Statement of Financial Performance

By Colin Nicholson

Animportant accounting document is the Statement of Financial Performance, also simply called the Income Statement. It used to be known as the Profit and Loss Statement. This is a so-called flow statement in the sense that instead of taking balances at the end of the year, it records the magnitudes of the flows of revenues, costs and profits through the year.

The basic idea is very simple. At the top of the statement will be the total sales revenue for the year. Below that will be the total expenses incurred in making those sales of goods and services through the year. Subtracting the expenses from the sales revenue leaves the profit for the year. This will be shown before income tax, then on another line the income tax expense for the year is shown and after that the profit after tax.

The basic form of a Statement of Financial Position is:

Revenue and other income, less expenses (they will be itemised in categories)
=Profit before taxation

Less income tax expense
= Profit after tax

In practice, there will be some complications. Also, there are some industries such as banking and insurance that may have very specific industry variations in the accounting standards that drive the form of these statements.

One common complication arises if the company has partly-owned subsidiaries. Then there will be a further item to show the portion of profit that belongs to minority shareholders in those subsidiaries. This is subtracted from the total profit to leave the profit that is attributable to shareholders of the company.

Colin Nicholson's books: Building Wealth in the Stock Market and The Psychology of Investing may be purchased from Colin's website www.bwts.com.au and good bookstores). Contact Colin at colin@bwts.com.au or through his web site where you may join the list to receive his free email newsletter.