Financial Statements
Income statement, balance sheet and interpreting financial performance
Financial statements communicate a business's financial position to owners, banks, and investors.
Income Statement (Trading and Profit & Loss Account):
Shows profitability over a period.
Gross Profit = Net Sales − Cost of Goods Sold (COGS)
Net Profit = Gross Profit − Operating Expenses (rent, salaries, utilities, depreciation)
Balance Sheet (Statement of Financial Position):
Shows assets, liabilities and capital at a specific date (snapshot).
Format:
```
ASSETS LIABILITIES & CAPITAL
Non-current assets Capital
Land & buildings Opening capital
Machinery (less depreciation) + Net profit
Current assets − Drawings
Inventory/Stock Non-current liabilities
Debtors/Receivables Long-term loans
Bank/Cash Current liabilities
Creditors/Payables
Bank overdraft
Total Assets = Total Liabilities + Capital
```
Depreciation: Reduction in value of non-current assets over time.
Key ratios:
Key Points to Remember
- 1Gross Profit = Net Sales − Cost of Goods Sold
- 2Net Profit = Gross Profit − Operating Expenses
- 3Balance sheet: Assets = Liabilities + Capital
- 4Depreciation: straight-line or reducing balance method
Pakistan Example
HBL Annual Report — Reading Financial Statements in Pakistan
Every publicly listed Pakistani company (HBL, OGDC, Lucky Cement) publishes annual financial statements required by SECP. AKU-EB Accounting students who can read an income statement and balance sheet have an advantage in understanding whether a company is profitable and solvent. A business with high gross profit but low net profit has high operating expenses — rent in Karachi's commercial areas, salaries, and energy costs are common culprits.