Income Statement – Functional Presentation (PAS 1) – Part 1 – Source: Yt

Income Statement

 Income statement : formal statement showing the financial performance of an entity for a
period of time
 Financial performance : primarily measured in terms of the LEVEL OF INCOME earned by the
entity THROUGH EFFECTIVE AND EFFICIENT UTILIZATION of its resources
 A “period must expire” before the financial performance of an entity can be properly measured.

Profit or loss : “bottom line” in the traditional income statement

*An entity may use other term to describe this amount as long as the meaning is clear

 Profit or loss : TOTAL OF INCOME LESS EXPENSES excluding the components of other
comprehensive income

- Profit or loss = Income – Expenses

Forms of Income Statement

- The income statement may be presented in two ways:

 Functional (or Cost of Goods Sold/Cost of Sales Method)

- classifies expenses according to function

Ex. Distribution Cost, Administrative Expenses, etc.

 Natural : classified based on its characteristics

 Distribution Costs : costs which are directly RELATED TO SELLING, ADVERTISING, AND DELIVER
OF GOODS to customer.

- Distribution costs ordinarily include:

 Salesmens’ salaries
 Salesmens’ commission
 Traveling and marketing expenses
 Advertising
 Freight out (or Delivery Expense)
  Depreciation of delivery and store equipment

 Administrative expense: constitute COST OF ADMINISTERING BUSINESS

- ordinarily include expenses not related to selling and cost of goods sold

- Examples:

 Doubtful accounts (or Bad Debt Expense) - Contra-asset in Accounts Receivables

 Office salaries
 Expenses of general executives, general accounting, and credit department
 Office supplies used
 Certain taxes
 Contribution
 Professional fees
 Depreciation of office building and equipment
 Amortization of intangible assets

 Other expenses : those expenses which are NOT DIRECTLY RELATED TO THE SELLING, AND
ADMINISTRATIVE FUNCTION.

- Examples:

 Loss on sale of trading securities, PPE, and noncurrent investment

 Casualty loss – flood, earthquake, etc.

 Finance costs : Interest expense

 PAS 1, Paragraph 87, mandates that an entity SHALL NOT PRESENT any items of income and
expense as “EXTRAORDINARY ITEMS” in the income statement or statement of comprehensive
income or in the notes.

- ANY CASUALTY LOSS (Eg. from earthquake, typhoon, hurricane, tsunami, flood, fire, and other natural
disaster) is treated as OTHER EXPENSE

- Any GAIN FROM EXPROPRIATION (Gain from government for using a private property for public use) is
treated as OTHER INCOME.
FORMULA for Cost of Goods Manufactured:

*Superintendence – salary of supervisor of an entity / manufacturing related / Manufacturing Overhead

 Income Statement : Pro-forma Statement

- Net Sales = Sales – Sales Return

Just for reference:

Complete set of financial statements

1. Statement of financial position (Balance Sheet) /

2. Statement of profit or loss / and other comprehensive income
3. Statement of changes in equity (depends on what type of business)
4. Statement of cash flows /
5. Notes

5a. Comparative information in respect of the preceding period; and

6. Additional statement of financial position (required only when certain instances occur)