This lesson provides a detailed examination of the first two primary financial statements. It covers the structure, content, and purpose of the Income Statement and the Statement of Changes in Equity, explaining how they measure performance and track ownership interests.

• The Income Statement (Statement of Profit or Loss): The income statement measures a company’s financial performance over a specific period (e.g., a quarter or a year). It reports revenues, expenses, gains, and losses to arrive at a net profit or loss . The income statement answers the fundamental question: “Is the company profitable?”

• Components of the Income Statement: Key elements of the income statement include:

  • Revenue (Sales): Income earned from the company’s primary business activities.

  • Cost of Goods Sold (COGS): The direct costs attributable to producing the goods or services sold.

  • Gross Profit: Revenue minus COGS.

  • Operating Expenses: Selling, general, and administrative expenses (SG&A), research and development (R&D), and depreciation.

  • Operating Income (EBIT): Earnings before interest and taxes, reflecting profitability from core operations.

  • Net Income: The “bottom line”—profit after all expenses, interest, taxes, and other items are subtracted. This figure connects the income statement and statement of financial position as it represents the increase in owner’s equity from operations .

• Statement of Changes in Equity: This statement reflects information about the increase or decrease in net assets or wealth over a period . It shows the changes in the company’s equity accounts, including:

  • Share capital issued or repurchased.

  • Retained earnings (net income minus dividends).

  • Other comprehensive income items.

  • This statement provides a link between the income statement and the balance sheet, explaining why equity changed from the beginning to the end of the period .