1) Income statement: Nature, forms and uses of

Income Statement:
Introduction:
The amended PAS 1, paragraph 10A provides that an entity has two options in
presenting comprehensive income.
Two. Statementes
A. Income statement:
Shows the components of profit and loss. Under PAS 1 it is also called "statement of
profit or loss"
B. Statement of Comprehensive Income
This statement begins with profit or loss plus or minus the other comprehensive income
What is an Income Statement and its nature?
Income Statement is a formal statement showing the financial performance of an entity
given period of time
A company's financial performance is based in terms of level of income earned by the
entity. It is also known as the results of operations of the entity.
Income statement presents the income, expense , gain, losses and net income or loss
recognized during the period from entity's profit-directed acitvities.
What is income?
From the conceptual framework, income is defined as "increase in economic benefit
during the accounting period in the form of inflow or increase in asset". In other words,
income is an inflow of future economic benefit that increases equity.
Sources of income:
*sales of merchandise to customer: includes all sales to customers during the period.
(Sales - sales return/allowances/discounts = net sales)
*Rendering of services: it is the income derived from a service rendered.
(Ex: professional fee, media advertising fee)
*Use of entity resources: income derived from the usage of resources of one's entity
(Ex: rent, interest, dividend icome
* disposal of resources ither than products: An income derived from selling or disposing
an entity's resources.
(Ex: selling of an equipment, gain on sale of intangible asset)

What are the forms of Income

Statement?
Forms:
There are 2 forms of presenting
income statement:
Functional presentation:
-Traditional and common form of
income statement
- cost of sale method
-classifies expenses according to
their function as part of cost of
sales, distribution cost and
administrative activities
(Entity classifying expenses by
function shall disclose additional
information on the nature of
expense)
Natural presentation:
-Nature of expense method
-expenses ate aggregated
according to their nature
- expenses which are of the same
nature are grouped as one ite
Which form of income
statement is required by the
standard?
Under PAS 1 paragraph, there is NO prescribe type of format since each presentation
has merit for different type of entities.
Uses of income statement:
The purpose of the income statement is to show managers and investors whether the
company was profitable during the period being reported.
KEY POINTS
-An income statement reflects the revenues and expenses of a company for a specific
period of time.
-Business use these reports to understand the financial position of their business and
where to make changes for future years.
- Income statement information provides the basis for a variety of decisions.

2. Approaches to income statement measurement:

1. Capital maintenance approach
This is also called as net asset approach meaning that the net income occurs
only after the capital is used form the beginning if the period is maintained.
This has 2 variations:
Financial capital concept:
It is the traditional concept based on historical cost.
Financial capital is the monetary value of the net asset contributed.
Under financial capital concept, Such capital is synonymous with net assers or
equity of thr entity
Under this concept: Net income = Net asset at the end of the year > net asset at
the beginning of the year
Physical concept:
It is the quantitative measure of the physical productive capacity to produce
goods & services
This concept requires that productive assets must be valued at current cost
Net income = Physical productive capital end of the year > Physical productive
capital beg of the year
2.Transaction approach
The conventional or traditional reparation of income statement in comformity with PFRS
In computing net income it requires the determination how much net income was
esrned
It is the direct result of the application of the principle of matching cost with revenue
NI= income - expense

3) Components of Income Statement

Profit or loss section or statement
The following minimum line items must be presented in the profit or loss section (or
separate statement of profit or loss, if presented): [IAS 1.82-82A]
-revenue
-gains and losses from the de-recognition of financial assets measured at -amortized
cost
-finance costs
-Share of the profit or loss of associates and joint ventures accounted for using the
equity method
-certain gains or losses associated with the reclassification of financial assets
-tax expense
-a single amount for the total of discontinued items
Expenses recognized in profit or loss should be analyzed either by nature (raw
materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling,
administrative, etc). [IAS 1.99] If an entity categorizes by function, then additional

information on the nature of expenses at a minimum depreciation, amortization and

employee benefits expense must be disclosed. [IAS 1.104]

SAMPLE OF INCOME STATEMENT/COMPREHENSIVE INCOME STATEMENT

4) Principles of income statement presentation

5) Concept of Income Statement Preparation
6) Irregular Items
Discontinued operation
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Extra ordinary
Unter IAS1 paragraph 87, (issued 1993) Extraordinary Items is required to be disclose in
the income statement separately from the profit or loss from ordinary activities. These
are the transactions that are clearly distinct from ordinary ones.
In 2002, the board decided to eliminate the concept of extraordinary items. Therefore
no items of income and expense are to be presented as arising from the outside the
entitys ordinary activities or called as extraordinary items. The board decided that
the nature or function of a transaction or other event rather than its frequency, should
determine its presentation within the income statement. Eliminating this category also
eliminated the need for random segregation of the effects of related external events.
Today,
Additional line items may be needed to fairly present the entity's results of operations.
[IAS 1.85]
Items cannot be presented as 'extraordinary items' in the financial statements or in the
notes. [IAS 1.87]
Certain items must be disclosed separately either in the statement of comprehensive
income or in the notes, if material, including: [IAS 1.98]
write-downs of inventories to net realisable value or of property, plant and
equipment to recoverable amount, as well as reversals of such write-downs
restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring
disposals of items of property, plant and equipment
disposals of investments
discontinuing operations
litigation settlements
other reversals of provisions

Accounting Changes
Under IAS8: An entity is permitted to change an accounting policy only if the change:

is required by a standard or interpretation; or

results in the
financial
statements
providing
reliable and
more
relevant
information
about the
effects of
transactions,
other events
or conditions
on the
entity's
financial
position,
financial
performance,
or cash flows

7) Interim
Reporting:
What is Interim
financial reporting?
Intrim Reporting
Means that the preparation and presentation of financial information for a period of less
than one year.

8) Segment Reporting:
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