1. The Statement of Profit or Loss

Question 1

List out the items to be included in the IAS 1 statement of profit or loss functional format.

Answer 1

Revenue
Cost of Sales
Gross Profit
Other Income
Distribution Costs
Administrative Expenses
Operating Profit
Finance Income
Finance Costs
Profit before Tax
Income Tax
Profit for the Period

Question 2

What is the income tax referred to in IAS 1?

Answer 2

Income tax is the term used in IAS 1 to refer to tax on the entity’s profit. It is not to be confused with income tax (PAYE) on an employee’s salary.

Question 3

What may be included in ‘Other Income’? (4)

Answer 3

Other income may include:
1) Gains on disposal of property, plant and equipment
2) Gains on disposal of intangible assets
3) Rent received from property
4) Proceeds from insurance claims.

Question 4

What is ‘Finance Income’?

What term may this be used interchangeably with?

Answer 4

Finance income may include dividends received on investments in equity shares and bank interest received.

Investment income

Question 5

What is IAS 1’s prescription in terms of the presentation of expenses?

Answer 5

IAS 1 states that an entity shall present an analysis of expenses using a classification based on either the nature of expenses or their functions within the entity, whichever provides information that is reliable and more relevant.

The format and classification used here is the functional one.

Additional disclosures on the nature of expenses, including depreciation and amortisation, are required, however you are not required to be aware of those in ‘Accounting’.

Question 6

How should ‘Cost of Sales’ be calculated for the ‘Accounting’ exam?

What is included in CoS for a manufacturing business?

What is included in CoS for a services business?

Answer 6

Purchases (net of discounts received) plus delivery inwards adjusted for opening and closing inventory, and any substantial losses of inventory.

In a manufacturing company, wages of production staff, and maintenance and depreciation expenses of production non-current assets, plus losses on their disposal, are also included.

For a company that provides services, cost of sales mainly comprise the cost of staff time.

Question 7

How should ‘Distribution Costs’ be classified according to IAS 1, i.e. what may be included? (6)

Answer 7

1) Wages of marketing and distribution staff
2) Sales commission
3) Distribution expenses such as vehicle running costs and carriage outwards
4) Depreciation of motor vehicles used for distribution, and marketing costs such as advertising and promotion, and any loss on disposal of such assets
5) Depreciation of other non-current assets used by distribution operations and any loss on disposal of such assets
6) The cost of advertising and selling activities, since these are a part of distributing goods and services to customers

Question 8

How should ‘Administrative Expenses’ be classified according to IAS 1 i.e. what may be included? (6)

Answer 8

1) Wages of administrative staff
2) Depreciation of non-current assets used by non-production and non-distribution operations, and any loss on disposal of such assets
3) Amortisation of intangible assets
4) Impairment losses on tangible and intangible assets
5) Expense of substantial loss of inventory
6) Irrecoverable debts expense

Note: In the exam, you will be required to allocate costs to one of the three buckets

Question 8

In the ‘Accounting’ exam, in to what categories, should costs be classified?

Answer 8

1. Cost of Sales
2. Distribution Costs
3. Administrative Costs

Question 9

Give examples of what is included in ‘Other Income’. (3)

Answer 9

Income other than revenue or finance income (investment income) should be presented separately in determining operating profit. Examples of other income include:
1. Rent received from property that is rented to third parties
2. Insurance claim proceeds
3. Profits on disposal of non-current assets (you may be advised that this should be presented within an expense category rather than separately being presented in other income)

Question 10

Give examples of what should be included in ‘Finance Income’. (2)

Answer 10

Finance income (investment income) will be presented separately in the statement of profit or loss. In ‘Accounting’, finance income may include:
1. Dividends received on investments
2. Interest received on savings

Question 11

Give examples of what should be included in ‘Finance Costs’. (2)

Answer 11

Finance costs, sometimes referred to as interest expenses, are a separate expense category. In ‘Accounting, finance costs may include:
1. Interest payable on bank loans and overdrafts
2. Interest on debt securities