Date of Submission:
*The objective of the ‘statement of comprehensive income’*
“Statement of comprehensive income” provides information concerning revenue and expenses that is beneficial to the users of the company’s commercial statements. It provides information showing the company’s performance during a specified time. Financial performance shows the profitability of a company. Handlers of financial statements want information in assessing the company’s potential ability to generating cash (Mark, 2018). The statement of comprehensive income can be presented as a single statement or presented in two ways that is an income statement and a statement of comprehensive income. Two separate statements show income statement which shows profit and loss and statement of comprehensive income which starts with profit and loss and shows other income which is not reflected in profit and loss (Mark, 2018)
*Why we prepare an income statement*
The income statement is prepared by companies to disclose the financial information of the company. An income statement shows a prompt of the company’s revenues and expenses. Expenses and revenues are usually in operating activities. An income statement is useful in helping the company to evaluate the past financial performance. The information in the income statement helps the company in predicting possible future performance. The information of expenses, total revenue and total income can be used by the company in assessing and predicting all the possible risks that the company is likely to face. The information on loss and profit in the financial statement is useful in expounding the company’s current sate in terms of the going concern and liquidity. The information in the income statement can be used for equity research, valuation and ratio analysis. The research, analysis and valuation can be used by the company in predicting forthcoming economic decision (Mark, 2018).
*What is performance and what does it mean*
Performance refers to the point at which the company has achieved its set financial objectives. Financial performance denotes to the method of evaluating the outcomes of a corporation’s procedures and policies in financial terms. Financial performance is used by the corporation to weigh its financial health during a specified time. Financial performance can be used as a center of comparing similar firms in the same industry (Mark, 2018).
*Users of financial statements*
Investors use the ‘income statement’ to check if the corporation is making consistent profits. Consistent profits show that the company is viable for making investments in the company. The investors use the income statement in analyzing the corporation’s financial performance. Potential stockholders can use the ‘income statements’ in analyzing the profitability of the company and make the best economic decisions and determine whether they will invest in the company or not. Investors are interested in the profitability and the net sales of the company.
Lenders are interested in the company’s profits so that they can assess and evaluate if the company can pay all the interest expenses on the loaned amount and be in a position to repay all the loan on time. Lenders are interested in the company’s capital resources and liquidity.
It refers to the escalation in assets or a reduction in liabilities increasing the company’s equity. The income arises as a result of enhancement of assets, cash inflows and decrease in liabilities. Income of a company does not include the contributions taken from equity members (Roberts, 2018).
*Recognition of income*
Income is recognized when there is a decrease in a liability or an increase in income. Income is recognized when an escalation in the economic benefits in the future can be measured as a result of a decrease in a liability or an increase in the asset (Roberts, 2018).
*The distinction between revenue and gains.*
Revenue takes place in the progress of the normal business events of a company. Revenues are earned by the company through fees, rent, royalties, dividends, sales and interests. Gains denote an escalation in the economic benefits. Gains may or may not occur in ordinary business activities. Gains include gains on the revaluation of marketable securities and the dumping of non-current properties. Gains are documented in the income statement as net linked expenses while revenues are recorded as the gross amount (Roberts, 2018).
Expenses refer to a reduction in the economic benefits of a company at a certain accounting period. Expenses occur as a result of depletion of assets, cash outflows, incurrences of liabilities which lead to a decrease in the company equity. Expenses result in a reduction in the corporation’s equity. Expenses of a corporation do not include payments to equity members (Roberts, 2018)
*Recognition of expenses*
Expenses are recognized in the income statement when a reduction in the economic benefits of a company in future can be measured as a result of an escalation in liability or a reduction in an asset (Roberts, 2018).
*The distinction between expenses and losses*
Expenses occur in the progress of normal business events of a company. Expenses as usually in the form of depletion of assets or cash outflows. Expenses include wages, inventory, depreciation, cost of sales and plant and equipment. Losses refer to items that lead to a decrease in the economic benefits of a company. Losses may or may not occur as a result of ordinary business activities of a company. Expenses include rent expense, delivery expense, rent expense and advertising expense. Example of a loss includes the sale of a long-lived asset at an amount that is less than the asset’s book value (Roberts, 2018).
“The basis of measurement is the fair value, current cost and value in use” (Robert, 2018). Historical cost is applicable if the financial liabilities and financial assets are evaluated at amortized cost. Fair value shows the expectations of the current market participants concerning the uncertainty, timing and amount of probable cash flows. Current cost shows the current amount that will be paid to acquire an asset (Roberts, 2018).