Computation of Various Components of Financial Statements

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Operating expenses include research and development, marketing, general and administrative, amortization of intangible assets i. In addition, when an entity purchases a capital asset, such as a building or equipment, they expense a portion of the asset over a number of years; this is called depreciation. Depreciation expense is an accounting expense that is deducted from net income.

Investing Lesson 4 - Analyzing an Income Statement

Operating income is equal to revenues minus cost of goods sold and operating expenses. In other words, it measures the profits or losses of the day to day operations of the business.


Revenues minus all expenses equals net income profits or losses. The purpose of the income statement is to provide the financial earnings performance of the entity over a specific period of time. It is also referred to as a profit and loss statement or earnings statement.

Components of Income Statement

The format of the income statement components allows for dissecting the revenues, expenses, operating income, and profits of an entity. The income statement is one of three critical company financial statements for investor analysis. These are the amounts owed to lenders and other creditors. Also known as Capital Contribution by the Owner.

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It shows the residual interest in the Net Assets of an entity that remains after deducting its liabilities. For each transaction in the Balance Sheet, the fundamental accounting equation holds:. The Income Statement is one of the components of the financial statement which reports the financial performance of the business over a period of time and comprise of Revenue which comprise of all cash inflows from manufacturing of goods and rendering of services , Expenses which comprise of all cash outflows incurred in the manufacturing of goods and rendering of services and also comprise of all gains and losses which are not attributable in the ordinary course of business.

Excess of Revenues over Expenses result in Profit and vice versa resulting in Loss for the business during that period. Under IFRS, Income Statement also comprises of Other Comprehensive Income which comprise of all changes in Equity except for shareholder transactions and as such can be presented together as a single statement.

This statement is one of the components of the financial statement which reports the amount and sources of changes in Equity Shareholders Investment in the business over a period of time.

Beginners' Guide to Financial Statement

It summarizes the changes in the capital and reserves attributable to Equity holders of the company over the accounting period and accordingly all the increase and decrease during the year when adjusted with the Beginning Balance results in Ending Balance. The statement includes transactions with shareholders and reconciles the beginning and ending balance of each equity account, including capital stock, additional paid-in capital , retained earnings , and accumulated other comprehensive income. The statement basically shows how the composition of equity share capital, other reserves and Retained Earnings has changed over the year.

This statement is one of the components of the financial statement which shows the changes in the financial position of the business on from the perspective of movement of cash into and from the business.

Financial Statements Definition

Cash flow statement bridges that gap and helps various stakeholders of the business to understand the sources of cash and utilization of cash. Basically, there are three sections to the cash flow statement namely:.

The first class of assets is current assets which refer to short-term assets and these kinds of assets are not depreciated. The movement or usages of them are directly charged to the income statement. For example, the usages of inventories are charged as operating expenses or costs of goods sold in the income statement. Some of the current assets are justed move from one accounting item another. For example, accounts receivable are moved to cash in bank or cash on hand when the entity collects the payment from customers. The second types of assets are fixed assets.

These kinds of assets normally refer to assets that use more than one year and with large amounts as well as are not for trading or holders for price appreciation. In other words, fixed assets are the resources based on nature are converted into cash or cash equivalent in more than one year accounting period.

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Yet, the policies should be aligned with current practice or market as well as reflected the real economic value. Fixed assets are decreasing value from period to period because of their usages or because of impairment of their economic value. Depreciation and impairment of fixed assets are charged into the income statement and they report cumulatively in the contra account to fixed assets in the balance sheet which is called accumulated depreciation.

Assets of the entity at the specific period can be calculated by the accumulation of liabilities and equities or total current assets plus total fixed asset. Liabilities are classified into two different types: Current liabilities and Non-current Liabilities.

Current Liabilities refer to the kind of liabilities that expected to settle within 12 months after the reporting date. For example salaries payable are classed as current liabilities because they are expected to pay to an employee in the following month.