Question 1: Format for the Income Statement
a) Paragraphs 81, 82, 87, 91 and 92
b) List of Items
Paragraph 81. As a minimum, the face of the income statement shall include line items that present the following amounts for the period:
(a) revenue;
(b) finance costs;
(c) share of the profit or loss of associates and joint ventures accounted for using the equity method;
(d) tax expense;
(e) a single amount comprising of (i) the post‑tax profit or loss of discontinued operations and (ii) the post‑tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; and
(f) profit or loss.
Paragraph 82. The following items shall be disclosed on the face of the income statement as allocations of profit or loss for the period:
(a) profit or loss attributable to minority interest; and
(b) profit or loss attributable to equity holders of the parent.
Paragraph 87. Circumstances that would give rise to the separate disclosure of items of income and expense include:
(a) 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;
(b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.
Paragraph 91. The first form of analysis is the nature of expense method. Expenses are aggregated in the income statement according to their nature (for example, depreciation, purchases of materials, transport costs, employee benefits and advertising costs), and are not reallocated among various functions within the entity. This method may be simple to apply because no allocations of expenses to functional classifications are necessary. An example of a classification using the nature of expense method is as follows:
Revenue X
Other income X
Changes in inventories of finished goods and work in progress X
Raw materials and consumables used X
Employee benefits expense X
Depreciation and amortisation expense X
Other expenses X
Total expenses (X)
Profits before income tax X
Paragraph 92. The second form of analysis is the function of expense or ‘cost of sales’ method and classifies expenses according to their function as part of cost of sales or, for example, the costs of distribution or administrative activities. At a minimum, an entity discloses its cost of sales under this method separately from other expenses. This method can provide more relevant information to users than the classification of expenses by nature, but allocating costs to functions may require arbitrary allocations and involve considerable judgement. An example of a classification using the function of expense method is as follows:
Revenue X
Cost of sales (X)
Gross profit X
Other income X
Distribution costs (X)
Administrative expenses (X)
Other expenses (X)
Profit before income tax X
Question 2: Application of AASB 101
Waterworks Limited
Operation Statement
For the Year ending 30 June 2006
Actual 2006
Actual 2005
Income
Revenue
3,224,852
1,399,357
Interest Revenue
540
922
Profit from Discontinued Operations
2,338,102
915,929
Government Payment of Outputs
5,484
9,416
Other Income
18,164
0
Gain on sale of non-current assets
6,206
0
Total Income
5,593,348
2,325,624
Expense
Changes in inventories of finished goods and work in progress
363,971
399,970
Raw materials and consumables used
1,276,189
558,184
Employee benefits expense
1,013,350.00
759,881.00
Depreciation and amortisation expense
129,268
111,687
Interest Expense
26,997
29,149
Administration Expense
52,534
62,003
Operating Expense
139815
109861
Other Expenses
88603
101298
Profit before income tax
3,090,727
2,132,033
Tax Expense
137,621
12,607
Total Expenses
2,953,106
2,119,426
Operating Surplus (Deficit)
2,640,242
206,198
Question 2: Justification of Expense Method
Compared to indirect method, expense method is provides simple and comprehensive income statement format. This will not only aid readability and understanding of professionals but more importantly favor the interest of the general public regarding corporate performance. The indirect method shows complicated and blurred structure where similar items are motivated by also distorted belief that manufacturing-related income and expenses should be de-classified to administrative and marketing income and expenses. On the contrary, expense method enables organized presentation and summarized the dealing of the accounting period that enhances functionality. Negative values are also reduced to a large extent and also normal operational income/ expenses are de-classified to gains, those arise from joint ventures and disposal of assets where normal operations of the company is in question. Therefore, the expense method can present the true position and performance of the company rather just giving possible loopholes for users to arrive at misleading conclusions using the hard-to-understand statements.
Question 3: Analysis of Aggregation of Income/ Expense Accounts
Individual Components
Income
Revenue
Revenue from operating activities
Interest Revenue
Interest Revenue
Profit from Discontinued Operations
Transferred manufacturing costs
Government Payment of Outputs
Government subsidies
Other Income
Insurance recoveries
Gain on sale of non-current assets
Gains on the sale of non-current assets
Total Income
Summation of these items
Expense
Changes in inventories of finished goods and work in progress
Opening inventory work in progress less closing inventory work in progress
Raw materials and consumables used
Opening inventory in raw materials add purchases and the total is deducted to closing inventory in raw materials
Employee benefits expense
Payroll tax(in both manufacturing and administration), direct labor, labor accrued, superannuation, safety gear, staff training, uniforms, wages and worker’s compensation
Depreciation and amortisation expense
Depreciation of plant and other assets
Interest Expense
Interest expense
Administration Expense
Accounting fees, advertising, bad debts, bank fees and charges, cleaning, consumables, drafting, entertainment, fees and ;licenses, filing fees, gas, first aid supplies, printing and stationery, repairs and maintenance, security, travel and telephone
Operating Expense
Freight, consumables and electricity
Other Expenses
Hire plant and equipment, rent on lands and buildings
Profit before income tax
Summation of the above items
Tax Expense
Tax expense
Total Expenses
Difference of PBIT Expense and Tax Expense
Operating Surplus (Deficit)
Difference between Income and Expense
Credit:ivythesis.typepad.com
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