 Today we are going to talk about income statement or we call it statement of profit and loss and other comprehensive income. Now in this statement we report revenues. Revenue means sales we made if we are selling the goods or revenue if we are rendering some services so we are recording there the services the fee we charged then we have the sale of goods and services. Now all these all these things are again standards for each and every item for example revenue we have a standard how the revenue should be recognized when it should be recorded when should it be reported into the income statement similarly cost of goods sold and the services render cost again we have standards for all these things. Now cost of sale is cost of goods sold rendering and services then the difference of the two revenue minus the cost of goods sold we got the gross profit. Now try to understand here one thing in a trading business and in a manufacturing business trading business we have buying and selling goods but in a manufacturing business we buy the raw material we process that raw material into finished goods and then we sell it so when we are coming up to the cost of goods sold statement it is different in case of a trading concern and in case of a manufacturing concern. So for trading concern is there simply opening stock plus purchase is minus closing stock that gives you the cost of goods sold but in case of manufacturing company first of all you need to prepare the cost of goods manufactured and then you adjust that cost of goods manufactured with the opening finished goods closing finished goods and find out the cost and I am sure you have already discussed this thing in your previous courses as well. Now the difference is gross profit sales minus the cost of sales then other comprehensive income it is not basically regular income it is somehow unusual type of income that you will come across for example you are selling one of your equipment because it is outdated now so whatever money you are getting so compare with the carrying value of that and the money you are getting if there is if there is a gain so that will be other income. Now another important thing is investment income you make some investments if it is let us say in a certain company like you have a subsidiary or you have an associate so that income will be supported separately but this income is not regular one sometimes it is there sometimes it is not there so if it is there then you have to report it. The other important thing here is that this income statement if other comprehensive income we could work in one go or we can have two statements then the profit and loss statement separate and other comprehensive statement separate the thing is the ultimate both should be taken to the income statement now so far gross profit is concerned it must be sufficient to cover the operating expenses finance expenses and taxes now operating expenses broadly administrative expenses all administrative expenses staff salaries all other regular utilities etc all those expenses should be the operating expense operating expenses rather we club them into administrative expense now so far marketing expenses are concerned so we call it selling and distribution expense so whatever we spend on marketing that will be the club together in the selling and distribution expense now after that we got operating profit now gross profit minus operating expenses which include depreciation and amortization now look here the depreciation and amortization is not basically a cash expense depreciation is an asset you bought you are using it so the cost of that assets we are appropriating over a number of years so that we can also charge it to the profit and loss account amortization is also similar thing like goodwill you you have bought a business and you paid goodwill so what you do you amortize that goodwill over a number of period net profit is the bottom line of the income statement and to improve profit increase profitable sales lower production cost cut operating expenses but do remember here we are not supposed to cut short things here we have to look forward we have to look on a long-term basis sometime you know what we do in Pakistan that we try to cost cut cost it is not in actually helping out to improve profit cutting cost is another thing you have to save cost how if it not effects on your productivity only then it will be allow that you can save that you can save your cost you cut your cost so that you can improve your profit now see the format of statement of comprehensive income sales look I said rupees in millions and two years 20 and 19 cost of sales you got gross profit you get selling expense you got administrative expense reducing we got operating profit then we have the finance cost this is also very important sometime we call it interest cost but do remember interest is one item of finance cost there are some bank charges etc so those are clubbed together into finance cost then we have taxation also now here a question is how the tax will be recorded in the income statement because tax will be calculated by the tax department that this much tax you owe us so here what we do normally we just estimate that if we are earning that much profit so this much is going to be the tax like for 30 percent so whatever profit you get after the before tax take 30 percent of that sometime we ask the our experts that this is our business you tell us how much is going to be our taxable income because a lot of things have been added to the profit directed from profit and they come up a new figure of tax taxable profit so but for the time being we are not talking about taxation here so we just take it as an estimated figure now in this taxation thing again there are some income tax and there is some deferred tax now what is deferred tax basically that government allowed us that you can charge depreciation at this rate and we are charging a different rate so if there is a timing difference so with this you can work out the deferred tax so taxation include both let me tell you here one thing important that the sale tax we pay or we charge that is not here that will be adjusted somewhere in sales business in purchase business not in this particular place so profit after tax and then other comprehensive income now they said you can put it here or you can prepare another statement or other comprehensive income and ultimately it comes to here from the total of that statement we report it here so we got the retained profit for the year why I call it retained because it is not yet distributed now if you are going to distribute it then you go further and report it somewhere else now what we do in fact in these statements particularly income statement the matching principle match the sales with the associated cost to determine profit in a given period income statement tries to measure whether the products and services that a company produce are profitable when everything is added up on the left over is the profit profit will be the profit will be turned into cash in fact we are talking here quality of income now quality of income is basically if your profit is supported by the cash flow only then we can say you are really making a profit because in profit last we make adjustments here and there so if it is not being supported by the cash generation then I think it's something wrong there income statement top line is sales and you know we call it top line is sales and the bottom line is profit top line is sales revenue cost and expenses taxes and bottom line is profit notes are likely like windows into how these numbers were determined as I said earlier the important thing is how these number comes so there should be sporting notes to it for example there's a figure of sales or rather revenue so how that revenue is earned means what are the details of it what method you have used it to recognize the revenue so that will also be given in notes to the accounts now then we have the statement of financial position now again format is not prescribed by the IES one normal from it which we are nowadays following in Pakistan we start with the non-current assets and we call them property plant and equipment premises office equipment motor vehicles and many other assets which are being used to produce goods and services they are not for sale they are long-term assets goodwill is only when you are buying a business and you are paying for it extra than the value of that business the business is let's say worth about 10,000 rupees and if you are paying 12,000 rupees the 2000 is your goodwill now research and development that is another important issue again as I said earlier each word here we are reporting there is a standard it's not that if we just putting here no there is a standard behind it and we follow that standard before putting this here research and development you know when you find some new technologies new research you conduct all research expenses are supposed to be charged to the profit and loss account but when though on the basis of those research you start developing the project you start developing the product that is a development cost and on that case that will be taken into asset accounts then we have current assets normally store and spare stock and trade and again stock and trade will be if it is a trading business simple we call it stock and trade but if it a manufacturing business then it will be a raw materials stock it will be a working process stock it may be a finished good stocks then if there is any sprinting station is stock available prepaid insurance if you paid something in advance so that also then bank account then total current assets current liabilities the amount which we owe to pay within next one year that has current liabilities creditors current portion of long term debt interest payable bonus payable audit fees payable taxes payable dividend outstanding payable and so on these are things to be reported long term loans five percent preference shares now this is this is one thing which is now total and then the shareholder's equity shareholder's equity is state away ordinary shares share premium general reserve retained earnings shareholder's equity and total equity and then the explanation of these assets are different again details are there that cash account seeable inventory property etc and then we have current library accrued expensive long term liabilities loan different tax and so on so these are the basics you have always studied in your previous courses thank you very much