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Income Statement, also referred to as Profit and Loss (P&L) Statement
shows an entity's results of operations for a particular period.
It presents an entity's income and expenses, and the resulting net income or net loss.
Explanation and Pointers
1. An income statement shows the net income or net loss of a business. This is achieved
by deducting all expenses from all income.
2. The income statement complies with the accrual basis of accounting. Income is
recognized when earned regardless of when collected. Expenses are recognized when
incurred regardless of when paid.
This means that income and expenses presented in the income statement have been earned
and incurred, respectively. Nonetheless, it does not mean that they have all been collected or
paid.
3. International accounting standards suggest that companies should present other
comprehensive income in their financial statements. A Statement of Comprehensive
Income shows the contents of an income statement followed by a list of "other
comprehensive income".
4. Other comprehensive income includes gains and losses that cannot be reported as
profit and loss, such as unrealized gains and losses, and revaluation surplus. This is
taken up in higher financial accounting studies.
5. When the company does not have other comprehensive income, the contents of the
income statement and the statement of comprehensive income are the same. In any
case, international accounting standards favor the use of the title "Statement of
Comprehensive Income".
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2. Income increases capital. Expenses decrease it. Net income is equal to income minus
expenses. Hence, net income would increase the capital account. If expenses exceed
income, there is a net loss. In such case, net loss will decrease the capital account.
3. Notice that the net income is the bottom-line amount in the company's Income
Statement.
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shows the movement in the Cash account of a company.
It presents cash inflows (receipts) and outflows (payments) in the three activities of
business: operating, investing, and financing.
Accountants follow the accrual basis in measuring income and expenses. However,
some users are particularly interested in the cash transactions of the company; hence
the need to present a Statement of Cash Flows.
Explanation and Pointers
1. Statement of Cash Flows presents the inflows and outflows of cash in the different
activities of the business, the net increase or decrease in cash, and the resulting cash
balance at the end of the period. Cash inflows refer to receipts of cash while cash
outflows to payments or disbursements.
2. Cash inflows and outflows are classified in three activities: operating, investing, and
financing.
Operating activities refer to the main operations of the company such as rendering of
professional services, acquisition of inventories and supplies, selling of inventories for
merchandising and manufacturing concerns, collection of accounts, payment of
accounts to suppliers, and others. Generally, operating activities refer to those that
involve current assets and current liabilities.
Investing activities may be summed up as: "where the company puts its money for longterm purposes", such as acquisition of property, plant and equipment; and investment in
long-term securities. Selling these properties are also considered investing activities. In
general, investing activities include transactions that involve non-current assets.
Financing activities refer to: "where the company gets its funds", such as investment of
the owner/s, and cash proceeds from bank loan and other long-term payables. The
payment of such items (i.e. withdrawal of owner/s and payment of loans) are also
financing activities. Generally, financing activities include those that affect non-current
liabilities and capital.
3. All inflows are presented in positive figures while all outflows in negative (in
parentheses).
4. After inflows and outflows are presented, the net increase or decrease in cash is
computed. Then it is added to the beginning balance of cash to get the balance at the
end. Easy, right? In simple sense, this report presents the cash balance at the
beginning of the period, the changes during the period, and the resulting balance at
the end of the period.
5. Notice that the cash balance at the end, $ 21,000, is the same as the cash balance
presented in the company's Balance Sheet.
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