Lecture 9: Format of Statement of Profit or Loss and OCI and the Statement of Financial Position
So now we want to look at the format of your financial statements. We're going to take a look at the two you're going to spend the most of your time with:
The statement of profit or loss and other comprehensive income
Statement of financial position
Before you get lost in the detail, let's run through the type of information we're looking at and a couple of things that we've spoken about already.
We're looking at how we present the profit and loss that you make for the company. We've spoken already about the fact that the profit and loss indicates, in this particular set of financial statements, the performance throughout the year. So you'll see the type of information is the revenue.
So the revenue, what we’ve done is, we've accumulated all the sales and revenues through from day one to day 365. So we've got all the sales that you made throughout the year and how the company performed throughout the year. This applies to your cost of sales, gross profit and any other income you make, as well as any other expenses. Everything that is in the performance (statement of profit and loss) is an accumulation of what happened from day one to day 365. So we are accumulating all the information. We're constantly adding it together.
We looked at some qualitative characteristics of the conceptual framework which said when we present financial information we need to make sure it's useful and there were a few things it said.
One thing it says is, make sure that the information is comparable. When you look at it, you’ll see we've got the current year and the prior year in the financials, and when you write your exams you'll actually have the years in there, that would be maybe 2014 and 2013, so you indicate to the users this is what's going on this year, and this is what’s going on last year.
In order for it to be comparable, I want to understand what the same set of financials, and what the same situation was last year. So, for all your year last year versus all your year this year, what are your sales? Again, as we said before, if you look at this R300, 000 revenue in isolation, you don't really know whether that's a good thing or a bad thing. If you look at it here, you can see last year you made R250, 000 worth of revenue and this year you were making R300, 000; looks like things have actually improved. What if I said to you last year your revenue was R1, 250 000? Although you have R300, 000 hasn't changed, can you see that you'd actually feel quite differently about that? So the comparability of financial information for users is very important as well.
The relevance of information; we're talking about the profit or loss. I want to know that you've given me all the information that is actually relevant to your profit or loss. I'm not interested in your staff morale, environmental stuff or the colour of the paint on your wall. I'm only interested in what's going to actually impact the profit and loss, the financial transactions, that you may have made through the year. You'll notice we always talk about other comprehensive income, and at this level, we kind of leave it alone a little bit, but it does make our title quite long.
What we're trying to do is let the users know that your money for the year is not only made by buying and selling items. There's a possibility that you're going to be making money in some other way as well. Let's say I am a manufacturer; we go back to our example right at the beginning. I buy material, I make jeans, and I sell them, so I’m producing jeans. That means that my gross profit, or my profit or loss in terms of my core business, is making money from selling jeans.
But what if my company also owns an investment that's earning interest on the side? That doesn't really have anything to do with my manufacture of jeans; it's other income. If I put all of that information in here, it will appear that I am making more money from my manufacture of jeans than I actually am. So what the users are saying is, let's make sure we separate what's related to the core of your business versus other income. Stuff you get, like maybe you sold an asset, and you made a profit on that. Maybe you bought an asset, or you sold an asset and actually had a bit of a loss on that, whatever the case is. So that's why we separate other comprehensive income.
We won't deal too much with that at the moment. All we're saying is - take a look at the information and make sure that the information that you give, is going to give an indication of the profit or loss. We've got revenue; we've got cost of sales, which gives you your gross profit and then your other income minus your distribution (your admin and your other expenses). These are indirect expenses that are spent by the company: your rental, security, insurance, salaries; any other kind of expenses that we’re going to call our cost of sales.
The statement of profit or loss is for the year, which means for the entire year from start to finish. When we take a look at the statement of financial position, this is completely different. Your statement of financial position we will always talk about at a specific date, at year-end, and we'll get into year-end in Unit 2. It’s a snapshot at a particular point in time.
You'll note again that I'm still comparing information between the current year and prior year, so that's the same. We generally represent, and we give two years’ information so that we can compare. So we could also say this would be for 2014 and that would be for 2013. What we're doing here is we're showing your financial position or what's happening at the end of the year. We indicate your assets, your equity, and your liabilities. We’ll cover the detail of those in study Unit 2.
What we're saying is at the end of the year, this is the value of your property, plants and equipment; the amount that people owe you; your cash; the amount of money that you have tied up in stock; how much the owners have put into the business; your retained earnings; your profit for the past couple of years; whether or not you have any money that you owe in terms of long-term loans; and then any creditors.
So what we're doing is at the end of the year, let's take a look at your financial position. You can see that our sales is over the year from day one to 365, whereas your statement of financial position is only going to say “at day 365”. This is the value of your asset at day 365; this was how much your debtors owe you at that date; this is what inventory you had. I don't care what inventory you had the day before yesterday; I'm not interested in that I only want to know now.
So this spans the entire year, whereas our statement of financial position is at one date. And that's very important for exam technique. You're going to get marks for making sure that you state that your statement of financial position is at a specific date, where your statement of profit or loss is going to be for the period ended, for the entire period.
So that's what your statement of financial position and your statement of profit and loss look like. Each of your modules or chapters hereafter are going to go into the detail of each of these, so we know what they look like, and we know how to record them. So basically, there is your statement financial position and your statement of profit or loss, and that's what it's going to look like.