STATEMENT OF INCOME

 the income statement measures the operating performance

of a firm
 information about earnings is the basis of determining
the real worth of a business enterprise because they
believe that asset values are ultimately validated by
enterprise earnings.
BASIC CONCEPTS UNDERLYING THE INCOME
STATEMENT
 The entity concept
the business for which the income statement is prepared is
considered to be distinct and separate from its owner/s and
other entities
 The periodicity concept
the income statement summarizes the transactions and events
that resulted in a profit or loss to the business for a given
period of time
also referred as fiscal period or time periods
thus, periodic statements of income are a necessity to meet
the needs of the business environment.
 The monetary concept
the income statement will present only items of revenue and
expenses which are quantifiable, capable of being measured in
terms of the monetary currency which is legal tender in the
country of the reporting entity
 The historical-cost concept
is a measure of value used in accounting in which the price
of an asset on the balance sheet is based on its nominal or
original cost when acquired by the company
 The going concern concept
the income statement necessarily reflects expenses that are
the result of systematic and rational cost allocations among
accounting periods, and of accruing expenses that have not yet
been paid
 The revenue recognition concept
income may be measured by the (1) economic approach , and
(2) transactions approach
economic approach also called valuation method under which
income represents the excess of the value of net assets at the
end (after adjustment for any additional investment and
withdrawals) over the value of net assets at the beginning of
the accounting period
if the value of tht assets at the beginning is greater, the
difference represents a loss
transaction approach also referred to as the direct or
matching method under which income represents the excess of
revenues earned for the period over the expired costs that
produces such revenues
 The FRSC in the framework for the preparation and presentation
of Financial Statements defines income as “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
 Income encompasses both revenue and gains
 Revenue arises in the course of ordinary activities of the
business entity and is referred to by a variety of different
names such as “sales, fees, interest, dividends, royalties,
rent”
 Gains on the other hand, may or may not arise in the course of
ordinary activities and often reported net of related expenses,
such as gain on sale of investment property
 The expense recognition or matching concept
Expenses are “decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets
or incidenses of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants
Expenses encompasses (1)expenses perse that arise in the course
of ordinary activities (cost of sales wages, depreciation); and
(2)losses that may or may not arise in the course of ordinary
activities, and often reported net or related income (loss of sales
of investment property where the carrying amount exceed net selling
price)
Traditionally, expenses refer to “costs that are associated
with the revenue of the period.” COSTS are defined as the
applicable expenditures and charges directly or indirectly incurred
in acquiring a good or service in the condition and
location in which it is used or sold, and may be classified as
follows:
1.Costs of assets used to produce revenue(cost of goods sold,
selling and administrative expenses, interest expense)
2.Costs from nonreciprocal transfers and casualties(taxes, fires,
theft)
3.Costs of assets other than products(plant and equipment or
investment in other companies)
4.Costs incurred in unsuccesful efforts(losses)
5.Declines in net realizable values of inventories held for sale.
The basis of recognition of expenses are as follows:
1.Direct association between costs incurred and earning of
income(referred to as matching of costs with revenue) example: cost of goods
sold recognized at the same time as income from sale of goods.
2.Indirect association between income and expenses(referred to as
systematic and rational allocation) example: depreciation and amortizaztion
3.Immediate recognition. When expenditure produces no future economic
benefits, or when future economic benefits do not qualify or cease to qualify
as an asset. Example: losses on disposals of fixed assets
4.When a liability is incurred without the recognition of an asset.
Example:liability under product warranties
 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS
Accounting policies and changes. Under IAS 8, Accounting Policies,Changes in
Accounting Estimates and Errors,accounting estimates are defined as “the
specific principles,bases,conventions,rules and practices applied by an entity
in preparing and presenting financial statements.”

Changes in accounting policies made an adoption of a new standard should be

accounted for in accordance with the transitional provisions contained within
that standard.

Accounting estimates and changes.Management should disclose the following:

1.the estimates and assumptions that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within
the next financial period; and
2.the judgements made in applying the entity's accounting policies that have
the most significance on the amounts recognized in the financial statements

IAS 8 defines change in accounting estimate “an adjustment of the carrying

amount of an asset or a liability, or the amount of the periodic consumption
of an aset, that results from the assessment of the present status of, and
expected future benefits and obligations associated with, assets and
liabilities.”

Material prior-period errors. IAS 8 defines prior-period errors as “omissions

from, and misstatements in, the entity's financial statements for one or more
prior periods arising fom a failure to use,or misuse of reliable information
that (a)was available when financial statements for those periods were
authorized for issue;and (b)could reasonably be expected to have been obtained
and taken into account in the preparation and presentation of those financial
statements”
DISCONTINUED OPERATIONS
According to IFRS 5,Non-Current Assets Held for Sale and Discontinued
Operations,an entity shall present and disclose information that enables users
of the financial statements to evaluate the financial effects of discontinued
operations of non-current assets.”

Discontinued operations is defined as“a component of an entity that either

has been disposed of or is classified as held for sale and (a)represents a
separate major line of business or geographical area of operations; (b)is part
of a single coordinated plan to dispose of a separate major line of
business;or (c)is a subsidiary acquired exclusively with a view to resale.”

Component of an entity is defined as “operations and cash flows that can be

clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity.
An entity shall disclose, in relation to discontinued operations, the
following:

(1)A single amount on the face of the income statement comprising the total
of(a)the post-tax profit or loss of discontinued operations; and(b)the post-
tax gain or loss recognized on the measurement to fair value less costs to or
on the disposal of the assets or disposal group(s)constituting the
discontinued operations.

(2)An analysis of the single amount in no.(1)above into:(a)the

revenue,expenses and pre-tax profit or loss of discontinued operations;(b)the
related income tax;(c)the gain ors recognized on measurement to fair value
less costs to sell or on the disposal of the assets or disposal
group(s)constituting the discontinued operations;and (d)the related income
tax.
(3)The net cash flows attributable to the operating, investing and financing
activities of discontinued operations. These may be presented either in the
notes or on the face of the financial statements.

NATURE OF THE INCOME STATEMENT

Income statement is a summary of the results of business activities of the
enterprise during a period of time that shows financial perfomance. It
presents the rues earned during the period and the expenses related there to,
utilizing the following formula:
REVENUES-EXPENSES= Net Income(loss)

Assets=Liabilities+[Capital+(Revenues-Expenses)]
FORM OF THE INCOME STATEMENT
Accountants traditionally prepare the income statement in either the single-
step form or the multiple-step form(multi-step)form.
Under the single-step form , revenues are listed ahead of the expenses;the
total of the expenses is then deducted from the total of the revenues to
arrive at net income.
Under the multi-step form , the income statement presents several sections
with intermediate amounts that enhance the usefulnessand significance of the
contents of the statement.

Nature-and-Expense Method & Function-of-Expense Method.Under current

IFRS,it is required that an analysis of expenses using a classification based
on nature of expenses or their function within the entity,should be presented
on either the face of the income statement or in the notes to the income
statement.
The nature of expense method aggregates expenses in the income statement
accordingn to their nature (for example , depreciation , purchase of materials
, transportation costs , wages and salaries advertising costs) and are not
reallocated among various functions within the enterprise.

The function of expense method classifies expenses according to their function

as part of cost sales, distribution (selling) or administrative activities.
This presentation often provides relevant information to users than the
classification of expenses by nature, but the allcation of costs to functions
may be arbitrary and involves considerable judgement.

CONTENT OF THE INCOME STATEMENT

Items presented in the income statement may generally be classified into two
broad categories revenues and expenses.However it hass become customary for
accountants to highlight more important details of information by adopting a
series of sections in a multiple-step income statement. These sections are as
follows:
Sales. This sections reports the total sales revenue for the period whether
for cash or on account and the related deductions to arrive at net sales. The
sales accounts reported at the amount of cash and credit sales , net on any
trade discounts. The contra or offset accounts that are presented as
deductions from sales include sales discounts and sales returns and allowances
the former being debited with any cash discounts that customers avail of when
settling their account purchases within the discount period. Freight costs
that are billed to the customers and added to the sales price should also be
deducted from the sales account.

Cost of goods sold.It summarizes the cost of the merchandise that was sold
during the period by presenting the beginning inventory to which is added the
cost of merchandise purchased or of merchandise manufactured to arrive at the
cost of goods available for sale; the cost of the ending inventory is then
deducted to arrive at the cost of goods sold.Contra or offset accounts
reported as deductions in the cost of goods sold section include purchase
returns and allowances and purchase discounts.Any freight incurred in the
purchase of goods and raw materials is added as part of the cost of the
Operating expenses. These are changes that are related to the ordinary or
typical operating activities of the entity and are generally classified and
presented in two categories:
1.Selling expenses,which include expenses and charges connected with the
marketing and distribution of the goods such as salesmen's
commissions,advertising, freight-out and store furniture and fixtures
2.General and administrative expenses, which include all other expenses such
as office salaries and wages, office supplies and office building.

The resulting difference between the sales section and the cost of goods sold
section is reffered to as gross profit or margin whereas the difference
between the gross profit and the operating expenses is called operating
income or income from operations.The total of (or difference
between)operating income and other revenue (expenses)is known as income
before income tax.The provision for income tax is then deducted to arrive at
net income(loss).If discontinued operations exists, the total of(or
difference between)operating income and other revenue(expenses)is designated
income from continuing operations before
income tax. The income tax applicable is then deducted to arrive at income
from continuing operations.

Discontinued operations. This section summarizes the results of operations

of the discounted segment or division of the business enterprise, and the gain
or loss from the disposition of such discontinued segment or division,or f not
yet disposed, the resulting loss(excess of carrying amount over the fair value
less costs to sell of the net assets of the discontinued operations at the
balance sheet date).Both amounts must be stated net of applicable income tax
effects.

Earnings per share(EPS).Information about earnings per share under current

IFRS (IAS 33,Earnings per Share)is required only when an entity's ordinary
(common)shares or potential ordinary shares are publicly traded or in the
process of issuing ordinary shares and potential ordinary shares in public
markets. If an entity presents EPS information even if it is not required to
do so, it shall disclose such information in accordance with IAS 33.
Under the IAS 33, an enterprise should present basic and diluted earnings
per share on the face of the income statement with equal prominence for all
periods presented.

Earnings per share data are used to evaluate the past operating performance of
a business, its future potential,and to assist in making sound investment
decisions.