FINANCIAL ACCOUNTING AND REPORTING

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ACCOUNTING PROCESS

Steps in the Accounting Cycle – There are 9 basic steps in the accounting cycle, which includes 2

phases known as recording and summarizing.

RECORDING PHASE

1. Analyzing the transaction (business document)– This is where the accountant gathers

information from source documents and determines the impact of the transaction on the financial

position as represented by the equation “assets equals liabilities plus equity”.

2. Journalizing – This is the process of recording the transactions in the appropriate journals. A

journal is a chronological record of transactions also known as the book of original entry.

Although all transactions could be recorded in the general journal, it is more efficient to use

special journals in recording a large number of like transactions. Special journals that enterprises

usually use are:

1. Sales Journal – Only sales of merchandise on account are recorded.

2. Cash receipts journal – All types of cash receipts are recorded.

3. Purchase journal – Used to record all purchases on account (merchandise, equipment

and supplies).

4. Cash disbursement journal – All payments of cash for any purpose are recorded.

Type of journal entries according to form:

1. Simple journal entry – One which contains a single debit and a single credit element.

2. Compound journal entry – One which has two or more elements and often representing

two or more transactions.

Accounts are the storage units of accounting information and used to summarize changes in

assets, liabilities and equity including income and expenses. The following are a broad

classification of kinds of accounts:

1. Real account – Statement of financial position or so called permanent accounts. These

accounts are not closed and carryover to the next accounting period. (ex. Cash, AR and

PPE)

2. Nominal account – Income statement or temporary capital accounts. These accounts are

closed at the end of the accounting period. (ex. Sales and expenses)

3. Mixed account – A combination of real and nominal accounts. (ex. Prepaid expenses)

4. Clearing account – Holds temporarily certain information pending transfer to other ledger

accounts.

5. Controlling account – The general ledger account that summarizes the detailed information

in a subsidiary ledger.

6. Suspense account – Is an account that holds temporarily certain information pending for

disposition.

7. Reciprocal account – Has a counterpart in another book with in the entity or in another

ledger or another entity.

8. Principal account – An account that is independent or can stand alone.

9. Auxiliary account – An account that cannot stand alone and are technically neither assets,

liabilities nor income and expenses.

10. Summary account

3. Posting – It is the process of transferring data from the journal to the appropriate accounts in the

general ledger and subsidiary ledger. This process classifies all accounts that were recorded in

the journals.

Kinds of ledgers

1. General ledger – Includes all the accounts appearing on the financial statements.

2. Subsidiary ledgers – Affords additional detail in support of certain general ledger accounts.

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SUMMARIZING PHASE

4. Preparing the unadjusted trial balance – A list of general ledger accounts with their respective

debit or credit balance. The purpose of the unadjusted trial balance is to provide evidence that

the total debits in the general ledger equal the total credits and prepares the accounts for

adjustments.

5. Preparing adjusting entries – To take up accruals, expiration of prepayments and deferrals,

estimations and other events often not signaled by new source documents. Adjusting entries are

made at the end of each accounting period. The concepts involved behind adjusting entries are

ACCRUAL, MATCHING OF COSTS AGAINST REVENUE and ACCOUNTING PERIOD.

Typical Adjusting Entries classified according to timing of cash flow.

1. Prepayments and Deferrals – The cash flow precedes the revenue or the expense

recognition.

Prepaid Expenses

Asset Method Expense Method

Prepaid expense (asset) xx Expense xx

Cash xx Cash xx

Adjustment:

Expense xx Prepaid expense (asset) xx

Prepaid expense xx Expense xx

Deferred or Unearned Revenue

Liability Method Income Method

Cash xx Cash xx

Unearned Income (liab.) xx Income xx

Adjustment:

Unearned Income xx Income xx

Income xx Unearned Income (liab.) xx

2. Accruals – Income or expense recognition precedes the cash flow.

a. Accrued Income – Income earned but not yet received. A receivable is always debited

and income is recognized (credited)

b. Accrued expenses – Expenses incurred but not yet paid. An expense is recognized

(debited) and a liability is always credited.

3. Estimates – Adjusting entries that do not involve cash flows.

a. Doubtful accounts – The expense to be matched against credit sales.

b. Depreciation – Allocation of the cost of fixed assets as expense over its useful life

4. Ending inventory – An adjustment to set up the year-end physical count of the inventory.

This only applies if the PERIODIC INVENTORY SYSTEM IS USED.

6. Preparing the financial statements – The most important part of the summarizing phase, this is

where the processed information is communicated to external users.

Basic financial statements

a. Statement of financial position

b. Income statement or a statement of comprehensive income

c. Statement of changes in equity

d. Statement of cash flows

e. Notes and disclosures

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7. Preparing the closing entries – Recorded and posted for the purpose of closing all nominal or

temporary accounts to the income summary account and the resulting net income or loss is

afterwards closed to the capital or retained earnings account.

8. Preparing the post closing trial balance – A listing of general ledger accounts and their

balances after closing entries have been made. The post closing trial balance is the same with

the year-end statement of financial position, the only difference is that valuation accounts like

allowances for assets are found in the credit side instead of being deducted from the related

asset account.

9. Preparing reversing entries – The last and optional step in the accounting cycle. Reversing

entries are made at the beginning of the new accounting period to reverse certain adjusting

entries from the succeeding accounting period.

The purpose of reversing entries is a matter of convenience for accruals and consistency for the

adjustments in the following year for prepaid expenses and deferred income when the income

statement method was used to record the cash flow.

Once again, reversing entries will only apply to the following but remember that they are not

necessary and only optional:

1. Accrued income

2. Accrued expense

3. Prepaid expense, only if the expense method was used in recording the payment

4. Unearned income, only if the income method was used in recording the collection

Accrued Income Prepaid expense (Exp. Method)

12 mos. rental at 100 per month beginning

Nov. 1, 2016.

18 mos. rental at 100 per month beginning

Nov. 1, 2016

12/31/16 Adjustment: 11/1/2016

Rent Receivable 200 Rent Expense 1,800

Rent Income 200 Cash 1,800

1/1/2017 Reversing entry: 12/31/2016 Adjustment:

Rent Income 200 Prepaid Rent 1,600

Rent Receivable 200 Rent Expense 1,600

After the reversal, the rent receivable account

will have a balance of ZERO and the rent

income account will have a DEBIT balance of

200. Hence the collection of 1,200 will be

recorded as follows:

The adjustment under the expense method will

be for the unused portion or the prepayment of

1,600. If the asset method was used, the

adjustment would have been for 200 or the

portion for the expense.

10/31/2017 1/1/2017 Reversing entry:

Cash 1,200 Rent Expense 1,600

Rent Income 1,200 Prepaid Rent 1,600

After the reversing entry, the 1600 is once

again expensed and the 12/31/2017 adjusting

entry will be as follows:

Prepaid rent 400

Rent Expense 400

If the reversing entry was not prepared, the

adjustment would have been a debit to Rent

expense and credit to prepaid rent for 1,200

which is the adjustment used if the ASSET

METHOD was used.

END

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FINANCIAL ACCOUNTING AND REPORTING

The Conceptual Framework for Financial Reporting

PURPOSE AND STATUS OF THE FRAMEWORK

The IASB Framework for the Preparation and Presentation of Financial Statements describes the

basic concepts by which financial statements are prepared. The Framework serves as a guide to

the FRSC in developing accounting standards and as a guide to resolving accounting issues that

are not addressed directly in Philippine Accounting Standards or Philippine Financial Reporting

Standards or Interpretations. The purpose of the framework as outlined is to:

a) To assist the Board in the development of future IFRSs and in its review of existing

IFRSs

b) To assist the Board in promoting harmonisation of regulations, accounting standards

and procedures relating to the presentation of financial statements by providing a

basis for reducing the number of alternative accounting treatments permitted by

IFRSs

c) To assist national standard-setting bodies in developing national standards;

d) To assist preparers of financial statements in applying IFRSs and in dealing with

topics that have yet to form the subject of an IFRS

e) To assist auditors in forming an opinion on whether financial statements comply with

IFRSs

f) To assist users of financial statements in interpreting the information contained in

financial statements prepared in compliance with IFRSs

g) To provide those who are interested in the work of the IASB with information about

its approach to the formulation of IFRSs.

This Conceptual Framework is not an IFRS and hence does not define standards for any particular

measurement or disclosure issue.

Scope of the Framework:

The Objective of general purpose financial reporting;

Qualitative characteristics of financial information

Underlying assumption

The definition, recognition and measurement of the elements of the financial

statements

Concepts of capital and capital maintenance.

The Objective of Financial Reporting

The objective of general purpose financial reporting is to provide financial information about

the reporting entity that is useful to existing and potential investors, lenders and other

creditors in making decisions about providing resources to the entity. Those decisions

involve buying, selling or holding equity and debt instruments, and providing or settling

loans and other forms of credit.

General purpose financial reports provide information about the financial position of a

reporting entity, which is information about the entity’s economic resources and the claims

against the reporting entity. Financial reports also provide information about the effects of

transactions and other events that change reporting entity’s economic resources and

claims.

Financial performance reflected by accrual accounting

Accrual accounting depicts the effects of transactions and other events and circumstances on a

reporting entity’s economic resources and claims in the periods in which those effects occur, even

if the resulting cash receipts and payments occur in a different period.

Qualitative Characteristics of Useful Financial Information

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These characteristics are the attributes that make the information in financial statements

useful to investors, creditors, and others. The Framework identifies “fundamental” and

“enhancing” qualitative characteristics:

Fundamental Characteristics

Relevance – Information in financial statements is relevant when it is capable of making a

difference in the decisions made by the users.

Ingredients of relevance:

Predictive Value – Information can help users increase the likelihood of correctly predicting

or forecasting the outcome of certain events.

Feedback Value – Information can help users confirm or correct earlier expectations.

Note that the predictive and confirmatory roles of information are interrelated.

Materiality – Information is material if omitting it or misstating it could influence decisions that users make on the basis of

financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance

based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual

entity’s financial report.

Faithful Representation – Financial reports represent economic phenomena in words and

numbers. To be useful, financial information must not only represent relevant phenomena, but it

must also faithfully represent the phenomena that it purports to represent.

Ingredients of Faithful Representation

Complete – A complete depiction includes all information necessary for a user to

understand the phenomenon being depicted, including all necessary descriptions and

explanations.

Neutral – A neutral depiction is without bias in the selection or presentation of financial

information. A neutral depiction is not slanted, weighted, emphasised, de-emphasised or

otherwise manipulated to increase the probability that financial information will be received

favourably or unfavourably by users

Free from error means there are no errors or omissions in the description of the

phenomenon, and the process used to produce the reported information has been selected

and applied with no errors in the process.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics that

enhance the usefulness of information that is relevant and faithfully represented.

Comparability is the qualitative characteristic that enables users to identify and understand

similarities in, and differences among, items.

Verifiability – helps assure users that information faithfully represents the economic

phenomena it purports to represent. Verifiability means that different knowledgeable and

independent observers could reach consensus, although not necessarily complete

agreement, that a particular depiction is a faithful representation.

Timeliness – means having information available to decision-makers in time to be capable

of influencing their decisions.

Understandability – Classifying, characterising and presenting information clearly and

concisely makes it understandable.

The cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be provided by financial reporting.

Reporting financial information imposes costs, and it is important that those costs are justified by

the benefits of reporting that information. There are several types of costs and benefits to consider.

Underlying Assumptions (Postulates)

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The Framework sets Going Concern as the only underlying assumption meaning, financial

statements presume that an enterprise will continue in operation indefinitely or, if that presumption

is not valid, disclosure and a different basis of reporting are required.

The new FRSC conceptual framework mentions going concern as the only underlying assumption

(previously Accrual was included). However, it is widely believed that inherent traits of the

financial statements are the basic assumptions of:

Accounting Entity. The business is separate from the owners, managers, and employees

who constitute the business. Therefore transactions of the said individuals should not be

included as transactions of the business.

Time Period. Financial reports are to be prepared for one year or a period of twelve

months.

Monetary unit. There are two aspects under this assumption

a. Quantifiability of the peso, meaning that the elements of the financial statements

should be stated under one unit of measure which is the Philippine Peso.

b. Stability of the peso, means that there is still an assumption that the purchasing power

of the peso is stable or constant and that instability is insignificant and therefore

ignored.

The Elements of Financial Statements

Financial statements portray the financial effects of transactions and other events by grouping

them into broad classes according to their economic characteristics. These broad classes are

termed the elements of financial statements.

The elements directly related to financial position and their definition according to the

framework are:

Asset- A resource controlled by the enterprise as a result of past events and from which

future economic benefits are expected to flow to the enterprise.

Liability- A present obligation of the enterprise arising from past events, the settlement of

which is expected to result in an outflow from the enterprise of resources embodying

economic benefits.

Equity- The residual interest in the assets of the enterprise after deducting all its liabilities.

The elements directly related to performance and their definition according to the framework

are:

Income- Increases in economic benefits during the accounting period in the form of inflows

or enhancements of assets or decreases of liabilities that result in increases in equity, other

than those relating to contributions from equity participants.

Expense- Decreases in economic benefits during the accounting period in the form of

outflows or depletions of assets or incurrence of liabilities that result in decreases in equity,

other than those relating to distributions to equity participants.

Recognition of the Elements of Financial Statements

Recognition is the process of incorporating in the financial statements an item that meets the

definition of an element and satisfies the following criteria for recognition:

It is probable that any future economic benefit associated with the item will flow to or

from the enterprise; and

The item’s cost or value can be measured with reliability.

Based on these general criteria:

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An asset is recognized in the statement of financial position when it is probable that the

future economic benefits will flow to the enterprise and the asset has a cost or value that

can be measured reliably.

A liability is recognized in the statement of financial position when it is probable that an

outflow of resources embodying economic benefits will result from the settlement of a

present obligation and the amount at which the settlement will take place can be measured

reliably.

Income is recognized in the when an increase in future economic benefits related to an

increase in an asset or a decrease of a liability has arisen that can be measured reliably.

This means, in effect, that recognition of income occurs simultaneously with the recognition

of increases in assets or decreases in liabilities

Expenses are recognized when a decrease in future economic benefits related to a

decrease in an asset or an increase of a liability has arisen that can be measured reliably.

This means, in effect, that recognition of expenses occurs simultaneously with the

recognition of an increase in liabilities or a decrease in assets.

Measurement of the Elements of Financial Statements

Measurement involves assigning monetary amounts at which the elements of the financial

statements are to be recognized and reported. The Framework acknowledges that a variety of

measurement bases are used today to different degrees and in varying combinations in financial

statements, including:

Historical cost

Current cost

Net realizable (settlement) value

Present value (discounted)

Historical cost is the measurement basis most commonly used today, but it is usually combined

with other measurement bases. The Framework does not include concepts or principles for

selecting which measurement basis should be used for particular elements of financial statements

or in particular circumstances. The qualitative characteristics do provide some guidance in this

matter.

Concepts of Capital

Financial concept of capital – capital is synonymous with net assets of the enterprise.

This is the concept of capital adopted by most enterprises. A financial concept of capital,

e.g. invested money or invested purchasing power, means capital is the net assets or

equity of the entity.

Physical concept of capital – capital is regarded as the productive capacity of the

enterprise based on, for example, units of output per day.

Concepts of Capital Maintenance

Financial capital maintenance – Under this concept, a profit is earned only if the financial

(or money) amount of the net assets at the end of the of the period exceeds the financial (or

money) amount of the net assets at the beginning of the period, after excluding any

distributions to, and contributions from, owners during the period.

Physical capital maintenance – Under this concept, a profit is earned only if the physical

productive capacity (or operating capability) of the enterprise (or the resources need to

achieve that capacity) at the end of the period exceeds the physical productive capacity at

the beginning of the period, after excluding any distributions to, and contributions from,

owners during the period.

– – END – –

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Presentation of Financial Statements (PAS 1)

Objective

Prescribe the basis for presentation of general purpose financial statements, to ensure

comparability both with the entity’s financial statements of previous periods and with the

financial statements of other entities.

Overall framework and responsibilities for the presentation of financial statements.

Guidelines for their structure and minimum requirements for the content of the financial

statements.

Standards for recognizing, measuring, and disclosing specific transactions are addressed in

other Standards and Interpretations.

Scope

Applies to all general purpose financial statements, that are based on Philippine Financial

Reporting Standards.

General purpose financial statements are those intended to serve users who do not have

the authority to demand financial reports tailored for their own needs.

Purpose of Financial Statements

The objective of general purpose financial statements is to provide information about the financial

position, financial performance, and cash flows of an entity that is useful to a wide range of users in

making economic decisions. To meet that objective, financial statements provide information about

an entity’s:

Assets.

Liabilities.

Equity.

Income and expenses, including gains and losses.

Other changes in equity.

Cash flows.

That information, along with other information in the notes, assists users of financial statements in

predicting the entity’s future cash flows and, in particular, their timing and certainty.

Components of Financial Statements – A complete set of financial statements comprises:

1) A statement of financial position as at the end of the period

2) A statement of comprehensive income for the period

3) A statement of changes in equity for the period

4) A statement of cash flows for the period

5) Notes, comprising a summary of significant accounting policies and other explanatory

information

6) A statement of financial position as at the beginning of the earliest comparative period

when an entity applies an accounting policy retrospectively or makes a retrospective

restatement of items in its financial statements, or when it reclassifies items in its

financial statements.

Overall Considerations for Statement Presentation

Fair Presentation and Compliance with PFRSs

The financial statements must “present fairly” the financial position, financial performance and cash

flows of an entity. Fair presentation requires the faithful representation of the effects of

transactions, other events, and conditions in accordance with the definitions and recognition

criteria for assets, liabilities, income and expenses set out in the Framework. The application of

PFRSs, with additional disclosure when necessary, is presumed to result in financial statements

that achieve a fair presentation.

PAS 1 requires that an entity whose financial statements comply with PFRSs make an explicit

and unreserved statement of such compliance in the notes. Financial statements shall not be

described as complying with PFRSs unless they comply with all the requirements of PFRSs.

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Inappropriate accounting policies are not rectified either by disclosure of the accounting policies

used or by notes or explanatory material.

PAS 1 acknowledges that, in extremely rare circumstances, management may conclude that

compliance with an PFRS requirement would be so misleading that it would conflict with the

objective of financial statements set out in the Framework. In such a case, the entity is required to

depart from the PFRS requirement, with detailed disclosure of the nature, reasons, and impact of

the departure.

Going Concern

An entity preparing PFRS financial statements is presumed to be a going concern. If management

has significant concerns about the entity’s ability to continue as a going concern, the uncertainties

must be disclosed. If management concludes that the entity is not a going concern, the financial

statements should not be prepared on a going concern basis, in which case PAS 1 requires a

series of disclosures.

Accrual Basis of Accounting

PAS 1 requires that an entity prepare its financial statements, except for cash flow information,

using the accrual basis of accounting.

Consistency of Presentation

The presentation and classification of items in the financial statements shall be retained from one

period to the next unless a change is justified either by a change in circumstances or a

requirement of a new PFRS.

Materiality and Aggregation

Each material class of similar items must be presented separately in the financial statements.

Dissimilar items may be aggregated only if they are individually immaterial.

Offsetting

Assets and liabilities, and income and expenses, may not be offset unless required or permitted

by a Standard or an Interpretation.

Comparative Information

PAS 1 requires that comparative information shall be disclosed in respect of the previous period for

all amounts reported in the financial statements, both face of financial statements and notes,

unless another Standard requires otherwise. If comparative amounts are changed or reclassified,

various disclosures are required.

Frequency of Reporting

There is a presumption that financial statements will be prepared at least annually. If the annual

reporting period changes and financial statements are prepared for a different period, the

enterprise must disclose the reason for the change and a warning about problems of comparability.

Statement of Financial Position

Current/Noncurrent Distinction

An entity must normally present a classified statement of financial position, separating current and

noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that

is reliable and more relevant may the current/noncurrent split be omitted.

Current assets

An entity shall classify an asset as current when:

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(a) It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle

(b) It holds the asset primarily for the purpose of trading

(c) It expects to realize the asset within twelve months after the reporting period

(d) The asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted

from being exchanged or used to settle a liability for at least twelve months after the

reporting period.

An entity shall classify all other assets as non-current.

Normal Operating Cycle – The time between the acquisition of assets for processing and their

realization cash or cash equivalents. When the entity’s normal operating cycle is not clearly

identifiable, its duration is assumed to be twelve months.

Current liabilities

An entity shall classify a liability as current when:

(a) It expects to settle the liability in its normal operating cycle

(b) It holds the liability primarily for the purpose of trading

(c) The liability is due to be settled within twelve months after the reporting period

(d) The entity does not have an unconditional right to defer settlement of the liability for at least

twelve months after the reporting period

An entity shall classify all other liabilities as non-current.

Issues on Refinancing

An entity classifies its financial liabilities as current when they are due to be settled within

twelve months after the end of the reporting period, even if:

a. The original term was for a period longer than twelve months; and

b. The intention is supported by an agreement to refinance, or reschedule the payments, on

a long-term basis is completed after the end of the reporting period and completed

before the financial statements are authorized for issue.

If the entity has the discretion to refinance, or to roll over the obligation for at least twelve

months after the end of the reporting period under an existing loan facility, it classifies the

obligation as non-current, even if it would be due with in a shorter period.

Breach of a Loan Covenant

If a liability has become payable on demand because an entity has breached an undertaking

under a long-term loan agreement on or before the end of the reporting period, the liability is

current, even if the lender has agreed, after the end of the reporting period and before

the authorization of the financial statements for issue, not to demand payment as a

consequence of the breach. However, the liability is classified as non-current if the lender

agreed by the end of the reporting period to provide a period of grace ending at least 12

months after the end of the reporting period, within which the entity can rectify the breach and

during which the lender cannot demand immediate repayment.

Statement of comprehensive income

An entity shall present all items of income and expense recognized in a period:

(a) In a single statement of comprehensive income, or

(b) In two statements: a statement displaying components of profit or loss (separate income

statement) and a second statement beginning with profit or loss and displaying components

of other comprehensive income (statement of comprehensive income).

Components of Comprehensive Income

1. Profit and Loss – Income minus Expenses including Tax expense and any Income or Loss

from Discontinued Operations.

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2. Other Comprehensive income – Items of income and expenses including reclassification

adjustments (RA) that are not included in Profit and Loss as required by a standard or

interpretation. There are two types of OCI items, those that are reclassified to profit or loss

(RA) and those that are reclassified to Retained Earnings (RE). OCI includes the following

Unrealized gain or loss on equity investments measured at FVOCI (RE)

Unrealized gain or loss on debt investments measured at FVOCI (RA)

Unrealized gain or loss from derivative contracts designated as cash flow hedge (RA)

Revaluation Surplus (RE)

Remeasurement Gains and losses for defined benefit plans (RE)

Change in fair value arising from credit risk for financial liabilities measured at FVPL

(RE)

Translation gains and losses of foreign operations

Information to be presented in the statement of comprehensive income

As a minimum, the statement of comprehensive income shall include line items that present the

following amounts for the period:

(a) Revenue

(b) Finance costs

(c) Share of the profit or loss of associates and joint ventures accounted for using the equity

method

(d) Tax expense

(e) A single amount comprising the total of:

(i) The post-tax profit or loss of discontinued operations and

(ii) The post-tax gain or loss recognised on the measurement to fair value less costs to sell

or on the disposal of the assets or disposal group(s) constituting the discontinued

operation

(f) Profit or loss

(g) Each component of other comprehensive income classified by nature

(h) Share of the other comprehensive income of associates and joint ventures accounted for

using the equity method

(i) Total comprehensive income.

An entity shall disclose the following items in the statement of comprehensive income

as allocations of profit or loss for the period:

(a) Profit or loss for the period attributable to:

(i) Minority interest, and

(ii) Owners of the parent.

(b) Total comprehensive income for the period attributable to:

(i) Minority interest, and

(ii) Owners of the parent.

An entity shall present either an analysis of expenses using a classification based on either

the nature of expenses or their function with in the entity, whichever provides information

that is reliable and more relevant.

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a. Nature of expense method – Expenses are aggregated in the income statement

according to their nature and are not reallocated among various functions within the

entity.

Revenue X

Other income X

Changes in inventories of finished goods and work in

progress X

Raw materials and consumables used X

Employee benefit costs X

Depreciation and amortization X

Other expense X

Total expense (X)

Profit X

b. Function of expense or cost of sales method – Classifies expenses according to their

function as part of cost of sales or, for example, the cost of distribution or administrative

activities.

Revenue X

Cost of sales (X)

Gross profit X

Other income X

Distribution costs (X)

Administrative expenses (X)

Other expenses (X)