© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.1 Measuring and reporting financial performance OBJECTIVES You should be able to: Prepare a profit and loss account from relevant financial information Discuss the nature and purpose of the profit and loss account Explain the main accounting conventions underpinning the profit and loss account Discuss the main measurement issues that must be considered when preparing the profit and loss account

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.2 Profit measurement and the recognition of revenue The realisation convention states that revenue should be recognised only when it has been realised. Normally, realisation is considered to have occurred when: The amount of revenue generated can be objectively determined There is reasonable certainty that the amounts owing from the activities will be received The activities necessary to generate the revenue are substantially complete

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.3 Accounting for sales commission Sales commission expense £6,000 Profit and loss account Balance sheet at year end Cash £5,000 Accrual £1,000 Cash flow statement

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.4 Accounting for rent payable Rent payable expense £16,000 Profit and loss account Balance sheet at year end Cash £20,000 Prepaid expense £4,000 Cash flow statement

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.5 Profit measurement and the calculation of depreciation The useful life of the asset The residual value of the asset The cost of the asset To calculate a depreciation charge for a period, four factors have to be considered: The depreciation method

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.6 Written- down value (£000) Asset life (years) Graph of written-down value against time using the straight-line method

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.7 Written- down value (£000) Asset life (years) Graph of written-down value against time using the reducing-balance method

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.8 Calculating an annual depreciation charge Year 1Year 3Year 2 Year 4 and so on Depreciation less Residual value equals Cost Depreciable amount Asset life (number of years)

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 3.9 Last in, first out (LIFO) Weighted average cost (AVCO) First in, first out (FIFO) Common assumptions used are: Profit measurement and stock costing methods