has undertaken to do so.
  2. Expenses: These are cash outflows which the firm incurs in order to deliver/manufacture the product or service.
  3. It is the net increase/decrease in assets or equity after taking into account the net effect of the above mentioned two items.

The income statement equation is:

Revenues- Expenses = Net Income

Depending on the business, sales might be called differently on the income statement. For example sales of services are often termed as revenues. Although, the essence very much remains the same.

Gross profit is the amount that remains after factory level expenses are deducted from net sales, the factory level expenses may include fright inward, labour cost, cost of raw materials. All this can be clubbed together to form cost of goods sold.

Subtracting operating expenses from gross profits gives us operating profit. Operating expenses include salaries to staff, advertising, rent, depreciation, administration costs etc. Subsequently subtracting interest and taxes we get the net profit or profit after taxes.

There can be other expenses which are likely to happen and are normal in course of doing business. Examples include:

1. Profit or loss on selling off equipment no longer used by the company or on the disposition of investments that were incidental to the business.

2. Interest income and interest expense are financial costs and must not be confused with operating costs.

Depreciation Expense:

Depreciation expense can be calculated using straight line or accelerated method of depreciation. The straight line method recognises an equal amount of depreciation every year whereas in accelerated method initially higher depreciation expenses are charged than in later years.

Inventory Valuation:

Inventory can be valued by FIFO (First In, First Out), LIFO (Last In, First Out) and weighted average methods. Different methods have different implications on profits because it affects the cost of goods sold differently.

In FIFO, the first item purchased is assumed to be the first item sold and is valued accordingly. In LIFO the last item purchased is assumed to be sold first.

LIFO is prohibited under IFRS, whereas it is allowed under US GAAP. FIFO is allowed under both IFRS and US GAAP.

Pro forma Income Statement:

Net sales 25000

Cost of goods sold 9000

Gross Profit 16000

Operating Expenses

Selling, general, and administrative expenses 8000

Depreciation 2000

Operating Profit 6000

Net interest expense 500

Income before Tax (EBT) 5500

Taxes 300

Net income (Profit after tax) 5200

Allocation of net income

Addition to retained earnings 3500

Dividends 1700

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