www.aqhuman.com
Financial Awareness
Income Statement
Aqhuman financial training & coaching
www.aqhuman.com
The Income Statement
Let us build a format:
Revenue (sales, turnover) 500
Cost of sales (100)
Gross profit...
www.aqhuman.com
The Income Statement
Let us build a format:
Revenue (sales, turnover) 500
Cost of sales (100)
Gross profit...
www.aqhuman.com
The Income Statement
Let us build a format:
Revenue (sales, turnover) 500
Cost of sales (100)
Gross profit...
www.aqhuman.com
The Income Statement
Let us build a format:
Revenue (sales, turnover) 500
Cost of sales (100)
Gross profit...
www.aqhuman.com
Revenue recognition (or when is a sale a
sale?)
Above is a flight booking transaction. When does the airli...
www.aqhuman.com
Revenue recognition (or when is a sale a
sale?)
Above is a flight booking transaction. When does the airli...
www.aqhuman.com
Revenue recognition
So it is important to get the sale
in the right year as the costs
go in the same year....
www.aqhuman.com
Revenue recognition: another example
A landlord collects the rent quarterly in advance; £100,000 on 24th
M...
www.aqhuman.com
Revenue recognition: another example
A landlord collects the rent quarterly in advance; £100,000 on 24th M...
www.aqhuman.com
Costs
Revenue (sales, turnover) 500
Cost of sales (100)
Gross profit 400
Operating costs (100)
Operating p...
Costs
A cost of sale is closely associated with the company’s product,
for example...
raw material, production labour,
fac...
Costs
A cost of sale is closely associated with the company’s
product, for example...
raw material, production labour,
fac...
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 t...
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 t...
www.aqhuman.com
Costs and assets
Recall that the retailer spent (cash)
Of this £20 was taken as a cost to
the income state...
www.aqhuman.com
Costs and assets
Recall that the retailer spent (cash)
Of this £20 was taken as a cost to
the income state...
www.aqhuman.com
Cost and assets
Cash expenditure £100
£20 cost £80 asset
income statement balance sheet
Costs are expendit...
www.aqhuman.com
Cost and assets
Cash expenditure £100
£20 cost £80 asset
income statement balance sheet
Costs are expendit...
www.aqhuman.com
Depreciation
You buy some equipment, today, for £10,000. You estimate
that it has a 5 year life, when you ...
www.aqhuman.com
Depreciation
You buy some equipment, today, for £10,000. You estimate
that it has a 5 year life, when you ...
www.aqhuman.com
Depreciation
You buy some equipment, today, for £10,000. You estimate
that it has a 5 year life, when you ...
www.aqhuman.com
Dividend policy
What factors do the directors of a business use to decide the
level of dividends?
Aqhuman ...
www.aqhuman.com
Dividend policy
What factors do the directors of a business use to decide the
level of dividends?
Investme...
www.aqhuman.com
Retained earnings (or profits)
Revenue (sales, turnover) 500
Cost of sales (100)
Gross profit 400
Operatin...
www.aqhuman.com
Retained earnings (or profits)
Revenue (sales, turnover) 500
Cost of sales (100)
Gross profit 400
Operatin...
www.aqhuman.com
Retained earnings (or profits)
Revenue (sales, turnover) 500
Cost of sales (100)
Gross profit 400
Operatin...
www.aqhuman.com
Income statement; summary
•Sales are sales when the goods or service are delivered
•Costs represent expend...
www.aqhuman.com
Aqhuman Financial Training
Aqhuman’s principal is Kevin Amor, FCA. Kevin qualified as a
chartered accounta...
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Income statement

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Revision presentation on the Income Statement for clients of Aqhuman Financial Training

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Income statement

  1. 1. www.aqhuman.com Financial Awareness Income Statement Aqhuman financial training & coaching
  2. 2. www.aqhuman.com The Income Statement Let us build a format: Revenue (sales, turnover) 500 Cost of sales (100) Gross profit 400 Operating costs (100) Operating profit 300 Aqhuman financial training & coaching
  3. 3. www.aqhuman.com The Income Statement Let us build a format: Revenue (sales, turnover) 500 Cost of sales (100) Gross profit 400 Operating costs (100) Operating profit 300 Aqhuman financial training & coaching Recall that we speak of “above the line”; this represents the operational activities of the business
  4. 4. www.aqhuman.com The Income Statement Let us build a format: Revenue (sales, turnover) 500 Cost of sales (100) Gross profit 400 Operating costs (100) Operating profit 300 Interest ( 50) Profit before tax 250 Taxation ( 75) Profit attributable to shareholders 175 Aqhuman financial training & coaching Below the line refers to “treasury” matters; dealing with tax planning and financing. The International income statement finishes here:
  5. 5. www.aqhuman.com The Income Statement Let us build a format: Revenue (sales, turnover) 500 Cost of sales (100) Gross profit 400 Operating costs (100) Operating profit 300 Interest ( 50) Profit before tax 250 Taxation ( 75) Profit attributable to shareholders 175 Dividends (100) Retained earnings 75 Aqhuman financial training & coaching Whereas the UK gaap profit and loss account continues to show the dividend. Under IAS this information is shown in the notes.
  6. 6. www.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)? Aqhuman financial training & coaching 10 Feb: booked 10 March: paid 30 March: year end 10 April: tickets arrive 10 May: fly
  7. 7. www.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. Aqhuman financial training & coaching 10 Feb: booked 10 March: paid 30 March: year end 10 April: tickets arrive 10 May: fly x
  8. 8. www.aqhuman.com Revenue recognition So it is important to get the sale in the right year as the costs go in the same year. Sales in the wrong year + costs in the wrong Year = profit in the wrong year! Aqhuman financial training & coaching
  9. 9. www.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 & coaching
  10. 10. www.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 & coaching
  11. 11. www.aqhuman.com Costs Revenue (sales, turnover) 500 Cost of sales (100) Gross profit 400 Operating costs (100) Operating profit 300 Aqhuman financial training & coaching What is the difference between these two types of cost?
  12. 12. 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
  13. 13. 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
  14. 14. 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) 60 Cost of sales (20 x £1) (20) Profit 40 Aqhuman financial training & coaching
  15. 15. 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) 60 Cost 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 & coaching
  16. 16. www.aqhuman.com Costs and assets Recall that the retailer spent (cash) Of this £20 was taken as a cost to the income statement What does the remaining represent? Aqhuman financial training & coaching £100 (£20) £80
  17. 17. www.aqhuman.com Costs and assets Recall that the retailer spent (cash) Of this £20 was taken as a cost to the income statement What does the remaining represent? This is, of course, stock (or inventory) and will appear as an asset on the balance sheet Aqhuman financial training & coaching £100 (£20) £80
  18. 18. www.aqhuman.com Cost and assets Cash expenditure £100 £20 cost £80 asset income 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 & coaching
  19. 19. www.aqhuman.com Cost and assets Cash expenditure £100 £20 cost £80 asset income 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). Assetsrepresent 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 & coaching
  20. 20. www.aqhuman.com Depreciation You buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it. Balance 10 sheet Income statement Cash flow (10) Aqhuman financial training & coaching Today Today; all of the benefit of owning the equipment lies in the future. So the expenditure is entirely an asset
  21. 21. www.aqhuman.com Depreciation You buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it. Balance 10 10 Sheet (2) 8 Income Statement (2) Cash flow (10) Aqhuman financial training & coaching 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
  22. 22. www.aqhuman.com Depreciation You buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it. Balance 10 10 Sheet (2) 8 Income Statement (2) Cash flow (10) Aqhuman financial training & coaching Today 1 2 10 10 10 10 (4) (6) (8) (10) 6 4 2 - (2) (2) (2) (2) 3 4 5
  23. 23. www.aqhuman.com Dividend policy What factors do the directors of a business use to decide the level of dividends? Aqhuman financial training & coaching
  24. 24. www.aqhuman.com Dividend policy What factors do the directors of a business use to decide the level of dividends? Investment for growth (and therefore the 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 & coaching
  25. 25. www.aqhuman.com Retained earnings (or profits) Revenue (sales, turnover) 500 Cost of sales (100) Gross profit 400 Operating costs (100) Operating profit 300 Interest ( 50) Profit before tax 250 Taxation ( 75) Profit attributable to shareholder 175 Dividends (100) Retained earnings 75 Aqhuman financial training & coaching These profits here belong to the shareholders
  26. 26. www.aqhuman.com Retained earnings (or profits) Revenue (sales, turnover) 500 Cost of sales (100) Gross profit 400 Operating costs (100) Operating profit 300 Interest ( 50) Profit before tax 250 Taxation ( 75) Profit attributable to shareholder 175 Dividends (100) Retained earnings 75 Aqhuman financial training & coaching The dividends represent the amount that the shareholders withdraw
  27. 27. www.aqhuman.com Retained earnings (or profits) Revenue (sales, turnover) 500 Cost of sales (100) Gross profit 400 Operating costs (100) Operating profit 300 Interest ( 50) Profit before tax 250 Taxation ( 75) Profit attributable to shareholder 175 Dividends (100) Retained earnings 75 Aqhuman financial training & coaching 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
  28. 28. www.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 & coaching
  29. 29. www.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 and accounting for a number of business schools’ MBA programmes. Aqhuman financial training & coaching

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