Accounting (Basics) - Lecture 3 COSTS (EXPENSES) AND REVENUES OF ACCOUNTING UNIT AS PART OF PROFIT AND LOSS STATEMENT AND RELATED ACCOUNTING PROCEDURES. Content nCosts (expenses) and revenues nIncome statement (profit and loss statement) nRelated accounting procedures nCash-flow statement nDifference between cost (expenses) – expenditure and revenues - income 2 Costs (expenses) and revenues 3 nThe income statement tracks both revenue, which is the output from the economic activity of the business, and costs (expenses), which are inputs into the economic activity of the business. Revenues nThe revenue is defined as the result (output) of the economic activity of the enterprise achieved by spending of costs (expenses). nRevenues give the sense to economic existence of the enterprise. nThe revenue can influence assets (increasing of assets) or equities (decreasing of equities). n But not every increasing of assets or decreasing of equities must be automatically revenue! n 4 Costs (expenses) nThe cost (expense) is defined as the input into the economic activity of the enterprise with the aim to achieve revenues (outputs). nThe cost (expense) can influence assets (decreasing of assets) or equities (increasing of equities). nNot every decreasing of assets or increasing of equities must be automatically a cost (expense)! 5 Costs (expenses) and revenues nCosts (expenses) and revenues are charged on special accounts in the system of double-entry accounting system. nSystematically they are recorded in the profit and loss statement q(income statement) or (P/L Statement) n Sep 20, 2013 Hackl, Econometrics 6 Profit and loss statement nThe profit and loss statement provides information about the company performance over an accounting period. nThe attention is paid to the structure of the income statement and dynamism of particular components nThe information from the income statement is a very important source material for evaluation of profitability. n 7 Profit and loss statement nif the balance sheet enables us to evaluate whether the company is economically stable, the profit and loss statement tells us about its ability to create enough profit nIf you think of the balance sheet as a snapshot, then you can think of the income statement as a video recording covering the period between before and after pictures n 8 Profit and loss statement nLike the balance sheet, the profit and loss statement is an important source material for analysing the financial management of the company, the objective of which is to evaluate the economics and profitability for a particular period n Revenues – Costs (expenses) = Economic result (Profit/loss) or Net income n 9 Profit and loss statement nThe most important component of the statement is “income on operating activities” (EBIT) because it reflects the efficiency of the company to generate positive net income on company’s main operations 10 Profit and loss statement nThe structure of P/L statement is a little bit more complicated than the structure of the balance sheet. nThe P/L statement is composed gradually with the aim to calculate several partial indicators which represent single parts of economic activity of the enterprise. nThe concrete structure of the P/L statement is as follows: n Sep 20, 2013 Hackl, Econometrics 11 Profit and loss statement nGross profit nOperating profit (EBIT) nFinancial profit / loss nEarnings before tax (EBT) nNon-operating costs and revenues nNet income n n Sep 20, 2013 Hackl, Econometrics 12 Gross profit nThe difference between net sales and the cost of goods sold. nIt includes total revenues and costs of sales. nFor example: qServices ordered by the company, consumption of material, cost of goods sold qRevenues from the goods sold, revenues from own products and services 13 Operating profit nIt includes salaries, rents, utilities, depreciation, advertising costs, administrative costs + gross profit. 14 Financial profit / loss nRevenues from securities, interest revenues nInterest expenses, bank account fees, sold securities and ownership interests 15 Earning before taxes nThe sum of earnings before taxes (including financial prifit or loss) 16 Non-operating costs and revenues nCosts and revenues from extraordinary activity – not such as the core business activity nExtraordinary revenues or costs (expenses) Sep 20, 2013 Hackl, Econometrics 17 Profit and loss statement - sample Profit and loss statement Thousands of … (currency) Gross profit Operating Costs and Revenues Total Operating Profit (EBIT) Financial Costs and Revenues Earnings before Tax (EBT) Non-operating Costs and Revenues Total Sum of Costs and Revenues Tax (19)% Net Income 18 Differences between BS and P/LS nThe basic difference between the balance sheet and the income statement is that the balance sheet records assets and liabilities at a given moment, while the income statement is always related to a given time interval – an overview of resulting operations over a time interval nThe income statement includes flow quantities based on a cumulative basis and their changes at the time do not have to be even n 19 Profit and loss statement nThe P/L statement is - after the balance sheet - the second basic financial statement that must be obligatory compiled to the date of accounting shutter (so called financial statements compilation date). n Sep 20, 2013 Hackl, Econometrics 20 Cash-flow statement nThe primary purpose of the statement of cash flows is to provide information about the state of financial resources at the beginning and at the end of an accounting period nThe statement also shows how particular business operations participate in inflows and outflows of financial resources n 21 Cash and its equivalent nCash, bank account nValuables (stamps, telephone cards, meal vouchers) nCash in transit nCash equivalents, which are defined as liquid financial assets, ie. the assets easily convertible to a known amount of money - the marketable securities (treasury bills, bonds of large banks, certificates) n Sep 20, 2013 Hackl, Econometrics 22 Cash-flow statement nDouble-entry bookkeeping guarantees that the sum of the cashflows from the three main categories (operating, investing, financing activities) equals to the change in cash balances over the accounting period n 23 Why to know the cash-flow statement nNet income is an extremely useful metric in financial analysis; it reflects ongoing profitability. nHowever, since the income statement measures profitability using accrual accounting, it suffers from the limitation of not being able to objectively tell us what is happening to cash during the year. n 24 Difference between cash flow statement and income statement nIncome statement measures revenues and costs (expenses) and at the bottom you can see the profit/loss of the accounting period (net income) n nCash flow statement measures inflows (incomes) and outflows (expenditures) of the money n 25 Expenditure and income nExpenditure is a decrease of money. nIncome is an increase of money. nIncomes and expenditures are shown in cash-flow statement. nCash-flow statement provides information about structure of incomes and expenditures realized during an accounting period by enterprise. 26 Cash-flow statement nThe cash-flow of enterprise is usually divided into cash-flow in operating activity (incomes and expenditures for material, goods, products, from paid wages, etc.), investment activity (incomes and expenditures for fixed tangible and intangible assets) and financial activity (incomes and expenditures for financial assets (securities, deposits, cash, etc.). 27 Cash-flow statement nThe most simple form of cash-flow statement is following: n 28 Cash-flow statement (in thousand of currency) Opening balance of cash Increase of cash (incomes) Decrease of cash (expenditures) Final balance of cash Cash-flow statement nThe statement of cash flows is used for evaluation of company’s financial stability, short-term planning of cash receipts and cash payments, long-term compiling of a financial plan and evaluation of cost-effectiveness of investment variants. n 29