Financial Statements of Limited
Companies - Profit and Loss
Account
Financial Statements of Limited
Companies - Profit and Loss
Account
learning objectives
what is profit?
the main elements of the profit and loss account
levels of profit within the profit and loss account a profit and loss account format
elements of the profit and loss account
other profit and loss account disclosure
Session Summary (1) Session Summary (1)
reconciliation of movement in shareholders’ funds
format 1 profit and loss account
profit and loss and the balance sheet profit comparison from the use of various stockvaluation methods
stock value comparison from the use of various stock valuation methods
profit and loss and cash flow
Session Summary (2) Session Summary (2)
describe what is meant by profit (or loss)
outline the structure of the profit and loss account(income statement) of a limited company
classify the categories of income and expenditure that comprise the profit and loss account
appreciate the alternative profit and loss account formats
Learning Objectives (1) Learning Objectives (1)
prepare a profit and loss account
explain the links between the profit and loss accountand the balance sheet, particularly with regard to
the valuation of fixed assets and depreciation
stock and cost of sales
debtors and the doubtful debt provision
explain the links between the profit and loss accountand cash flow
appreciate the subjective aspects of profit measurement
Learning Objectives (2) Learning Objectives (2)
The profit (or loss) of an entity may be considered fromtwo perspectives:
by considering the change in wealth between the startand end of an accounting period:
total assets (TA) - total liabilities (TL) = equity (E) + profit (P) P = TA - TL - E
What is Profit? (1) What is Profit? (1)
by considering the summarisation of all the trading and non-trading transactions through
deducting total costs from total revenues (sales) that have occurred during an accounting period:
profit (P) = total revenue (TR) – total costs (TC)
P = TR - TC
What is Profit? (2) What is Profit? (2)
The Main Elements of the Profit and Loss
Account
The Main Elements of the Profit and Loss
Account
Levels of Profit within the Profit and Loss
Account
Levels of Profit within the Profit and Loss
Account
A Profit and Loss Account Format
A Profit and Loss Account Format
Elements of the Profit and Loss
Account
Elements of the Profit and Loss
Account
extraordinary items
exceptional items
earnings per share
reconciliation of movement in shareholders’ funds
Other Profit and Loss Account Disclosure
Other Profit and Loss Account Disclosure
Reconciliation of Movement in
Shareholders’ Funds
Reconciliation of Movement in
Shareholders’ Funds
Format 1 Profit and Loss
Account
Format 1 Profit and Loss
Account
•
the profit and loss account is closely linked with the balance sheet in two ways:
they both reflect the change in wealth of
the business
most transactions are reflected once in both the
profit and loss account and the balance sheet valuation of the various items within the balance sheetis in accordance with the Companies Acts 1985/1989, accounting concepts and standards
Profit and Loss and the Balance Sheet slide 1
Profit and Loss and the Balance Sheet slide 1
Profit and Loss and the Balance Sheet (1)
Profit and Loss and the Balance Sheet (1)
valuation of assets has a significant impact on the levelof profit (or loss) earned by a business during an accounting period through:
depreciation and fixed assets
cost of sales and stocks
bad and doubtful debts and trade debtors
there are limitations to the profit and loss account, which like the balance sheet is an historical document, primarily due to the impact on costs of the use of alternative methods of valuation of assets and liabilities
Profit and Loss and the Balance Sheet slide 2
Profit and Loss and the Balance Sheet slide 2
Profit and Loss and the Balance Sheet (2)
Profit and Loss and the Balance Sheet (2)
Profit Comparison from the Use of Various
Stock Valuation Methods
Profit Comparison from the Use of Various
Stock Valuation Methods
Stock Value Comparison from the Use of Various Stock
Valuation Methods
Stock Value Comparison from the Use of Various Stock
Valuation Methods
the profit (or loss) earned during an accounting periodis not the same as the cash flow generated during the period
the links between the two measures may bequantified and reconciled
Profit and Loss and Cash Flow
Profit and Loss and Cash Flow