Lecture 13: Statement of Profit or Loss and OCI
Let's now have a look at the format for the Statement of Profit or Loss and Other Comprehensive Income. Some of you might know this as the income statement, that's long gone, please note that the name changed.
So again, we must have the company’s name, the title of the statements (Statements of Profit or Loss and Other Comprehensive Income) and then I must date it. Remember, this time, the dating is for a period. It's an income concept so Statement of Profit or Loss and Other Comprehensive Income for the period ending. Take note it says for the period ending, not at. Statement of Profit or Loss is different to the Statement of Financial Position.
Again, we’re going to compare two years; we should state that it’s in Rands, and what any rounding is. Same as we did in the previous video.
First and foremost, let's understand that there are two different formats for the Statement of Profit or Loss. First of all, you can classify Expenses either by Function or by Nature. We’re going to use the first one; we're going to classify the Expenses by Function. Now it's an important distinction to be made, and if in doubt that the questions given to you are silent on this matter, you will assume classification of expenses by function. I'll make this clearer just now.
What’s always going to be there is definitely your first line item, which will be Revenue.
Revenue is just income in the normal operations of the business. So if I am into building tables and selling them; normal income for me is the revenue or sales from selling tables. If I'm still in the same business; I build and sell tables, but I have shares that are purchased as an investment in my business, and when I sell those shares I make a profit or I receive dividends; that's not my normal operations. My normal operations are selling tables so that other one will be, the dividends or the profit on sale of shares, will be other income. Profit or revenue or income from selling tables will be classified as Revenue.
Then what's important, if we are classifying our expenses by function, we must have this next line item called Cost of Sales. Those are the sales costs or costs directly related to selling my tables. Now in that Cost of Sales, we will do a little calculation in the workings. The cost of sales, just from a working perspective, will be made up of Opening Stock + Purchases – Closing Stock.
I want you just to get used to that working. It's not on the face here, but it is something that you have to learn and think about, because it's how we calculate Cost of Sales.
So now, Revenue - Cost of Sales (if I put an x in a bracket, it means a negative) gives me a line item called Gross Profit. It's a very important figure, and companies use this a lot. Later on, you'll see something called gross profit percentage.
After Gross Profit, there will be all the other income line items - our Dividends or Profit from Shares, if that’s not our core business. And we'll call that exactly that - Other Income.
Next up we must classify or put all Distribution Costs together. So back to my table scenario - Let's pretend I've got a whole bunch of shops countrywide, as well as a factory, and what I do is I have to send out all my tables to these different shops. So, there's going to be trucking expenses such as petrol for the trucks etc. All those Distribution Expenses will get grouped together, and that is an expense, so it's a negative in brackets.
Next up I will have all my Administrative Expenses. And those Administrative Expenses will be things like my accountants, my cleaning ladies at head office, my marketing people, probably management as well, unless they are direct operations managers. Those will all get grouped together as an expense.
Then any other expenses that can't go into those first two, I will just lump together and call Other Expenses. Some of those I have to disclose separately in the Notes, but for now, that is fine.
Then, my company probably has some form of debt. I probably borrowed money and now guess what? On that money, there's going to be interest charged. The banks don't give you money for free. Interest we will group under a heading called Finance Costs. I must have a separate line item for that; it can’t be put in with other expenses, so all the interest costs go into Finance Costs.
Then, I will add it up, and I will add up Profit Before Tax. I have a Total, and generally, over here I'm going to have some type of Note. I'll probably have a Note for Revenue, and a note in the financials for Profit before Tax.
Then we're going to have Income Tax Expense, which is how much the government is going to take from you, not just in the current period, but sometimes in the future periods. We're going to have two types here; we are going to have Current Tax Expense and Deferred Tax Expense. For you it's nice and easy, it's going to be 28%. We assume only current, but that is going to get more complex later on in your studies. That will come off as an expense, add up again and I have Profit after Tax.
Now in the olden days, income statements as we used to call it, stopped here, but now we've got a new type of income. I like to call it the politically incorrect income. Income that I shouldn't be using for valuations etc., and that is going to be called Other Comprehensive Income. You're not really going to deal with this, but Other Comprehensive Income is going to have two types. Items in what you call ‘may be reclassified’ versus ‘not be reclassified’. That's a bit beyond the scope of this course, but what I want you to understand is that there will be a gross amount, as well as a tax amount.
So let's just look at the first one. Let's pretend we understand what a Revaluation Surplus means. So we might have a revaluation gain on a building; a valuer comes in and gives us an expert valuation. That can't go into profit and loss, because that's not part of our normal trading activities. So I do this revaluation one side of my journal; I increase the building. The other side I put through this other comprehensive income, which will be kept separate when it lands up in equity.
What I have to do is I have to split out the Tax components from it. Remember, I put a block and put the nett amount on top, and what I do next is I add it up, let’s pretend there's nothing in last year. I then get to a thing called Total Comprehensive Income.
This format is very important; please don't dismiss the heading and the date etc., and how I word that heading.
Now, what we do need to do is, we need to understand that there's a different type of layout for the Statements of Profit or Loss. We did the first one by classifying the Expenses by Function, and expenses also mean Cost of Sales.
What I have to do now is look at the second one, where I look at the classification of expenses; of Expenditure by Nature.
Now, by Nature, we're still going to have our two headings; being the current year and prior year. Revenue is going to be the same, that’s not an expense, it’s not going to be messed with. But you'll note here that there is no Cost of Sales.
What we are going to have is we'll take each type of expense and put it by the Nature to which it relates, and you'll see what I mean now. Let's put Revenue and Other Income first to get those out the way, and then we're going to look at the Expenses by Nature.
So we might have Changes in Inventory. Very similar to what I did in my previous page, when I did that little extra working in cost of sales.
I might have Raw Material & Consumables Used. Glue, nails, screws etc.; not part of major raw materials for my tables.
I might have Employee Benefit Salaries, and I might have Depreciation on Assets. This list can go on for quite a bit.
What I do have to have; I will still have an item for immaterial or small expenses to go into (Other Expenses), and I still have to keep my interest expense separate, so I’ll have Finance Costs.
Along with that, I will then have my normal Total, and that will give me Profit before Tax, and the rest is all the same; the Tax Expense, Other Comprehensive Income etc.
I hope you can see the difference by classifying by Nature the expenses versus classifying by Function. When I say Function, you'll notice I always will split out Cost of Sales, and then I'll have specific Distribution, Admin and Other Expenses.
Please learn these formats. You need to know the classification by function more importantly than the classification by nature, but the question can be asked either way. 99% of the time through your studies will be by function. Also remember that this is financial statements currently per IAS1, which means companies.
You can apply it to CC’s and partnerships but is not required as partnerships, and CC’s are not under the Companies Act requiring IFRS, because they're not companies.