ACCA Applied Knowledge · Financial Accounting
Statement of Profit or Loss and Other Comprehensive Income for ACCA FA
The statement of profit or loss and other comprehensive income shows a company's income, expenses and profit for a period, then adds other comprehensive income to reach total comprehensive income. To solve questions, start with revenue, deduct cost of sales and expenses, then apply tax, finance costs and OCI items in the correct order.
What this chapter covers
This chapter covers the main performance statement of a company under IFRS Accounting Standards. It shows revenue, cost of sales, gross profit, expenses, finance costs, tax and profit for the year. It then adds other comprehensive income, such as gains on revaluing property, to reach total comprehensive income.
The chapter pulls together adjustments you meet elsewhere in Financial Accounting. Inventory, depreciation, disposals of non-current assets, irrecoverable debts and accruals all end up as lines in this statement. Tax, finance costs and dividends also appear here or in the statement of changes in equity.
It connects directly to the statement of financial position, because every profit figure feeds retained earnings. It also leads into the Section B accounts preparation question, where you build the statements from a trial balance and notes. Consolidated statements use the same layout, so a solid grasp here helps with the consolidations question too.
Financial Accounting has a Section A of 35 two-mark questions and a Section B with two 15-mark multi-task questions, one on accounts preparation. The statement of profit or loss sits at the centre of that accounts question and of many objective test questions on adjustments, formats and equity. Each small adjustment you handle correctly changes profit, and a wrong profit then spoils retained earnings and other figures that depend on it. Mastering this chapter earns direct marks and protects marks elsewhere.
Statement of profit or loss and other comprehensive income: topics in the order to study them
- 1Format of the Statement of Profit or Loss and OCIYou need the layout first, because every later adjustment is a line within it.
- 2Cost of Sales, Inventory Adjustments and Other ExpensesCost of sales is the largest calculation, so learn it while the format is fresh.
- 3Depreciation, Disposals and Irrecoverable Debts in Profit or LossThese are the common expense adjustments that sit inside cost of sales or expenses.
- 4Income Tax, Finance Costs and Dividends in the StatementThese items sit below operating profit, and you must know which are in profit or loss and which are not.
- 5Other Comprehensive Income and Total Comprehensive IncomeOCI builds on a completed profit figure, so learn it once profit is secure.
- 6Statement of Changes in EquityIt brings together profit, OCI, dividends and share issues, so it comes last.
How to prepare Statement of profit or loss and other comprehensive income
Learn the layout first, then practise adjustments in the order they appear in the statement, and finish with timed objective test questions.
- Write out the statement format from memory until you can do it without prompts. Include the OCI section and total comprehensive income.
- Practise cost of sales: opening inventory plus purchases, carriage inwards and returns, less closing inventory. Check each answer.
- Work through depreciation, disposal gains or losses, and irrecoverable and allowance for receivables adjustments, noting which line each one affects.
- Do tax, finance costs and dividends questions. Ask for each item: is it in profit or loss, in equity, or only in the statement of financial position?
- Practise a full trial balance to statements question under time pressure, as the Section B accounts question will require.
- Finish with short objective test questions on each topic. Practise number entry and multiple response types so you can answer them quickly on a phone or screen.
Common mistakes in Statement of profit or loss and other comprehensive income
Treating dividends as an expense in profit or loss
Fix: Remember dividends are a distribution of profit. Show them in the statement of changes in equity only.
Putting a revaluation gain into profit or loss
Fix: Send revaluation gains on property, plant and equipment to OCI and the revaluation surplus in equity.
Getting cost of sales wrong by ignoring closing inventory or carriage inwards
Fix: Lay out opening inventory, purchases, carriage inwards, returns and closing inventory in a fixed order every time.
Confusing the disposal gain or loss with proceeds
Fix: Always work out the carrying amount at disposal first, then subtract it from proceeds.
Using the full receivables allowance as the expense rather than the change
Fix: Expense only the increase in the allowance, or credit the decrease, after the irrecoverable debts write-off.
Leaving out the opening and closing balances in the statement of changes in equity
Fix: Fill in the opening balances, add each movement, then check that the closing balances agree to the statement of financial position.
Last-day revision: Statement of profit or loss and other comprehensive income
- Profit for the year plus other comprehensive income equals total comprehensive income.
- Cost of sales = opening inventory + purchases − closing inventory, with carriage inwards added and returns deducted.
- Gross profit = revenue − cost of sales.
- Closing inventory is valued at the lower of cost and net realisable value.
- Depreciation is an expense in profit or loss; the carrying amount is cost less accumulated depreciation.
- Gain or loss on disposal = proceeds − carrying amount at the date of disposal.
- Irrecoverable debts written off are an expense; a change in the allowance for receivables is also an expense or a reduction in expense.
- Revaluation gains on property, plant and equipment go to other comprehensive income, not profit or loss.
- Ordinary dividends are not an expense; they appear in the statement of changes in equity.
- Income tax expense is in profit or loss, and any unpaid amount is a liability in the statement of financial position.
- Finance costs are shown in profit or loss, normally below operating profit.
- The statement of changes in equity shows opening balance, total comprehensive income, dividends, share issues and closing balance for each component of equity.
Statement of profit or loss and other comprehensive income practice questions
- Kestrel Ltd had opening inventory of $18,000, purchases of $142,000, carriage inwards of $3,000, purchase returns of $5,000 and closing inve…
- Marlow Co has trade receivables of $84,000 before adjustments. It decides to write off an irrecoverable debt of $4,000 and to have an allowa…
- Under IAS 1 Presentation of Financial Statements, which of the following items is presented within other comprehensive income (OCI) in a com…
- At 1 January, Brindle Co had inventory of $42,000. During the year it purchased goods costing $310,000 and incurred carriage inwards of $6,0…
- On 1 January, Delta Co issued $500,000 of 6% loan notes at par. Interest is paid annually in arrears on 31 December. The year end is 30 Sept…
- Vantage Co has an opening trade receivables allowance of $4,200. At the year end, trade receivables are $150,000, of which $6,000 is to be w…
- Under IFRS, which of the following items would be presented within other comprehensive income in a company's financial statements?
- Under IAS 1, which of the following items must be presented in other comprehensive income rather than in profit or loss for the year?
Statement of profit or loss and other comprehensive income in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Statement of profit or loss and other comprehensive income: frequently asked questions
Is other comprehensive income part of profit for the year?
No. Profit for the year is calculated first. Other comprehensive income is added to it to reach total comprehensive income. Items such as revaluation gains on property, plant and equipment go to OCI.
Do dividends appear in the statement of profit or loss?
No. Dividends paid to shareholders are a distribution of profit, not an expense. They appear in the statement of changes in equity.
How does this chapter help in the accounts preparation question?
The Section B accounts question usually asks you to prepare financial statements from a trial balance and adjustments. The statement of profit or loss is the first one you build, and its profit feeds retained earnings in the statement of financial position.
What is the best way to revise this chapter for objective test questions?
Learn the format and the treatment of each item first. Then practise short questions on cost of sales, disposals, receivables and equity. Check each wrong answer for the specific rule you missed.