Kế toán, kiểm toán - Chapter 8: The income statement and the cash flow statement

CHAPTER 8The Income Statement and the Cash Flow Statement 1Learning ObjectivesDefine Income and explain the criteria that permit revenue and income to be recognised.Determine cost of goods sold.Explain the significance of gross profit and calculate the gross profit margin.Explain the principal categories of expenses.Explain what profit before income tax includes.Understand the Earnings Per Share (EPS) calculation.Consider alternative Income statement presentation models.Identify unusual items on the income statement.Explain the purpose and general format of the Cash Flow Statement.2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOverviewThe Income Statement indicates how much profit the firm made for a period.It also shows whether sales are increasing relative to the cost of goods sold.Distinguish between gross profit and net profit.In the second part of this topic we will explore the cash flow statement.The cash flow statement explains the change in the entity’s cash position for the period.The cash flow statement summarises the cash affects of the firm’s operating, investing and financing activities during the period.3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIncome The AASB defines income as “increases in economic benefits during the accounting period in the form of inflows or decreases in liabilities that result in increases in equity, other than those relating to contributions from owners”. Inflows or increase in assets; or Decrease in liabilities; Other than from owners; That increase equity.4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIncome The term Income is also used and is largely interchangeable with the term revenue. Sales Revenue is generated when a firm sells a product or provides a service to a client or customer and receives cash, creates an account receivable, or satisfies an obligation.Revenue is generally measured by the amount of cash received or expected to be received from a transaction i.e. it is a gross concept reported before associated expenses.Income is a net concept e.g. gain on disposal of NCA5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIncome Income is recognised when it is probable that the benefits (the sale, the fees, interest etc) will flow to the entity and when it is possible that the benefits can be reliably measured.Two recognition criteria:It must be more likely than not that the benefits will be received;The benefits must be capable of reliable measurement.6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynRevenue The term Revenue is also used and is largely interchangeable with the term income. Revenue is generated when a firm sells a product or provides a service to a client or customer and receives cash, creates an account receivable, or satisfies an obligation.Revenue is generally measured by the amount of cash received or expected to be received from a transaction.7Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynRevenue recognition pointRevenue is realised when the product or service has been exchanged for cash, claims to cash, or an asset that is readily convertible to a known amount of cash.Revenue is earned when the entity has completed, or substantially completed, the activities it must perform to be entitled to the revenue benefits.These criteria are usually satisfied when the product is delivered or service provided.8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynRevenueFrom a legal perspective, the sale of a product involves the passing of title. This is usually specified by the contract terms.This is important as it will:determine the period in which revenue will be recognised.determine who suffers any loss or damage to merchandise while it is in transit.9Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynRevenueThe affect of a sale on the financial statements is:10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynRevenueMisstated revenue can lead to significantly misleading financial statements eg overstated profit.Management and internal auditors often design internal control procedures to help promote the accuracy of the revenue recognition process of the firm.11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynINCOMEMisstated INCOME/ REVENUE FROM SALES can lead to significantly misleading financial statements eg overstated profit.Management and internal auditors often design internal control procedures to help promote the accuracy of the revenue recognition process of the firm.See Exhibit 9-2 pg 279 Seven Financial Shenanigans12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynSales RevenueDue to return of merchandiseRevenue from sale of productSometimes called turnoverService firms – revenue labelled appropriately, e.g. leasing company: rental and service revenues.13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynSales RevenueLong-term Construction ProjectsRevenue may be recognised using the percentage of completion method.Unusual revenue recognition methods should be disclosed in the notes to the financial statements.14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynExpensesAASB defines expenses as Outflows or depletions of assets or incurrences of liabilities that result in a decrease in equity, other than those involving owners.15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynExpensesThere are again 3 elements: There must either be a decrease in assets; or An increase in liabilities; Not involving the owners.16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynExpensesSome expenses are recognised concurrently with the revenues to which they relate (matching principle).Some expenses are recognised in the period in which they are incurred (administrative salaries).Some expenses result from an allocation of the cost of an asset to the period that is expected to benefit from the asset’s use (depreciation).17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCost of Goods Sold Most significant expense for many manufacturing and retailing companies Affected by inventory cost flow assumptions – FIFO, specific identification, weighted average Excludes inventory shrinkage (loss due to theft or obsolescence) – where identifiable.18Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCost of Goods SoldWhen an item is sold its cost is transferred from the inventory asset to the cost of goods sold expense with the following affect on the financial statements:19Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCost of Goods SoldPerpetual inventory systemCost of inventory is determined when the item is sold.Regular counts of inventory items will be made on a cyclical basis during the year,and compared to perpetualrecord of inventory on hand.Internal control procedure20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCost of Goods SoldPeriodic inventory systemInventory on hand is counted periodically, and the cost is determined using the relevant cost flow assumption. Cost of goods sold may then be calculated.21Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCost of Goods SoldPeriodic inventory systemDetermined from stocktakeCalculatedKnown 22Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynGross Profit / MarginGross profit is the excess of net sales revenue over cost of goods sold.Gross profit ratio = gross profit / salesSometimes called gross margin ratio23Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynGross Profit / MarginGross profit ratio is an important statistic used by managers for such things as:1. Estimating level of sales and sales mix to achieve profitability.3. Setting selling prices.2. Estimating cost of goods sold and ending inventory.24Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOther Operating ExpensesExpenses from ordinary activities are usually reported in the following functional categories on the income statement:distribution expensesmarketing expenses occupancy expenses administrative expenses research and development expensesother expensesborrowing costsExpenses may also be classified by nature (of the input).25Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIncome from ordinary activitiesBorrowing costs = interest expenses (associated with financial leverage)Profit from ordinary activities before tax:Most appropriate measure of management’s ability to utilise the firm’s operating assets.Excludes income tax and results of significant items.26Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynNet Profit or LossNet profit is also reported on a per ordinary share basis.Sometimes called the BOTTOM LINE27Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynEarnings Per Share (EPS)BasicEPS=Profit attributable to ordinary shareholders Weighted-average number of sharesTakes into account the number of days different blocks of shares have been held.Net profit less preferred share dividends28Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynEarnings per shareWhen a firm has options or convertible securities, there is the potential for the dilution of basic earnings per share. When any of these securities are present, a second earnings per share known as diluted earnings per share, is reported.Due the significance of this measure it is reported just below the profit figure.29Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIncome Statement AlternativesMultiple-StepSingle-Step30Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynUnusual Items Reported in IncomeDiscontinued operationsSignificant itemsCumulative effect of a change in accounting principleMinority interest (Outside equity interest) in earnings of subsidiariesUnusual items are reported separately from the results of recurring transactions to facilitate users’ interpretation of the accounts:31Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStatement of Cash FlowsProvides relevant information about the cash receipts and cash payments of an enterprise during the accounting period. The statement shows why cash and cash equivalents changed during the period by reporting net cash provided or used by:OperatingactivitiesInvestingactivitiesFinancingactivities32Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStatement of Cash FlowsOperatingactivitiesCash outflowsCash inflowsCash received from customers.Cash paid to suppliers and employees, and for taxes and interest.33Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStatement of Cash FlowsInvestingactivitiesCash outflowsCash inflowsSale of non-current assets and investments.Acquisition of assets, investments in securities.34Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStatement of Cash FlowsFinancing activitiesCash outflowsCash inflowsIssuance of shares and long-term debt.Payment of dividends, repayment of loans.35Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStatement of Cash FlowsIn Australia, the operating activities section of the statement of cash flows is presented according to the direct method.Cash flows from operating activities Cash flows from investing activitiesCash flows from financing activitiesNet increase/ decrease in cashCash balance openingCash balance closingReconciliation of net profit and net cash provided by operating activitiesxxx xxxxxxxxxxxxxxxRefer next slide 36Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStatement of Cash FlowsReconciliation - shown in notes to financial statementsNet profitAdjust for:revenues and expenses that do not affect cash (depreciation, amortisation).income tax not currently payable.changes in non-cash operating accounts.Net cash provided by operating activities.Income statementCash flow statementLinked by reconciliation37Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynInterpreting the StatementA business entity should have positive cash flows from operating activities. If operating activities do not generate cash, the entity must look to outside parties for funds to meet its day-to-day activities.The cash flow statement will also reveal if the entity is generating enough cash to finance growth (investing activities).The cash flow statement will provide details of the liquidity situation of the entity.38Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn