Moore Accounting Notes The Income Statement

The statement of comprehensive income [SOCI] Part 2: The basic steps to follow Prepared for CXC CAPE Unit 1

Step 1: calculate the net sales (turnover) $ TURNOVER: Sales less Sales returns & allowances net sales Turnover refers to the net sales/revenue earned from selling the goods or the services provided by the business whether by cash or on credit during the review period. Allowances refer to the various discounts offered by the business to the customers – e.g discounts allowed Check IAS 18 REVENUE for more information

Step 2: calculate the cost of sales $ inventory b/f add purchases add freight in less Purchases returns & allowances net purchases total goods available for sale less inventory c/d cost of goods sold [often called the cost of goods sold] Cost of goods available for sale is the net value of the stock we started with added to the stock we purchased during the review period after it has been adjusted for; carriage costs; as well as returns and allowances. The closing inventory refers to the stock of goods that remained unsold at the end of the review period. It must be valued at the lower of its cost and its net realizable value.

Step 3: calculate the gross profit $ TURNOVER: Sales less Sales returns & allowances net sales inventory b/f add purchases add freight in less Purchases returns & allowances net purchases total goods available for sale inventory c/d cost of goods sold Gross Profit The gross profit is simply the income the business earned from its trading activities. is the difference between the net sales obtained from the goods sold and the cost of selling those goods (trading expenses). The cost of goods sold may have to be adjusted due to storage expenses – such as warehouse wages

Step 4: calculate the operating expenses $ NET SALES less COST OF SALES GROSS PROFIT EXPENSES: selling/distribution administrative Total expenses The operating expenses refer to the costs the business incurred in order to effectively provide the goods for sale or to render its services to the customers. Remember!!! make adjustments if Expenses are prepaid Expenses are outstanding Expenses are provisional (depreciation, doubtful debts) Expenses are revised (bad debts, doubtful debts) The expenses can only be applied to the SOCI if they occurred in the period under review whether or not they have been settled. See IAS notes on disclosures using the “accrual basis”

Step 5: calculate the operating profit $ NET SALES less COST OF SALES GROSS PROFIT EXPENSES: selling/distribution administrative Total expenses OPERATING PROFIT The operating profit refer to net amount remaining with the business after it has paid its operating expenses. It is generally called the profit before interest and tax [PBIT]

Step 6: calculate the other income and expenses $ OPERATING PROFIT OTHER INCOME & EXPENSES income before taxes Other incomes and expenses makes reference to the net value of the non-operating activities of the business. These generally include interest paid on loans, interest received, rent received, etc. Remember!!! IN large companies the term OTHER COMPREHENSIVE INCOME is used where there are several categories of unrealized gains or losses. Unrealized gains or losses on available-for-sale securities Unrealized gains or losses on other financial investments Unrealized gains or losses on pension and retirement benefit plans Foreign currency adjustments

Step 7: calculate the net income $ OPERATING PROFIT less OTHER INCOME & EXPENSES PROFIT BEFORE TAX CORPORATION TAX (applied) NET (comprehensive) INCOME The net income refers to the amount remaining with the business after it has accounted for all of its expenses. It is determined after the tax (if any) has been applied to the income figure [PBT]

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