 In this module, we are going to discuss the structure of an income statement. As we have already discussed that in order to understand the overall level of profitability of a firm or a company, it is important to look at the income statement. So what are the various components or heads that are considered or accounted for when we construct an income statement? Using a hypothetical company example, this is what we are going to do in this module. So when we look at the overall structure of an income statement, we see that it gives us the value for the net income which is calculated by taking the difference between the revenue and the gains minus the losses as well as the expenses. So what we are going to do is, we are going to take into account four types of values. We are going to consider all the different types of revenues, then the gains add them up and then we are going to consider all the various types of expenses, whether they are being incurred on the primary activity or the secondary activity. So all the various types of expenses are to be accounted for and then you are going to account for the losses add them up and whatever sum is obtained, this particular value will be subtracted from the sum of the revenues and the gains. So when we calculate the value or the difference between the revenue plus gains and the expenses and plus the losses, we get the value for the net income. And I am going to explain this using an example from a hypothetical company called XYZ. So we are going to discuss the various heads that are accounted for in order to construct the income statement. For illustration purpose, we assume that there is a hypothetical company called XYZ and for the year 2001, we have the information, how much expenses were paid, how much total revenue was paid, how much dividend was paid, we have obtained all this information. And now we are going to discuss the income statement for which we are going to discuss. So suppose we have the sales revenue generated, that is $200 million and we subtracted the cost that you have paid on the labor and raw material and on the purchase, the total cost that you have received, that is suppose $110 million, you have subtracted the $200 million sales revenue generated from this, you have subtracted the cost of goods sold. So you have the value that you have got by minusing this, that is the gross margin. In order to find out the operating income from the gross margin, we need to subtract the general selling and administrative expenses. Administrative expenses means that you have given salary to the manager, overall marketing expenses, suppose they turned out to be $30 million, so the negative value, we are showing a parenthesis on it, to tell you that this value is negative. You have subtracted the general selling and administrative expenses from the gross margin that was $90 million, so you will get operating income, which for this example is $60 million. Then you subtracted the operating income from your interest expenses, so for example you borrowed a loan to work for your firm and you have to give interest every year. So the interest that you have given, that turned out to be for example $21 million, so you subtracted that, so the income generated from the operating income that you have got from the interest expense, so the income that you have got is the income on which you will get the tax charge. So therefore we call this $39 million value as the taxable income. According to the rate given by the government, you deducted the tax. We assumed that it was $15.6 million. You subtracted that, so you got the value of $23.4 million. This is the net income which has been generated for this imaginary company, XYZ for the year 2001. And now if we say 23.4 is our net income, then the company decides how much dividend you have to give, how much you have to return earnings. So suppose the company has decided that the $10 million from this $23.4 will be given to the dividend and the remaining $13.4 million will be retained as for the company's operations. So we have retained it. At the bottom, you can see another value. This is earning per share. This is the $23.4 value. This is the overall per share value, outstanding shares. The value that you have determined, you have accounted for your net income that is calculated to be $23.4 per share. So this is how we construct the income statement for any firm that you can see that in the beginning. We considered the overall sales revenue. Out of that, you deducted the gross margin. Out of the gross margin, you deducted the administrative expenses and the operating income. Apart from that, you paid for the interest. After deducting, you deducted the taxable income. You showed us that you have to pay for the taxable income. The income that is saved now will be considered as the net income. From there, you allocate how much you have to retain in equity, how much money and dividend you have to pay. This is purely on the discretion of the board of governors or your managers who have decided that you have to keep the proportion of the net income or how much you have to distribute to the shareholders. You decide accordingly. So this is how we can try to understand that this is how an income statement looks like. These are the various components of an income statement. What are the different values of the income statement? The income statement generally states that within a year, the net income that you have after deducting all kinds of expenses, after paying taxes, after paying the rent, you have shown that it is $23.4 million. So it means that the profit that the company has shown is not losing when we look at the income statement. But in order to have a broader picture or a complete picture, it is important to consider the other two financial statements also. So only the income statement will not be sufficient to come up with a certain decision.