Income Statement (Cambridge International IGCSE Accounting)
Income statements for limited companies
What is the layout of the income statement of a limited company?
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The income statement of a limited company is prepared in the same way it is prepared for that of a sole trader or a partnership business
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It is prepared annually
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It is the first of the three financial statements that must be prepared for limited companies
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The only difference is seen in the finance costs
- Debenture interest and redeemable preference share dividends are included as part of finance costs
- These appear after the profit from operations
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Dividends for ordinary shares and non-redeemable preference shares do not appear on the income statement
Layout of an income statement for a limited company
Worked Example The trial balance of Abrakadabra Limited at 31 March 2024 was as follows:
Abrakadabra Limited
Trial Balance at 31 March 2024Debit
$**Credit
$Revenue 166 000 Inventory at 1 April 2023 6 820 Purchases 65 900 Rent and insurance 10 280 Wages 25 850 Operating expenses 9 600 Fittings at cost 250 000 Provision for depreciation of fittings 75 000 Trade receivables 14 400 Bank 14 965 Trade payables 8 415 4% Debenture (repayable in 10 years) 46 000 Ordinary share capital 80 000 Retained earnings 28 000 Dividends paid on ordinary shares 5 600 403 415 403 415 Additional information:
- Inventory at 31 March 2024 was valued at $7 080
- Depreciation on fittings is to be charged at 20% method per annum using the reducing balance
- Rent includes a payment of $2 700 for the 3 months from 1 March 2024 to 31 May 2024
- Accrued wages at 31 March 2024 were $4 550
- No debenture interest has been paid for the year ended 31 March 2024
- No dividends were outstanding at 31 March 2024
- $2 200 of the retained earnings is to be transferred to a general reserve on 31 March 2024
Prepare the income statement for Abrakadabra Limited for the year ended 31 March 2024.
Answer:
- Identify which balances affect the income statement
Abrakadabra Limited
Trial Balance at 31 March 2024Debit
$Credit
**$Income Statement? Revenue 166 000 IS Inventory at 1 April 2023 6 820 IS Purchases 65 900 IS Rent and insurance 10 280 IS Wages 25 850 IS Operating expenses 9 600 IS Fittings at cost 250 000 Provision for depreciation of fittings 75 000 Trade receivables 14 400 Bank 14 965 Trade payables 8 415 4% Debenture (repayable in 10 years) 46 000 Ordinary share capital 80 000 Retained earnings 28 000 Dividends paid on ordinary shares 5 600 403 415 403 415 Deal with the additional notes and identify how they affect the income statement
Item 1 - The closing inventory will be subtracted as part of the cost of sales
Item 2 - Find the year's depreciation charge
- Find the current net book value
$250 000 - $75 000 = $175 000
- Multiply the net book value by 20%
20% × $175 000 = $35 000
Item 3 - Subtract the prepaid rent from the balance
- Find the cost per month
$2 700 ÷ 3 = $900
- Multiply this by two for the prepaid months (April & May)
$900 × 2 = $1 800
- Subtract this from the amount on the trial balance
$10 280 - $1 800 = $8 480
Item 4 - Add the accrued wages to the balance
$25 850 + $4 550 = $30 400
Item 5- Calculate the debenture interest
4% × $46 000 = $1 840
Item 6- Dividends for ordinary shares do not affect the income statement
Item 7 - Transferring money to the general reserve does not affect the income statement
- Prepare the income statement using the usual layout
- Remember to put the debenture interest after the profit from operations as it is a finance cost
Final answer: Abrakadabra Limited
Final answer: Income Statement for the year ended 31 March 2024Final answer: $** Final answer: $ Final answer: Revenue Final answer: 166 000 Final answer: Less: Cost of sales Final answer: Opening inventory Final answer: 6 820 Final answer:** Purchases ** Final answer: 65 900 Final answer: 72 720 Final answer:** Less: closing inventory ** Final answer: 7 080 Final answer: 65 640 Final answer: Gross profit Final answer: 100,360 Final answer: Less: Expenses Final answer:** Rent and insurance ** Final answer: 8 480 Final answer:** Wages ** Final answer: 30 400 Final answer:** Operating expenses ** Final answer: 9 600 Final answer:** Depreciation of fittings Final answer: 35 000 Final answer: 83 480 Final answer: Profit from operations Final answer: 16 880 Final answer: Debenture interest Final answer: 1 840 Final answer: Profit for the year Final answer: 15 040
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