Week 1 notes - Income Statement The purpose of the income...

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Income Statement The purpose of the income statement is to report the success or failure of the entity’s operations for a period of time. Income Statements are dated ‘for the month ended 31 October 2011’. The income statement lists the entity’s income (revenues and gains) and its expenses. The profit/loss is determined by deducting expenses from income. This result is the bottom line. Why are financial statement users interest in the bottom line? Managers allocate resources based on their beliefs about future performance. Investors are interested in past profit because it provides some indication about future profit. If more profitable will invest more funds. Creditors use income statement to evaluate future performance. When a bank lends money it does so because it seeks to be repaid in the future. Statement of Changes in Equity Reports the total income for the period and other changes in equity, such as adjustments to retained earnings for changes in accounting standards, changes in accounting policies and corrections of errors. Statement of changes in equity must also report details of transactions with owners of the company (Share capital movements and dividend payments) and a reconciliation of the movement in each component of equity. Retained Earnings is the accumulated profit that has not distributed as dividends to the owners. This is important, as it is the ling between the income statement and the statement of financial position. Statement of changes in equity shows: Profit for the current period (same as profit form income statement) The amount of retained earnings Dividends (Reduce equity because they are a distribution to owners Statement of Financial Position Reports the assets and the claims to those assets at a specific point in time. Claims are divided into two categories: claims of creditors and claims of owners. Claims of creditors = liabilities and claims of the owners is equity or shareholders equity. This is basic accounting equation. Assets = Liabilities + Equity Equity comprises of two parts: 1. Share Capital and 2. Retained Earnings and Reserves. Share capital results when the entity issues shares. The amount of retained earnings reported in the statement of financial position at the end of the period is the amount of retained earnings at the beginning of the period, plus profit after tax for the period, less and amount distributed as dividends in the period. Reserves also form part of equity. Some reserves are accumulated profit and result form transferring amounts of retained earnings to reserves. Other reserves result from the application of account standards. Creditors use the statement of financial position as another source of information to determine the likelihood that they will be repaid. They evaluate the nature of an entity’s assets and liabilities eg. Does it have assets that could be easily sold to repay debt.
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Week 1 notes - Income Statement The purpose of the income...

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