CHAPTER 9

PRESENTATION OF FINANCIAL STATEMENTS

An introduction
Income statement
PAS 1

Brief Summary:
This chapter tackles the definition of an income statement, and its natural and functional
presentation, the concept of comprehensive income, profit and loss, and other comprehensive
income (and its components).

Income Statement
- An income statement is à formal statement showing the financial performance of an
entity for a given period of time.
- The financial performance of an entity is primarily measured in terms of the level of
income earned by the entity through the effective and sufficient utilization of its
resources.
- The financial performance is also known as the results of operations of the entity.
- The transaction approach is the traditional preparation of the income statement in
conformity with accounting standards.

Sources of Income
a. Sale of merchandise to customers
b. Rendering of services
c. Use of entity resources
d. Disposal of resources other than products

Components of Expense
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expense
c. Administrative expense
d. Other expense
e. Income tax expense

Cost of goods sold of merchandising concern

Beginning Inventory ……………………………………………………………. xx

 Net Purchases…………………………………………………………………… xx

Goods Available for sale ……………………………………………………….. xx

Ending Inventory……………………………………………………………….. xx
Cost of goods sold ……………………………………………………………… xx

Gross purchase ………………………………………………………………… (xx)

Freight in ………………………………………………………………………. xx

Total ……………………………………………………………………………. xx
Purchase returns, allowances, and discounts……………………………………(xx)

Net Purchases ……………………………………………………………………xx

Cost of goods sold of manufacturing concern

Beginning Raw Materials ………………………………………………………. xx

 Net Purchases…………………………………………………………………….xx

Raw Materials available for use…………………………………………………xx

Ending Raw Materials ………………………………………………………….(xx)

Raw Materials Used …………………………………………………………….xx

Direct labor .…………………………………………………………………….xx
Factory overhead ……………………………………………………………….xx

Total manufacturing cost ……………………………………………………….xx

Beginning goods in process….…………………………………………………xx

Total cost of goods sold in process…………………………………………….xx

Ending goods in process………………………………………………………(xx)

Cost of goods manufactured …….…………………………………………….xx

Beginning finished goods…………………………………………………….. xx

Goods available for sale……….………………………………………………xx

Ending finished goods………………………………………………………..(xx)

Cost of goods sold…………………………………………………………….xx

Classifications of expenses
- Distribution costs constitute costs which are directly related to selling, advertising and
delivery of goods to customers.
 a. Salesmen's salaries
b. Salesmen's commissions
c. Traveling and marketing expenses
d. Advertising and publicity
e. Freight out
f. Depreciation of delivery equipment and store equipment

- Administrative expenses constitute cost of administering the business.

a. Doubtful accounts
b. Office salaries
c. Expenses of general executives
d. Expenses of general accounting and credit department
e. Office supplies used
f. Certain taxes
g. Contribution
h. Professional fees
i. Depreciation of office building and office equipment
j. Amortization of intangible assets

- Other expenses are those expenses which are not directly related to the selling and
administrative function.
a. Loss on sale of trading investments
b. Loss on disposal of property, plant and equipment
c. Loss on sale of noncurrent investment
d. Casualty loss - flood, earthquake, fire No more extraordinary items

No more extraordinary items

- PAS 1, paragraph 87, specifically mandates that an entity shall not present any items of
income and expense as extraordinary either on the face of the income statement or
statement of comprehensive income or in the notes.

Usefulness of an Income Statement

- The income statement for a period presents the income, expenses, gains, losses and net
income or loss recognized during the period.
- Information about financial performance is useful in predicting future performance and
ability to generate future cash flows.

Line items
- PAS 1, paragraph 82, provides that as a minimum, the income statement and statement
of comprehensive income shall include the following line items:
 a. Revenue
b. Gain and loss from the derecognition of financial asset measured at amortized
cost as required by PFRS 9
c. Income and expenses from insurance and reinsurance contract
d. Finance income and expenses from insurance and d. reinsurance contract
e. Finance cost
f. Share in income or loss of associate and joint venture accounted for using the
equity method
g. Gain or loss on the reclassification of financial asset from amortized cost to fair
value profit or loss
h. Gain or loss on the reclassification of financial asset from fair value other
comprehensive income to fair value profit or loss
i. Gain or loss from extinguishment of a financial liability by issuing equity
instrument as required by IFRIC 19
j. Income tax expense
k. A single amount comprising discontinued operation
l. Net income or net loss for the period
m. Total other comprehensive income
n. Comprehensive income for the period being the total of net income or net loss and
other comprehensive income

- The following items shall be disclosed on the face of the income statement and statement
of comprehensive income:
a. Net income or net loss for the period attributable to noncontrolling interest and
owners of the parent
b. Total comprehensive income for the period attributable to noncontrolling interest
and owners of the parent.

Form of income statement

- PAS 1, paragraph 99, provides that an entity shall present an analysis of expenses using a
classification based on either the function of expenses or their nature within the entity
whichever provides information that is reliable and more relevant.
- Income statements may be presented in two ways, functional and natural.

Functional presentation
- The functional presentation classifies expenses according to their function as part of cost
of goods sold, distribution costs, administrative expenses, and other expenses.
- It is also referred to as the cost of goods sold method.
- An entity classifying expenses by function shall disclose additional information on the
nature of the expenses, including depreciation, amortization and employee benefit costs.
Natural presentation
- It is referred to as the nature of expense method.
- Under the natural presentation, expenses are aggregated according to their nature and not
allocated among the various functions within the entity.

Which form of income statement?

- PAS 1 does not prescribe any format.]
- Paragraph 105 simply states that because each method of presentation has merit for
different types of entities, management is required to select the presentation that is
reliable and more relevant.

Comprehensive Income
- Comprehensive income is the change in equity during a period resulting from
transactions and other events, other than changes resulting from transactions with owners
in their capacity as owners.

Accordingly, comprehensive income includes:

a. Components of profit or loss
b. Components of other comprehensive income

Components of Profit or Loss and Components of Other Comprehensive Income

- The term profit or loss is the total of income less expenses, excluding the components of
other comprehensive income.
- In other words, this is the "bottom line" in the traditional income statement. An entity
may use "net income" or "net loss" to describe profit or loss.

Components of Other Comprehensive Income (OCI)

- Other comprehensive income comprises items of income and expenses including
reclassification adjustments that are not recognized in profit or loss as required or
permitted by Philippine Financial Reporting Standards.

The components of "other comprehensive income" include the following:

1. Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income
2. Unrealized gain or loss on debt investment measured at fair value through other
comprehensive income.
3. Gain or loss from translation of the financial statements of a foreign operation
4. Revaluation surplus during the year.
5. Unrealized gain or loss from derivative contracts designated as cash flow hedge
 6. "Remeasurements" of defined benefit plan, including actuarial gain or loss
7. Change in fair value attributable to credit risk of a financial liability designated at
fair value through profit or loss.

Statement of comprehensive income

- This is prepared in order to show the total comprehensive income.
- It starts with the net income or net loss as shown in the income statement plus or minus
the components of the other comprehensive income.
- The purpose of this is to provide a more comprehensive information on financial
performance measured more broadly than the income traditionally computed.

Presentation of Other Comprehensive Income

- PAS 1, paragraph 82A, provides that the statement of comprehensive income shall
present line items for amounts of other comprehensive income during the period
classified by nature.

The other comprehensive income section shall present line items for the amounts for the
period of:
(a) items of other comprehensive income (excluding amounts in paragraph (b),
classified by nature and grouped into those that, in accordance with other IFRSs:
(i) will not be reclassified subsequently to profit or loss; and
(ii) will be reclassified subsequently to profit or loss when specific conditions are
met.
(b) the share of the other comprehensive income of associates and joint ventures
accounted for using the equity method, separated into the share of items that, in
accordance with other IFRSs:
(i) will not be reclassified subsequently to profit or loss; and
(ii) will be reclassified subsequently to profit or loss when specific conditions are
met.