Accounting Business Reporting for Decision Making

CHAPTER 6 Statement of profit or loss and statement of changes in equity 217

Chapter 6 preview

In this chapter, we examine the financial statement that reflects the success of a business in generating

profits from its available resources during a specified time period. This statement is referred to as the

‘statement of profit or loss’. Other terms used to describe this statement are the ‘profit or loss statement’,

‘income statement’ and the ‘statement of financial performance’. The importance of this statement in an

overall assessment of the financial wellbeing of an entity will be discussed. We also examine the state-

ment of comprehensive income and the statement of changes in equity. The statement of comprehensive

income commences with the profit or loss for the reporting period, as reported in the statement of profit

or loss, and includes other income and expense items that are required by accounting standards to be

taken directly to equity. The statement of changes in equity explains movements in equity, hence assets

and liabilities, from the beginning to the end of the reporting period.

6.1 Purpose and importance of measuring

financial performance

LEARNING OBJECTIVE 6.1 Explain the purpose and importance of measuring financial performance.

Profit or loss, a measure of financial performance, is an important item in financial statements. Profit

reflects the outcome of an entity’s investment and financing decisions. An entity should periodically

report its performance to enable internal and external users to make informed decisions. The profit or

loss will inform internal decisions such as the entity’s pricing of goods and services and the need to

review cost structures. The profit or loss will inform external decisions such as whether or not to invest

in, or lend to, the business. An entity that generates losses rather than profits is not sustainable.

Nicholas Cash commenced a sole trader business, Advantage Tennis Coaching (ATC) (see) illustrative

example 3.1. ATC’s financial statements after one month of operations were provided as an example of finan-

cial statements for a small business. The statement of profit or loss of ATC was further analysed in illustrative

example 4.5 which is reproduced as illustrative example 6.1. The statement of profit or loss identifies that the

business has generated a profit of $16 370 for the one-month period ended 30 September 2016. Assuming the

financial information for September 2016 is representative, the profit suggests that the owner, Nicholas Cash, is

operating a financially viable business with fees from coaching exceeding the expenses associated with deliv-

ering the coaching. A lender would be reasonably confident in the ability of the business to support a small loan

to purchase ball machines. It would be useful to compare the profit this month to that of future months to better

evaluate the performance of the business. Comparing the profit with the equity and the assets in the business

used to generate the profit will allow Nicholas Cash to better assess the success of his business.

ILLUSTRATIVE EXAMPLE 6.1

A statement of profit or loss

Advantage Tennis Coaching

Statement of profit or loss for the month ending 30 September 2016

Income

Coaching fees $22 300

Expenses

Marketing

Wages

Telephone

Rent

Electricity

$ 2 000

2 200

280

1 000

450 5 930

Profit $16 370