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Understanding Comprehensive Income Statements

May 6, 2025

Unit 29: Statement of Comprehensive Income

1. Purpose of a Statement of Comprehensive Income

  • Definition: A financial document showing a firm's income and expenditure over a specific time period.
  • Profit: Money remaining after all costs have been subtracted from revenue.
  • Gross Profit: Calculated as sales revenue minus the cost of sales.
  • Operating Profit: Gross profit minus expenses.

2. Retained and Distributed Profit

  • Distributed Profit: Profit returned to the business owners.
  • Retained Profit: Profit kept within the business for future use.
  • Dividend: Share of profit paid to shareholders.

3. Components of the Statement of Comprehensive Income

  • Revenue: Money received from selling goods and services.
  • Cost of Sales:
    • For manufacturers: Includes costs such as raw materials and factory worker wages.
    • For retailers: Includes the cost of buying inventory.
  • Gross Profit: Revenue minus the cost of sales.
  • Administrative Expenses: General overheads like office salary and stationery supplies.
  • Other Operating Expenses: Expenses not included in administrative expenses, e.g., office supplies, postage.
  • Selling Expense: Costs directly related to selling products, e.g., sales commissions, advertising.
  • Operating Profit: Calculated as gross profit minus operating and administrative expenses.
  • Finance Cost: Interest paid if the business borrows money.
  • Profit for the Year: Operating profit minus finance cost, before taxation.
  • Profit for the Year After Tax: Subtract tax from the profit for the year.

4. Use of the Statement of Comprehensive Income in Decision Making

4.1 Investment Decision

  • Used by businesses to determine investment amounts.

4.2 Cost Analysis

  • Shows changes in costs throughout the year.

4.3 Basis for Future Forecasts

  • Provides a foundation for making business forecasts.

4.4 Making Comparisons

  • Used by investors to decide where to invest funds.

5. Nature and Importance of Profit

  • Normal Profit: Minimum profit necessary to retain the interest of business owners.
  • Importance: Acts as a measure of business performance.