1 - basic accounting concept-income statement
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7/31/2019 1 - Basic Accounting Concept-Income Statement
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1
Philippine Christian UniversityMasters in Business Administration
Management Accounting
Report on:
INCOME STATEMENT
Reported by:
Group 1Nur-Warith H. Caluang
Mary Grace B. MarasiganMaileen R. Marcial
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Income Statement
Summary of the revenues and the expenses ofan accounting period
Profit and loss statement, statement of
earnings or statement of operations Shows the items that account for most of the
movement in retained earnings
Reports the results of operations and indicatesreasons for the entitys profitability (or lackthereof)
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Components of Income Statement
a.REVENUE
Gross Sales
Sales returns and allowances
Sales discount (cash discount)
Trade discounts
Other revenues
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Components of Income Statement
b. COST OF SALES
Manufacturing cost of goods sold
Cost of services provided
Decrease in inventory (manufacturing)
c. GROSS MARGIN/GROSS PROFIT
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Components of Income Statement
d. EXPENSES
Selling, General & Administrativeexpenses
FASB separate disclosure for: R&D expense; and
Interest expense
e. INCOME BEFORE INCOME TAX
f. NET INCOME/(NET LOSS)
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Illustration of Income Statement
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Statement of Retained Earnings
Affected by:
net income or net loss; and
dividends declared or paid; or withdrawal (owners equity single
proprietorship
Shows the relationship of Balance Sheet andIncome Statement
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Income Statement Percentages
a. Gross margin = gross margin/net sales
average margin obtained on products sold
b. Profit margin = net income/net sales average net profit obtained from selling
products or services
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Other concepts of Income
a. Accrual vs. Cash basis
b. Income Tax accounting
usually similar but not identical with the
amount measured in accordance with GAAP familiarity with the principal tax rules which
would permit the recognition of expenses thatcould lower the taxable income
Accrual Cash
Revenue Earned Cash receipts
Expenses Incurred Cash disbursements
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Other concepts of Income
c. Economic income
Is a mixture of true income and the cost of usingshareholders capital
Difference between the value of a business at the end of
the accounting period and its value at the beginning of theperiod, after proper adjustments for transactions withowners (i.e. APIC and dividends)
d. Pro-forma earnings
asif earnings or projected earnings net income plus certain unusual or one-time charges, such
as restructuring charges and merger-related costs
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Accounting and Changing Prices
Nature of the problem
In case of price increase due to inflation,
nonmonetary assets measured at historical
costs may not be appropriately valued
Two proposed solutions:
1. Constant Dollar Accounting
2. Current cost accounting
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Constant Dollar Accounting
All balance sheet and income statement items
are adjusted by a general price index to their
purchasing power equivalent as of a common
date
Was discontinued as the inflation began to fall
in 1984
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Constant Dollar Accounting
Example:
31-Dec-02 31-Dec-03 Increase
Inventory
(nominal amount) 100,000.00 100,000.00 -
Price Index 300 330 10%
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Current Cost Accounting
Cost of replacing specific assets at their replacementcost
Inventory cost of:
a. purchasing goods of the same kind and quantity, or
b. acquiring the resources needed to produce suchgoods
PPE - cost of acquiring the same service potential asembodied in the assets owned. (i.e. cost of replicating
the capacity of the specific fixed assets) Discontinued in December 1986 due to the
requirement to report supplementary current costinformation.
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