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Business Processes & Accounting Systems · Week 05

Financial Statements I — Trading Account, Income Statement & LKAS 1

Gross profit via the trading account (cost of sales), net profit via the comprehensive income statement (admin, distribution, finance expenses), and LKAS 1 / IAS 1: components, fair presentation, going concern, accruals, consistency, materiality, offsetting, comparatives, current vs non-current, OCI.

ITE36221 video · 5 min📄 Financial Statements- Session 05.pdf📄 LKAS 1- extracted from IAS plus.pdf📄 Practice questions – PL.pdf

1From trial balance to financial statements

Trial balanceTrading account (gross profit)Income statement (net profit)Statement of financial position (Week 6)

2The trading account → gross profit

The trading account calculates the gross profit earned from buying and selling goods in a period (usually one year).

Cost of sales = Opening inventory + Purchases (+ carriage inwards, import duty − purchase returns) − Closing inventory
Gross profit = Sales (net of sales returns) − Cost of sales
Item Meaning
Opening stock Stock left over from last year. It's the first to be sold this year
Purchases Cost of goods bought this year. Add carriage inwards and import duty; deduct purchase returns (returns outwards)
Closing stock Goods left at year end. They're deducted because they weren't sold this year
Gross profit The profit from buying and selling

Format: trading account for the year ended 31 March 20xx

Rs Rs
Sales xxxx
Less: sales returns (xx)
Less: cost of sales
Opening stock xxx
Purchases xxx
Carriage inwards xxx
Less: purchase returns (xx)
Less: closing stock (xxx)
Cost of sales (xxxx)
Gross profit xxxx
Carriage inwards vs carriage outwards
  • Carriage inwards (on goods bought) is part of cost of sales.
  • Carriage outwards (delivering goods to customers) is a distribution expense.

3The income statement → net profit

The comprehensive income statement calculates the net profit after all expenses for the period. Start from gross profit, add other income (rent received, discount received, interest received), and deduct expenses grouped as:

Expense group Examples
Administration expenses Costs of running the business: office wages, insurance, electricity, rent, stationery, depreciation of office equipment
Distribution (selling) expenses Costs of selling and delivering: advertising, delivery van repairs and petrol, carriage outwards, sales commission, discount allowed
Finance expenses Costs of borrowing: overdraft interest, mortgage or loan interest
🧪 Try it — Trading account & income statement builder

Trading







Other income & expenses




4LKAS 1 / IAS 1 — Presentation of Financial Statements

Objective: prescribe the basis for presenting general-purpose financial statements, so they're comparable with the entity's previous periods and with other entities. It sets the overall requirements, structure guidelines and minimum content.

  • Scope: all general-purpose statements prepared under IFRS, for users who can't demand tailored reports.
  • The objective of financial statements: information about financial position, performance and cash flows, useful for economic decisions.
  • They cover assets, liabilities, equity, income and expenses (including gains and losses), owner contributions and distributions, and cash flows.
  • This helps users predict future cash flows, especially their timing and certainty.

A complete set of financial statements 00:01

  1. Statement of financial position (balance sheet) at the end of the period
  2. Statement of profit or loss and other comprehensive income, as one statement or two
  3. Statement of changes in equity
  4. Statement of cash flows
  5. Notes: significant accounting policies and explanatory notes
  6. Comparative information

Plus a third balance sheet (at the start of the earliest comparative period) after a retrospective policy change, restatement or reclassification. All statements get equal prominence; other titles may be used.

General features

Principle Requirement
Fair presentation and compliance Statements must "present fairly": faithful representation under the Framework's definitions. Complying with IFRS (plus disclosure) is presumed fair. An explicit, unreserved statement of compliance goes in the notes
Going concern Management must assess it. Disclose significant uncertainties. If the entity is not a going concern, don't use the going-concern basis and disclose this
Accrual basis Prepare using accruals, except cash-flow information
Consistency of presentation Keep presentation and classification from period to period, unless circumstances change or a new IFRS requires it
Materiality and aggregation Information is material if omitting, misstating or obscuring it could reasonably influence users' decisions. Present each material class separately; aggregate dissimilar items only if immaterial
Offsetting Don't offset assets and liabilities, or income and expenses, unless an IFRS requires or permits it
Comparative information Disclose prior-period comparatives for all amounts, including relevant narrative. At least two of each primary statement 04:16
Identification Clearly identify the statements and notes. Show the entity name, single or group entity, reporting period, presentation currency, rounding level
Reporting period At least annually. If it changes, disclose why and that amounts aren't fully comparable

Current vs non-current 00:34

Current Non-current
Assets Realised in the normal operating cycle; held for trading; realised within 12 months; cash and cash equivalents (unless restricted) All others
Liabilities Settled in the normal operating cycle; held for trading; due within 12 months; no unconditional right to defer beyond 12 months All others
Exam tip from the lecture 00:34

Split items that straddle 12 months. A loan's instalment due this year is current and the rest is non-current. The same applies to leases. Receivables are current.

  • Format is not prescribed. Assets can go current-first or non-current-first. A net-assets presentation and the UK "long-term financing" format are also acceptable.
  • A classified (current / non-current) balance sheet is normal, unless a liquidity-based presentation is more reliable.

Profit or loss vs other comprehensive income 01:31

Total comprehensive income = Profit or loss + Other comprehensive income (OCI)
  • Profit or loss = total income − expenses, excluding OCI items.
  • OCI = income and expense items not recognised in profit or loss because another IFRS says so. Examples: revaluation of non-current assets, foreign exchange translation, certain pension movements.
  • Total comprehensive income = the change in equity in a period other than from transactions with owners.
  • It can be presented as one combined statement or two separate statements 02:03.
No "exceptional items" 03:40

IAS 1 doesn't use the term "exceptional items". It requires separate disclosure of material items such as restructuring costs and impairment losses, either on the face of the statements or in the notes.

Exam focus

Expect:

  • Prepare a trading account and income statement from a trial balance (classify expenses into admin, distribution, finance)
  • The components of a complete set of financial statements
  • The general features (going concern, accruals, consistency, materiality, offsetting, comparatives)
  • Current vs non-current definitions
  • What OCI is

5Practice questions (course paper)

Q1: Trading account, Araliya Enterprises (year to 31 Dec 2018)
Rs. Rs.
Sales 230,000
Less returns inwards (15,000) 215,000
Purchases 120,000
Less returns outwards (10,000)
Add carriage inwards 5,000
Less closing inventory (20,000)
Cost of sales (95,000)
Gross profit 120,000

It's the first year in business, so there's no opening inventory.

Q2: Trading account, Nuwana Enterprises (year to 31 Mar 2019)
Rs.
Net sales: 469,320 − 16,220 453,100
Opening inventory 52,400 + purchases 394,170 − returns out 19,480 + carriage in 2,490 429,580
Less closing inventory (5,000)
Cost of sales (424,580)
Gross profit 28,520
Q3: Sugathadasa Enterprises (year to 31 Dec 2018)

The trial balance columns are jumbled in the PDF. Reading them back gives Dr = Cr = 484,253, which confirms the figures.

Trading account

Rs.
Net sales: 380,400 − 1,540 378,860
Cost of sales: 41,600 + 188,430 − 3,410 + 3,700 − 44,780 (185,540)
Gross profit 193,320

Expenses: carriage out 2,100 · salaries 61,400 · rent 3,700 · insurance 1,356 · motor 1,910 · office 412 · lighting & heating 894 · general 245 = 72,017

Net profit = 193,320 − 72,017 = 121,303

Carriage in vs carriage out

Carriage inwards goes into cost of sales. Carriage outwards is a selling expense in the income statement.

6Quick revision sheet

Concept Remember it as
Cost of sales Opening stock + purchases (+ carriage in − returns out) − closing stock
Gross profit Net sales − cost of sales
Net profit GP + other income − admin − distribution − finance
Carriage Inwards → cost of sales; outwards → distribution
IAS 1 set SFP · P&L + OCI · SOCE · cash flows · notes · comparatives
Fair presentation Faithful representation; explicit compliance statement
Going concern Assess; disclose uncertainties
Accruals Everything except cash flows
Materiality Could influence decisions; present material classes separately
Offsetting Not allowed unless an IFRS allows it
Comparatives Prior period for all amounts; at least two of each statement
Current Operating cycle / trading / 12 months / cash; no right to defer
OCI Revaluations, FX translation, some pension items
TCI P&L + OCI = change in equity except owner transactions

?Self-check quiz

10 questions on this week. Answer them all, then press Check my answers. Your best and latest scores are saved and shown on the subject page.

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