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ACCT 1105 · The Income Statement: Revenue, Expense, Profit

Led by Fra Luca de Pacioli Simulacrum

1 modules 1 module Accounting & Business Updated 6 days ago
The Income Statement…5
  1. Module 5 ○ Open

    The Income Statement: Revenue, Expense, Profit

    Led by Fra Luca de Pacioli Simulacrum

    The question

    The first of the two financial statements you can produce from a trial balance. The module covers the income statement as performance measurement over a period, the principles of revenue recognition (earned, not received) and matching (expense recognised in the same period as related revenue), accruals vs cash basis, the standard structure (Revenue → COGS → Gross Profit → Operating Expenses → Operating Profit → Finance Costs → PBT → Tax → Profit), the three margins, and why profit and cash are not the same number. The exercise applies revenue recognition to specific scenarios.

    Outcome

    The student can produce an income statement from a list of revenues and expenses, apply the revenue recognition and matching principles to specific transactions, calculate gross / operating / net margin, and explain why profit and cash are not the same number. (Income statement)

    Practice scenarios

    Recognising Revenue

    A construction company has just completed a six-month contract on 31 March worth £600,000. Under the contract: a £60,000 deposit was paid on signing in October; £200,000 was paid in two stage payments in December and February; the final £340,000 will be paid in monthly instalments of £20,000 over the next 17 months. Materials cost £180,000 (paid throughout); labour cost £240,000 (paid in monthly wages); overheads £40,000 (rent, fuel, supervision over the six months). Profit on the contract is £140,000. The CEO wants to know: what gets reported in the year-end income statement on 31 March?

    Your goals

    • Apply the revenue recognition principle: when is the £600,000 revenue earned? (Answer: progressively as the work was performed, with the bulk recognised in this financial year as the contract completed.)
    • Identify whether the firm should use the *completed contract* or *percentage of completion* method, and why IFRS effectively requires the latter for long-term contracts.
    • Match expenses against the recognised revenue.
    • Distinguish between revenue recognised (the accounting question) and cash received (the cash-flow question), and explain why the difference is large here.