Presentation of Financial Statements to a case study

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;

(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;

(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

Gain on sale of non-current assets

6,206

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

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