Module 2 The Profit and Loss Account Omar ElKheshen – kheshen@gmail.com 1 Learning Objectives By the end of this module you should understand: 1. The role of the profit and loss account in the measurement of corporate accomplishment and effort 2. The timing of revenue and expense and the role of accounting conventions 3. The impact on profit of different stock valuation methods and depreciation methods 4. The principal features of depreciation 5. The distinction between product costs and period costs 6. The implications of ‘gross profit’ and ‘net profit’ Omar ElKheshen – kheshen@gmail.com 2 Agenda 2.1 Introduction 2.2 What Is Profit? 2.3 The Measurement of Accomplishment 2.4 Another Reason for Opting for ‘Ship and Invoice’ 2.5 Conventions Underlying Measurement of Sales Accomplishment 2.6 The Measurement of Effort 2.7 Task One: Determining the Consumption of the Means of Production 2.8 Task Two: Determining the Value of Closing Work-in-Progress and Inventories 2.9 Types of Inventory in a Manufacturing Company 2.10 Inventory Valuation Methods 2.11 Valuation of Work-in-Progress and Finished Goods 2.12 Interpreting Profit Review Questions Omar ElKheshen – kheshen@gmail.com 3 Over the next two modules we shall be examining the 3 financial statements in greater depth You Will Become Aware of: Where the underlying information in these statements comes from The conventions employed by accountants in constructing the statements The various techniques used to measure aspects of business activity Omar ElKheshen – kheshen@gmail.com 4 We will use the profit and loss account and balance sheet of the sole trader encountered in Module 1 to further explain those three concepts Profit and Loss Account For the Period Actions 1–7 Sales Less: Cost of sales Materials € 500 Labour 20 Depreciation 50 Gross Profit Less: Selling and administrative costs Advertising 10 Salaries 10 Net Profit Omar ElKheshen – kheshen@gmail.com € 750 Fixed assets Plant and equipment at cost