Under the new terminology, the income statement is now termed as “Statement of Comprehensive Income”. In this book, we will stick to the traditional term for ease of reference.
In the following chapters, we will use the financial statements, i.e., income statement, balance sheet, and cash flow statement, extracted from Tex Cycle Technology (M) Bhd’s (TexCycle) 2016 annual report.
We will also refer to the disclosure notes in the same annual report, and readers are encouraged to refer to the annual report when going through these chapters.
A point to highlight is that the standard financial statement presentation shows the current financial year under review in the left column and the preceding financial year on the right column. This is due to relevance, as the current financial year is the highlight of the annual report.
analysis, I personally find that the reverse is easier to read. Thus, I will be
presenting the financial statements using the latter approach.
Table 1: Financials Extracted from TexCycle’s 2016 Statements of Profit or Loss and Other Comprehensive Income for the Year Ended 31 December 2016 (in RM)
|Revenue||5 & 6||25,944,697||31,684,570|
|Cost of Sales||(9,967,778)||(11,593,808)|
|Other operating income||1,088,392||6,752,386|
|Selling & distribution costs||(618,927)||(863,586)|
|Other operating expenses||(2,883,478)||(3,539,134)|
|Profit from operations||8,187,751||16,503,058|
|Profit before tax||8||8,111,620||16,516,604|
|Income tax expense||10||(737,988)||(1,339,922)|
|Profit for the year||7,373,632||15,176,682|
Note 5 on page 88 of
TexCycle’s 2016 annual report gives the breakdown of the group’s revenue, as
shown in Table 2.
|Table 2: Revenue Breakdown (in RM)|
|Provision of waste recovery and recycling services||23,319,381||28,948,753|
|Rental income from investment property||974,592||1,012,194|
|Rental of recycled products||903,497||816,618|
|Trading of chemicals and other products||381,634||562,226|
|Sales of goods||365,593||344,779|
Such disclosure allows investors to understand which businesses generate revenue. Additional details on the performance of the company can also be found in “Segment Information” section. In the case of TexCycle, its “Segment Information” is presented under Note 30, from page 111 to page 115.
Gross profit is used
to see how profitable the company is after taking into consideration the direct
costs, which are costs directly related to the manufacturing process of a
product or services. Examples of direct costs relating to manufacturing
processes are raw materials, direct labour, depreciation of machineries and
factory, and utility costs. For companies involved in provision of services,
direct costs are the costs of sales staff.
Profit from Operations
Profit from operations is the profit after deducting all indirect costs, which are costs not directly related to the manufacturing or sales processes. Examples of indirect costs are administrative salaries, rental of office building, depreciation of photocopier machines, etc. This is the profit that measures the performance of the business’s core operations.
Items such as interest income, interest expense, and share of profits of associates are costs and expenses that are incurred but not related to the operational activities of the company, and as such they are presented after operating profit.
Under Note 6 in page 88, TexCycle further breaks down the operating costs, as extracted in Table 3.
|Table 3: Operating Costs Applicable to Revenue (in RM)|
|Direct costs on services rendered||5,686,379||6,386,824|
|Depreciation of property, plant & equipment||2,806,675||3,089,612|
|Amortisation of prepaid lease payments||185,376||185,376|
|Costs of chemicals and other products sold||164,517||81,859|
|Raw materials and consumables used||65,242||126,030|
|Changes in inventories of finished goods||(284,951)||25,580|
|Other operating expenses||3,880,190||4,893,207|
Profit before tax
Profit before tax is the profit from operations after taking into consideration the financing cost and interest income. If the company has profits coming from its associates and joint venture, which we will explain in the next chapter, it will also be reflected in the profit before tax. These items are not factored in when calculating profit from operations as they are not part of the daily operations of a company.
Income Tax Expense
Taxation is one item that often confuses readers of income statement. While the income statement is prepared following accounting rules, tax payable by the company is calculated based on the Inland Revenue Board’s rules and guidelines.
There is a stark difference between both rules. The income statement is prepared using the accrual concept, while tax payable is calculated based on a cash receipt basis. Thus, profit calculated based on accounting standards is known as “accounting profit”, whereas profit calculated based on tax rules is known as “taxable profit”. Income tax is charged based on taxable profit, and not on accounting profit.
The disclosure on income tax expense can be found under Note 10, on page 91 of the annual report.
Deferred taxation is a major topic in itself and we will not go into it in details (at least for this book). However, we will touch a little on deferred tax in Chapter 9: Balance Sheet – A Measurement of Financial Health.