ACCOUNTING FOR BUSINESS

WEEK 5
STATEMENT OF PROFIT OR LOSS
AND
STATEMENT OF CHANGE IN EQUITY

UNIVERSITAS BINA NUSANTARA

SUBJECT MATTER EXPERT

MARIA PARAMASTRI HAYUNING ADI, S.E., M.Sc, CertDA
 LEARNING OUTCOME

 LO2: Apply the step for preparing financial reports, consisting of statement of financial position, statement of
profit or loss, statement of change in equity and statement of cash flow and analysis of financial statements
 These slides have been adapted from:

Birt, J., K. Chalmers., S. Maloney., A. Brooks., J. Oliver., D. Bond. (2020). Accounting: Business Reporting for Decision Making. 7th
Edition. Australia: John Wiley & Sons Ltd. ISBN: 9780730369295.

Weygandt, J.J., P.D. Kimmel., D.E., Kieso. (2019). Financial Accounting with IFRS. 4th Edition. Hoboken: John Wiley & Sons Inc.
ISBN: 9781119503408

Acknowledgement
UNIVERSITAS BINA NUSANTARA

Juni 2023
STATEMENT OF PROFIT OR LOSS
OUTLINE

ACCOUNTING CONCEPTS FOR FINANCIAL REPORTING

THE DEFINITION AND CLASSIFICATION OF INCOME AND EXPENSE

APPLYING RECOGNITION CRITERIA TO INCOME AND EXPENSES

PRESENTING THE STATEMENT OF PROFIT OR LOSS

THE STATEMENT OF COMPREHENSIVE INCOME

PRESENTING THE STATEMENT OF CHANGE IN EQUITY

 STATEMENT OF PROFIT OR LOSS / INCOME STATEMENT

• Some companies using statement of profit or loss and others companies name it Income Statement.
• The component is different, based on company operational activities and industries
 PURPOSE AND IMPORTANCE OF MEASURING FINANCIAL PERFORMANCE

Profit = Revenue – Expenses

• The statement of profit or loss reflects the accounting return for an entity over a specified time period.
• Profit is the difference between the income and expenses for a reporting period.
• While many entities aim for profit maximisation, the importance of sustainable business practices
means that decisions may be made that are not necessarily profit maximising, but are beneficial for the
environment or the community.

• Entities often articulate their governance, environmental and social policies and report on their
environmental and social performance in addition to their financial performance. This is referred to as
triple bottom line reporting.
 PURPOSE AND IMPORTANCE OF MEASURING FINANCIAL PERFORMANCE

• Revenue is a subset of income.

• Income encompasses both:
• revenue arising in the ordinary course of activities (e.g. sales, fees, dividends)
• gains (e.g. gains on disposal of non-current assets, and unrealised gains on revaluing
assets).
 ACCOUNTING CONCEPTS FOR FINANCIAL REPORTING

•The reporting period:

• Reporting period (accounting period) is the period of time to which the financial statements relates.
• For external reports, the convention is that the arbitrary reporting period is yearly, and so the entity prepares
financial statements at the end of each 12 months (not necessarily a calendar year).

• Accrual accounting versus cash accounting:

• Accounting standards require financial statements to be prepared on the basis of accrual accounting.
• Accrual accounting is a system in which transactions and events are recorded in the periods they occur, rather
than in the periods the cash is received or paid.
• A cash accounting system would determine profit or loss as the difference between the cash received in
relation to income items and the cash paid for expenses.
• Transactions are recorded in the period the cash is received or paid.
 ACCOUNTING CONCEPTS FOR FINANCIAL REPORTING

• Accrual accounting versus cash accounting:

• Under accrual accounting, the following may occur for income:
• Income is recognised without receipt of cash (accrued income).
• The income has been earned (service provided), but not yet paid for.
• Cash is received but income is not recognised (income received in advance).
• Must remain as a liability, until the income is earned.
• Expense is recognised without payment of cash (accrued expense).
• Yet to pay for an expense that we have consumed or used.
• Expense is paid but not recognised as an expense (prepaid expense).
• Paid in advance, and only when the expense is consumed or used up, do we record the
expense.
ACCOUNTING CONCEPTS FOR FINANCIAL REPORTING

• Accrual accounting example:

 ACCOUNTING CONCEPTS FOR FINANCIAL REPORTING

•Depreciation (amortisation):
• The systematic allocation of the cost of a tangible (intangible) asset over its useful life.
• It does NOT represent the loss in the asset’s value during the reporting period.
• It does NOT involve cash flows.
• Accumulated depreciation represents the total depreciation that has been charged to statement of
profit or loss in relation to an asset.
ACCOUNTING CONCEPTS FOR FINANCIAL REPORTING

• Depreciation example — straight-line depreciation:

• Equipment is purchased for $40 000 with an estimated useful life of 4 years and expected residual value
of $8000.

• Annual depreciation expense

= $40 000 – $8000 = $8000

4 years

Annual depreciation expense = Cost of asset – Expected residual value

Asset’s expected useful life
 DEPRECIATION

• Straight line, Units of Activity and Declining Balance

Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2020.
Cost €13,000
Expected salvage value € 1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000
Required: Compute depreciation using the following.
(a) Straight-Line (b) Units-of-Activity (c) Declining Balance
 DEPRECIATION (EXAMPLE)
STRAIGHT LINE

• Straight line

Book value = Cost – Accumulated Depreciation =

13,000 – 2,400 = 10,600 (2020)
DEPRECIATION

• Assume that delivery truck purchase on April 1, 2020

 DEPRECIATION

Units of Activity

Book value = Cost – Accumulated Depreciation = 13,000 – 1800 = 11,200 (2020)

 DEPRECIATION

Declining Balance

Declining Balance Rate = 2 x straight line rate = 2x20% = 40%

Book value = Cost – Accumulated Depreciation = 13,000 – 5,200 =
7,800 (2020)
DEPRECIATION

• Assume that delivery truck purchase on April 1, 2020

EFFECT OF ACCOUNTING POLICY CHOICES, ESTIMATES AND JUDGEMENTS ON FINANCIAL STATEMENTS
EFFECT OF ACCOUNTING POLICY CHOICES, ESTIMATES
AND JUDGEMENTS ON FINANCIAL STATEMENTS

• Quality of earnings:
• Earnings management:
• Managers’ use of accounting discretion via accounting policy choices and/or
estimations to portray a desired level of earnings.

• Reported profits are an important number because they are used in

contractual arrangements and to value entities.

• Managers’ choices may portray economic reality or be driven by self-interest.

 MEASURING FINANCIAL PERFORMANCE

• To measure the profit or loss of an entity, it is necessary to identify and measure all
income and expense items attributable to the reporting period.

• This requires an understanding of what attributes a transaction requires in order to

be classified as an item of income or expense.
 INCOME

• Income is defined in the revised Conceptual Framework (para. 4.68) as an increase in an asset, or a decrease in
a liability, which results in an increase in equity (other than those relating to equity-holder claim contributions).
• Recall that income comprises both revenue and gains, with revenue arising in the ordinary course of an
entity’s activities.
• Gains also represent increases in economic benefits, but they may or may not arise in the ordinary course
of an entity’s activities.
• Income must be inflows or enhancements of economic benefits that increase assets or reduce liabilities.

• Income classification:

• By income-generating activities.

• By income types:

• sales, fees, commissions, interest, royalties, rent and non-reciprocal transfers.

 EXPENSES

• Expenses are defined in the revised Conceptual Framework (para. 4.69) as a decrease in an asset, or
an increase in a liability, which results in a decrease in equity (other than those relating to equity-
holder claim distributions).
• Qualification: distribution to owners is NOT an expense despite it resulting in a decrease in equity.
• Specific examples:
• Cost of sales expense is the main expense incurred by an entity — in order to sell goods and
generate income, the entity must purchase goods for resale.
• Other expenses include wages and salaries, depreciation, selling administrative and borrowing
expenses.

Cost of = Inventory at beginning + Purchases – Inventory at

sales of period end of period
 EXPENSES

• Specific examples:
• The acquisition of certain assets (such as property, plant and equipment) is not an expense of the
period because there is no reduction in equity associated with the transaction.

• However there may be related depreciation and/or impairment expenses.

• Expenses classification:
• There is some choice as to how to display and classify expenses in the statement of profit or loss.
• Smaller entities often list all their expenses in the statement of profit or loss.
• Larger entities aggregate their expenses into certain classes for reporting purposes.
• Reporting entities are required to classify their expenses by nature or function.
EXPENSES

• Expense classification example:

 APPLYING RECOGNITION CRITERIA TO INCOME AND EXPENSES

• Recognition refers to recording items in the financial statements with a monetary value
assigned to them.

• ‘Income recognition’ or ‘expense recognition’ means that the income or expense is recorded
and appears in the statement of profit or loss.

• The factors to consider when making a recognition decision, framed in terms of whether an
asset or liability is recognised, are uncertainty, probability and measurement uncertainty.

• Income (revenue) recognition:

• The determination of when an increase in assets or reduction in liabilities has arisen, and
hence when income can be recognised, can be difficult and demands consideration of
relevance assessed with reference to uncertainty, probability and measurement.

• Difficult to be prescriptive as to the appropriate point in time when income should be

recognised.
INCOME (REVENUE) RECOGNITION
APPLYING RECOGNITION CRITERIA TO INCOME AND EXPENSES

• Expense recognition:
• Determining if a decrease in assets or an increase in liabilities is
required.

• Paying due attention to relevance as assessed considering the factors

of uncertainty.

• Probability and measurement uncertainty.

APPLYING RECOGNITION CRITERIA TO INCOME AND EXPENSES
PRESENTING THE STATEMENT OF PROFIT OR LOSS

• The appearance of the statement of profit or loss differs depending on whether:

• the statement is being prepared for internal or external reporting purposes
AND

• whether the preparing entity is a reporting entity.

 PRESCRIBED FORMAT FOR GENERAL PURPOSE FINANCIAL STATEMENTS

• Prescribed format for general purpose financial statements:

• The following must be presented on the statement of profit or loss:
• revenue
• cost of sales (if revenue sales is disclosed)
• finance costs
• share of profit of loss of associates and joint ventures if equity accounted
• tax expense
• profit or loss.
• Must also segregate profit or loss from continuing and discontinued operations.
 PRESCRIBED FORMAT FOR GENERAL PURPOSE FINANCIAL STATEMENTS

•Material income and expenses:

• Material income and expenses must be disclosed separately via either the statement of profit or
loss or the notes.

• The determination of whether an item is material is based on:

• the size and/or nature of the item
• whether its non-disclosure could influence users’ decision making.
 PRESCRIBED FORMAT FOR GENERAL PURPOSE FINANCIAL STATEMENTS

•Format for entities not required to comply with accounting standards:

• No prescribed reporting format for statements of profit or loss prepared by non-reporting entities.
• Although presentation and classification of items may show great diversity, the purpose of the
statement of profit or loss does not change: to report the profit for the entity for the reporting
period.

• The profit objective is not necessarily relevant for all entities.

PRESCRIBED FORMAT FOR GENERAL PURPOSE FINANCIAL STATEMENTS
 FINANCIAL PERFORMANCE MEASURES

• Gross profit:
• Refers to revenue less the cost of sales, and is applicable to manufacturing and retail operations.

• The gross profit measures the revenue remaining after deducting the cost of sales.

• Reflects the percentage by which an entity marks up the cost of its products to sell to its customers.
 FINANCIAL PERFORMANCE MEASURES

• Profit:
• Profit pre- and post-tax:
• Profit performance measures can be referred to on a pre- and/or post-tax basis.
• Profit pre- and post-interest:
• Earnings before interest and taxation (EBIT): the profit before net interest and
taxation expense.

• Net finance costs: interest income less interest expense (including finance lease
charges).
 FINANCIAL PERFORMANCE MEASURES

• Profit:
• Profit pre- and post-depreciation and amortisation:
• Earnings before interest, tax, depreciation and amortisation (EBITDA): the profit before interest,
taxation and depreciation/amortisation expense.

• Profit pre- and post-material items:

• Items of income and expense can be labelled as material (or significant) on the basis of their
size or nature.
FINANCIAL PERFORMANCE MEASURES

• Profit:
• Profit from continuing and discontinued operations:
•If an entity has sold or plans to sell a part of its business during the
reporting period, information must be disclosed that enables users of the
financial statements to evaluate the financial effects of the discontinued
operations.
FINANCIAL PERFORMANCE MEASURES

• Profit:
• Pro forma earnings:
• Earnings that are not in accordance with GAAP earnings. Unusual items
(particularly expense items) tend to be excluded in the calculation of pro forma
earnings.
 THE STATEMENT OF COMPREHENSIVE INCOME

• Reporting entities must also prepare a statement of comprehensive income.

• Other comprehensive income refers to all changes in equity during the reporting
period other than those resulting from transactions with owners as owners (such
as dividends and capital contributions).
 THE STATEMENT OF COMPREHENSIVE INCOME

• Reporting entities can elect to present all items in a single statement of

comprehensive income or in two statements:
(1) A statement of profit or loss showing the income and expenses associated with
the determination of profit (or loss) for the reporting period.
(2) A statement beginning with profit or loss and displaying components of other
comprehensive income (statement of comprehensive income).
THE STATEMENT OF COMPREHENSIVE INCOME

• Example — JB Hi-Fi Ltd Statement of comprehensive income for the

financial year ended 30 June 2018:
STATEMENT OF CHANGE IN EQUITY
 THE STATEMENT OF CHANGE IN EQUITY

• The statement of changes in equity:

• Required by all reporting entities.
• Details changes in equity from the beginning to the end of the reporting period.
• It shows:
• Income and expenses as per the statement of profit or loss.
• Income and expenses recognised directly in equity (e.g. non current asset revaluations).
• Transactions with equity holders as equity holders (e.g. shares repurchased, dividends paid).
THE STATEMENT OF CHANGE IN EQUITY

• Example — JB Hi-Fi Ltd, extract of statement of changes in

equity for the financial year ended 30 June 2018:
 THE LINK BETWEEN THE FINANCIAL STATEMENTS

• Profit (loss) for reporting period is added to retained earnings at start of period.
• The entity can make distributions from retained earnings and transfers to/from
retained earnings.

• The balance of retained earnings at the end of the period is included as an equity
item in the statement of financial position.
THE LINK BETWEEN THE FINANCIAL STATEMENTS
APPENDIX
REFERENCES

• Birt, J., K. Chalmers., S. Maloney., A. Brooks., J. Oliver., D. Bond. (2020). Accounting: Business
Reporting for Decision Making. 7th Edition. Australia: John Wiley & Sons Ltd. ISBN: 9780730369295.

• Weygandt, J.J., P.D. Kimmel., D.E., Kieso. (2019). Financial Accounting with IFRS. 4th Edition.
Hoboken: John Wiley & Sons Inc. ISBN: 9781119503408
THANK YOU
STATEMENT OF PROFIT OR LOSS
AND
STATEMENT OF CHANGE IN EQUITY
UNIVERSITAS BINA NUSANTARA