Lecture 5: Statement of Profit and Loss, Statement of Comprehensive Income and Statement of Changes in Equity

Question 1

Income

Answer 1

Inflow of economic benefits that results in an increase in assets (or decrease in liabilities) that increases equity, except for contributions by equiy participants.

Question 2

Revenues

Answer 2

Income that has arisen in the ordinary course of business

Question 3

Expenses

Answer 3

Outflows of economic benefits that decrease assets (or increase liabilities) that result in a decrease in equity, excpet for distributions to equity participants.

Question 4

Ohter specific expenses that must be seperately disclosed

Answer 4

1. Finance costs
2. Income tax

Question 5

Accrual accounting

Answer 5

States that income and expenses should be recorded in the period in which they are earned/incurred, which may or may not be different to when cash is exchanged
e.g. if we receive cash this month for a book but only deliver it next month then, we recognise the revenue income next month.

Question 6

When are income and expenses recognised

Answer 6

When they are probable and have reliable measurement

Question 7

When are revenues recognised

Answer 7

When they are earned and the entity has performed their obligation (accrual accounting)

Question 8

When are expenses recognised?

Answer 8

When they are incurred

Question 9

What is earning management and outline the two methods

Answer 9

Using accounting techniques and policies to skew the profit figure.
1. Taking a bath - consists of making a bad year worse by incurring every possible expense so that profit has to increase next period.
2. Cookie jar - consists of creating provisions in years of high profit in order to take funds out of profit/loss and create a proviion liabilitiy that is meant to be reserved for a specific date (but this is not true) - then later the provision is reversed in order to make profit.

Question 10

Comprehensive income

Answer 10

= profit + other comprehensive income (OCI)

Question 11

The statement of profit and loss

Answer 11

Reports on how well management have used their resources to generate returns and gives a measure of financial performance - only includes income and expenses

Question 12

The statement of comprehensive income

Answer 12

Reports the increase in net assets and OCI is included

Question 13

The statement of changes in equity

Answer 13

Gives detail about changes in carrying amount from the beginning to the end of the period of each component of equity