10/3/2023

Elements of Income statement

by VAS 01

Chapter 3 Income Increases in economic benefits during the accounting period in

the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those
THE INCOME STATEMENT relating to contributions from equity participants.

AND STATEMENT OF Includes revenues (income that arises in the course of the
ordinary activities of an entity) and gains
CASH FLOWS Expenses Decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
=> COULD BE IN NEGATIVE FORM (--) ON THE INCOME STATEMENT

Structure Income Statement (Multiple-Step)

• The income statement lists revenues first, followed by expenses.
• Then, the statement shows net income (or net loss).
Gross
• When revenues exceed expenses, net income results.
• When expenses exceed revenues, a net loss results.
Profit
• The income statement DOES NOT include investment and dividend Operating
transactions between the shareholders and the business in Expenses
measuring net income.
Non-
Includes revenues and Includes gains and losses
expenses directly related to and revenues and operating
the principal revenue- expenses related to Items
generating activities of the peripheral or incidental
company activities of the company

Operating Activities Nonoperating Activities

In this illustration, expenses are classified by FUCTION (regulated by
VAS), not by NATURE (as chapter 1 illustration)

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VAS income statement (Circular 200)

Income Statement (Single-Step)
1. Revenues from sales and services rendered
2. Revenue deductions
3. Net revenues from sales and services rendered =Line 1-2
Revenues 4. Costs of goods sold
5. Gross profit
& Gains
6. Financial income
7. Financial expenses
- In which: Interest expenses
Expenses 8. Selling expenses
& Losses 9. General administration expenses
10. Net operating profit =Line 5+6–7-8-9
11. Other income
12. Other expenses
13. Net Other income/expenses =Line 11-12
14. Total net profit before tax =Line 10+13
15. Current corporate income tax expenses
16. Deferred corporate income tax expenses
17. Profits after enterprise income tax =Line 14-15-16

U. S. GAAP vs. IFRS (for your references)

There are more similarities than differences between
income statements prepared according to IFRS and
those prepared according to U.S. GAAP. Some
differences are highlighted below.

• Has no minimum requirements. • Specifies certain minimum

SEC requires that expenses be
classified by function.
• “Bottom line” called net income
or net loss.
• Report extraordinary items
separately.
information to be reported on the
face of the income statement.
• Allows expenses classified by
function or natural description.
• “Bottom line” called profit or loss.
• Prohibits reporting extraordinary
items.

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The Statement of Cash Flows Statement of Cash Flows

The statement of cash flows provides information on the
• Provides relevant information about a company’s cash
receipts and cash disbursements. cash receipts and payments for a specific period of time.

Structure:
• Helps investors and creditors to assess The statement of cash flows reports in this order:
 future net cash flows (1) operating activities,
 Liquidity (short term) (2) investing activities,
 long-term solvency. (3) financing activities,
(4) the net increase or decrease in cash during the period,
• Required for each income statement period reported. and
(5) the cash amount at the end of the period.

Statement of cash flows VAS Operating Activities

Cash received/ proceeds Payment of fix assets
from sales of goods Investment in other companies Inflows from:
Operating Cash and Investing  sales to customers.
activities cash activities  (IFRS only) interest and dividends
equivalent received from investments. +
Sale of fix assets
Cash
Cash payments to
suppliers for goods, Sale of investment Flows
CIT payment…. Outflows for: from
Financing  purchase of inventory. Operating
activities  salaries, wages, and other
Proceeds from Issuing shares Payments to owners operating expenses. _ Activities
Proceeds from borrowings Repayment of borrowing  interest on debt.

Cash flow generated and used by the enterprises in a  income taxes.

 (IFRS only) dividends paid.
certain period

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Direct and Indirect Methods of

Operating Activities
(Investing and Financing are always direct)
Direct Method Indirect Method Example
During the year the company has the following information:
Cash in – cash out Starts with Sales: 100 cash sales + 50 receivable sales = 150
ACCRUAL INCOME Expenses: 70 cash payment + 20 deprecation =90
on IS and then
converts to cash Solution
basis by +/- from the information above:
adjustement
• Cash in – cash out = 100-70=30  Direct method
Some basic items of adjustments: • Income = sales – expenses = 150-90 = 60
Non cash Expenses: + •  Income +/- adjustment = indirect method
Non cash income: -
Receivables increase: - = 60 + 20 deprecation – 50 receivable = 30
Payable increase: +

VAS Investing Activities VAS Financing Activities

Inflows from: Inflows from:

sale of PPE used in the business.  Issuing shares to owners.
sale of investment securities (shares and bonds); or  borrowing from creditors
collection of nontrade receivables. +
interest or dividends received from investments. Outflows for:
 owners for the repurchase or reacquisition of
Outflows for: shares previously sold.
 purchase of PPE assets used in the business.  owners in the form of dividends.
_
 purchase of investment securities (shares and  creditors for the repayment of the principal
bonds) or loans to other entities. amounts of debt.
 (IFRS only) creditors for the payment of interest
on debt

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Special case:
Noncash Investing and Financing Activities

Significant investing and financing

transactions not involving cash
also are reported.
For example: Acquisition of equipment (an
investing activity) by issuing a long-term
note payable (a financing activity).

Extracted from the IS

U. S. GAAP vs. IFRS (for your references)

Both U.S. GAAP and IFRS require a statement of cash flows
and classify cash flows as operating, investing, or financing.

Typical Classification of Cash Flows from

Interest and Dividends
•Operating Activities •Operating Activities
– Dividends Received
– Interest Received •Investing Activities
– Interest Paid – Dividends Received
– Interest Received
•Investing Activities
•Financing Activities
– Dividends Paid
– Interest Paid
•Financing Activities
– Dividends Paid

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Which of the following transactions does not affect profit for the period?
Pay dividends to shareholders
Pay fines for administrative violations
Paid to employees
All of the above

Extracted from the SOFP

When a business sells goods at a price higher than the cost of goods
sold, this transaction will cause:
Total assets and liabilities remain unchanged
Liabilities and equity remain unchanged
Total assets and equity decreased
Total assets and equity increased
Trade discount is a discount given to the buyer
A. due to purchasing in large volumes
B. due to defective goods, insufficient quality or not following
specifications according to the provisions of the contract
C. since the buyer has returned the goods
D. due to early payment by the buyer as agreed

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When an enterprise issues bonds, when preparing a cash flow Which of the following is not a benefit of providing credit to customers?
statement, this activities should be classified as: A It may result in increased sales
Operating activities B It may encourage customer loyalty
Investing activities C It may attract new customers
Financing activities D It may improve the cash flow of the business
Depend on the purpose of using capital from bond issuance, if capital
is used for operating, it will be show in operating activities, if used for
construction, it will be reflected in investing activities.