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Accounting and Finance: An Introduction - McLaney and Atrill (2018) - Chapter 3 (Summary)
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Accounting and Finance – Week 2Chapter 3 – Measuring and reporting financial
performance
The Income statement
- Also, profit and loss account
- Measures and reports how much profit a business has generated over a period
- Revenue = measure of inflow of economic benefits arising from business operations
(results in either increase in assets or decrease in liabilities)
- Expense = outflow of economic benefits for a financial period (results in either
decrease in assets or increase in liabilities)
- Profit (or loss) for the period = Total revenue for the period – total expenses incurred
in generating that revenue
Different roles
- Balance sheet = wealth held by the business at a single moment in time
- Income statement = flow of wealth (profit) over a period of time
- Assets (at the end of the period) = Equity (amount at the start of the period) + Profit
(or – Loss) for the period + Liabilities (at the end of the period)
o Assumption that the owner makes no injections or withdrawals of equity
during the period
- Assets (at the end of the period) = Equity (amount at the start of the period) + (Sales
revenue – Expenses) (for the period) + Liabilities (at the end of the period)
Income statement layout
- Vary according to the type of business to which it relates
- Brackets are used when an item is to be deducted
Gross profit
- First item on the income statement is revenue
- We deduct cost of goods sold
- As a result, we get the gross profit (= profit from buying and selling goods, without
taking into account any other revenue and expenses)
Operating profit
- Operating expenses (e.g. salaries, wages, rent,…) are deducted from the gross profit
- As a result, we get the operating profit (= wealth generated during the period form
the normal activities of the business; does not take into account income from other
activities)
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