Lecture 5: Statement of Profit and Loss, Statement of Comprehensive Income and Statement of Changes in Equity Flashcards
Income
Inflow of economic benefits that results in an increase in assets (or decrease in liabilities) that increases equity, except for contributions by equiy participants.
Revenues
Income that has arisen in the ordinary course of business
Expenses
Outflows of economic benefits that decrease assets (or increase liabilities) that result in a decrease in equity, excpet for distributions to equity participants.
Ohter specific expenses that must be seperately disclosed
- Finance costs
- Income tax
Accrual accounting
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.
When are income and expenses recognised
When they are probable and have reliable measurement
When are revenues recognised
When they are earned and the entity has performed their obligation (accrual accounting)
When are expenses recognised?
When they are incurred
What is earning management and outline the two methods
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.
Comprehensive income
= profit + other comprehensive income (OCI)
The statement of profit and loss
Reports on how well management have used their resources to generate returns and gives a measure of financial performance - only includes income and expenses
The statement of comprehensive income
Reports the increase in net assets and OCI is included
The statement of changes in equity
Gives detail about changes in carrying amount from the beginning to the end of the period of each component of equity