Accounting Business Reporting for Decision Making

CHAPTER 6 Statement of profit or loss and statement of changes in equity 247

any income, expenses or changes in equity, whether it is a faithful representation of the asset or

the liability and of any income, expenses or changes in equity, and whether the information results

in benefits exceeding the cost of providing that information. Factors of uncertainty and unreliable

measurement may result in non-recognition. An entity always has the option to disclose infor-

mation concerning items not recognised.

6.8 Identify presentation formats for the statement of profit or loss.

There is an accounting standard governing the presentation of the statement of profit or loss for

entities that are required to comply with accounting standards. This standard prescribes the line

items that must be disclosed in the statement of profit or loss or in the notes to the accounts, but

permits discretion as to the presentation format.

6.9 Differentiate alternative financial performance measures.

Various profit measures may be used. Gross profit is restricted to revenue less the cost of sales.

Other derivations of profit include:

• profit before and after tax


• earnings before interest


• earnings before interest, tax, depreciation and amortisation


• profit before and after material items


• pro forma earnings


• profit from continuing and discontinued operations.

6.10 Explain the nature of the statement of comprehensive income and statement of changes in equity.

Entities required to comply with accounting standards must present a statement of comprehensive income

and a statement of changes in equity. The statement of comprehensive income reports profit or loss and

other comprehensive income. The statement of changes in equity explains the change in an entity’s equity

for the reporting period. The statement discloses income and expenses recognised in the statement of

profit or loss, income and expenses recognised directly in equity, and transactions with owners as owners.

6.11 Explain the relationship between the statement of profit or loss, the balance sheet, the
statement of comprehensive income and the statement of changes in equity.
The statement of profit or loss reports the profit or loss generated in the reporting period that
belongs to the owners of the business. It is added to the retained earnings from previous periods to
determine the pool of retained earnings available for distribution to owners. Retained earnings is
included in the equity section of the balance sheet as at the end of the period. The statement of com-
prehensive income details the profit or loss for the period (i.e. the statement of profit or loss) as well
as items of income and expense that are not recognised in profit or loss as required as permitted by
accounting standards. These items of income and expense bypass the statement of profit or loss and are
recorded directly in the equity section of the balance sheet. The statement of changes in equity explains
the change in equity from the start to the end of the reporting period. These changes relate to profit or
loss for the period, other comprehensive income and transactions with owners as owners. The state-
ments are also related, given that recognising income and expenses involves simultaneously recog-
nising (or reducing) assets or liabilities.

Key terms

Accrual accounting Transactions and events are recorded in the periods they occur, rather than in the

periods the cash is received or paid.

Accrued expenses Amounts not yet paid for economic benefits used or consumed.

Accrued income Amounts not yet received for goods or services that have been provided.

Accumulated depreciation Total depreciation charges for a particular asset.

Amortisation Allocation of the cost of an intangible asset over its estimated useful life.

Carrying amount (book value) Dollar value assigned to an asset or liability on the balance sheet.