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The Role of the CFompany’s Financial Statements. Gains and Losses Report

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The Role of the CFompany’s Financial Statements. Gains and Losses Report

Introduction

Accounting is often referred to as the language of business. This is because of the fact that business reports are presented with reference to the earning and the financial position of the accounting entity. the primary purpose of being in business is to make profit. As such, most of the stake holders will be more interested in the profitability of the business than other performance measurements. Financial reporting is therefore, a heart of business reporting. There are several financial statements that are prepared in order to report on the profitability of the business. These include the income statement, the statement of financial position, the cash flow statement, the statement of changes in equity among others (Peterson, 2002). There are guidelines that embody financial reporting. These are usually referred to as the accounting principles. This paper discusses principles of income statement for the month Bonito properties limited for the month of February 2013.

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The income statement is used to presented the profit or loss made by a business in a certain period of time. The profit is referred to as the excess of revenues over expenses incurred by a business. This means that a business whose revenues are less than the expenses will report losses. On the other hand, if a revenues exceed the expenses, the business reports profit.

The following Income statement indicates the profit for the month of January 2013 for Bonito Properties Limited.

Bonito Properties Ltd
Management Accounts
For one month period ended 31st Jan 2013
INCOME STATEMENT
For one month For one month
period ended period ended
28-Feb-13 1-Feb-13
Revenue USD USD
Bonito Villas 150560000-84364500
Bonito Guest Hse. Kakamega guest house 2,000.00
Kabuchai project 29,700.00
Bonito Serene Homes 12,837,782.00
Nzoia project income 10,459,370.99
Tuti land 430,000
Other Income 1,500
Turnover 23,760,352.99
Direct costs
Project expenses phase 1 59,340.00
Project expenses Kabuchai 16,500.00
Phase two
7,577,064.00
Project expenses – Nzoia Scheme 5,376,637.00
workshop expenses 212,550.00
Lukenya Quarry expenses 20,155.00
Tuti land expenses 32,000.00
Kanduyi land Purchase
Kisumu Land Purchase 930,000.00
Kakamega G. Hse 404,702.00
14,628,948.00
GROSS PROFIT 9,131,404.99
ADMINISTRATIVE EXPENSES
Employment:
Salaries and wages (including social security costs) 1,649,520.00
Staff medical insurance nhif 8,020.00
Staff uniform expenses
Staff training/welfare
Pension contributions (nssf) 57,600.00
Total employment costs 1,715,140.00
Other administrative expenses:
Directors’ sitting Allowance
Directors’ credit card 150,000.00
Subscriptions
Vehicle running expenses 59,000.00
Postage and telephone 17,800.00
Entertainment
Fines and penalties
Printing and stationery 12,400.00
Marketing expenses
Professional fees – Architects 120,000.00
Audit fees
Petty cash expense 43,000.00
Procurement costs
Legal fees
Bank charges 65,200.00
Travelling Expenses 12,000.00
Office general expenses
Internet costs 9,280.00
Total other administrative expenses 488,680
Total administrative expenses 2,203,820
OTHER OPERATING EXPENSES
Establishment:
Rent
Electricity and water 19,158.00
Security expenses
Insurance
Expensed assets
Licences
Depreciation of vehicles and equipment
Total other operating expenses
Operating profit 6,927,585
Finance cost 1,444,378.75
Profit before tax 5,483,206
Tax 1,644,962
Profit for the period 3,838,244

Principles applied in the income statement above

Revenue recognition

This is an accounting principle that states that the revenue to be recognized once the goods and/ or services have been transferred to the buyer from the seller. This means that once a selling entity has transferred the ownership of the goods to the buyer, the revenue is supposed to be recognized by the seller. This happens irrespective of whether the seller has received the payment from the buyer or not. In case of a low credit worthiness of the buyer; where the seller expects the buyer to defaults on some payment, the seller provides for a bad debt which is an expense item on the income statement (William & MIlton, 1999). Since Bonito Properties limited is a real Estate company with institutional clients, the provision for bad debt is set at zero since there is almost a hundred percent certainty that all the money owed will be received.

Percentage of completion

This is a principle that has been used to calculate on accrual basis the revenue from some projects. This is because of the construction nature of business where projects take over one accounting year to complete. As such, there is need to accrue income according to the fraction of work completed as at any specific reporting stage. IN this case there has been accruals done for the month of February 2013 affecting the reported incomes from various projects. For instance, the income reported for Bonito Serene homes is arrived at after obtaining and adjusting for construction value against the construction cost to arrive at a ratio of 1: 1.95. This means that the revenue recognized for that particular project is arrived at after obtaining the percentage of completion and adjusting it to report the accrued revenue.

Other operating Income and expenses

Other operating income is a figure that is reported as income though it does not come directly from the operating activities of a company. They can originate from unrealized gain from change in the foreign currency denominated financial instruments that have a relationship with the operating activities of the company. These can arise from such transactions as forward contracts etc. Once a company makes a gain due to such transactions, it is supposed to report in the income statement as other incomes.

Another item on this list is ‘other expenses’. This is a net figure that is reported arising from transaction that are not related to the operating activities of the company. Other expenses are gotten from such transactions as loss on disposal of assets, non-recoverable foreign taxes which are not based on double taxation treaties (Peterson, 2002). It is important to note that these figures are usually reported as net figures and not gross amount. This means that a company may have some non-operational related activities but if the expenses equal the income, the figure do not appear anywhere in the income statement.

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Segment reporting

This is a principle that indicates that companies involved different operational but related activities. Each segment of project is reported separated from other projects. This means that it is possible to easily indicate which segment is running at a loss or which is making more profits. This helps in evaluating the viability of projects where a project that operates at a loss is considered for closure. In bonito Properties, there are two segments; Property development and steel and timber fabrication. The income statement shows that the property development is running at a profit while the steel and timber fabrication department is running at a loss.

Materiality

Often an accountant is allowed to violate the an accounting principle or a guideline in some specific reporting items. An accountant is required to make some judgments if need be violate some rule as long as the effects of the judgment does not materials understate or misstate the financial statements. For instance, in Bonito properties limited a purchase of a printer at $240 has been expensed in the month of February whereas its useful life is estimated to be three years. This is considered an immaterial judgment since an allocation of $80 as a depreciation expense in one year or its omission would not materials understate or overstate the income statement.

Conclusion

It has been seen that there are general guidelines which are followed when preparing financial statements. These general rules often referred to as generally accepted Accounting principles offer framework under which accounting reporting is done. These principles are therefore, considered very useful in regulating the practice of financial reporting.

References

Peterson, H. (2002). Accounting for fixed Assets. New York: John Wiley & Sons.

William, K., & MIlton, F. (1999). Cost Accounting. Houston : Dame Publications.

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