WEEK 6 THE FINANCIAL STATEMENTS

SESSION 14A Review of the Elements of Financial Statements

Elements of the Financial Statements

a. Assets
b. Liabilities
c. Equity
d. Income
e. Expense

What is an Element?
These are the building blocks of and the composition that you will in the financial statements hence
they are called “elements” of financial statements.

Elements are the words of the accounting language. It is very important for you to understand and
appreciate the concepts of an asset, liability, equity, income and expense and know the conditions for
their recognition or derecognition.

Classification of elements of Financial Statements

The Elements of the financial statements are classified into:
a. Elements of Financial Position
b. Elements of financial performance (income statement)

Elements of Financial Position

a. Assets
b. Liabilities
c. Equity
These are elements that are presented in the balance sheet or statement of Financial Position. These
are important in assessing business stability and financial condition.

What is Recognition and Derecognition?

Recognition is the process of incorporating in the balance sheet or income statement an item that
meets the definition of an element of financial statements. It is also called recording.

Derecognition is the removal of an element in the financial statement when it ceases to be an element.

What is the Duality Principle or the double entry system?

Remember that when an element is recognized or recorded, it gives rise to the recognition of another
element. Contemporary accounting makes use of double entry system. Under this system, changes on
two elements are recorded every time a transaction is recorded.

What are Financial Statements?

Financial Statements are a structured financial representation of the financial position and the
transactions undertaken by an enterprise.

What are the objectives of financial statements?

The objective of general-purpose finance statements is to provide information about financial position,
performance and cash flows of an enterprise that is useful to a wide range of users in making economic
decisions.
It also shows the result of management’s stewardships of the resources entrusted to it. To meet this
objective, financial statements provide information about an enterprise’s:

a) Assets;
b) Liabilities;
c) Equity;
d) Income and expenses, including gains and losses; and
e) Cash Flows
This information, along with other information in the notes to the financial statements, assist users in
predicting the enterprise’s future cash flows and in particular the timing and certainty of the generation
of cash and cash equivalents.

Complete Set of Financial Statements

A complete set of financial statements comprises:

a) A statement of financial position or balance sheet statement as at the end of the period;
b) A statement of profit or loss (income statement) and other comprehensive income for the
period or statement of comprehensive income;
c) A statement of changes in Equity for the period;
d) A statement of cash flow period;
e) Notes to financial statements, comprising a summary of significant accounting policies and
other explanatory information.
The succeeding section focuses on the preparation, strengths and the limitations of the Statement of
Financial Position and describes how companies report their assets, liabilities, owner’s equity.
SESSION 14B. INCOME STATEMENT AND SCI

Objectives
At the end of the session, the learners are expected to:

LO1. To understand the nature and usefulness of the income statement

LO2. To understand the concept of comprehensive income, profit or loss and other
comprehensive income
LO3. To identify the components of other comprehensive income
LO4. To recognize the reclassification adjustment related to other comprehensive income
LO5. To be able to present the income statement following the functional and natural
presentation
Values Integration
1. Reflect on the difference and importance of Income in preparing the SCI.
2. Reflect on the importance of Cost o in preparing the SCI.
3. Reflect on the importance of Expenses in preparing the SCI.
4. Reflect on the importance of presenting the notes to financial statements

ACQUIRE New Knowledge

A. Discussion/Input
What is an Income Statement?
An Income Statement is a formal statement showing the financial performance or profit or loss of an
entity for a period of time.

What are the Usefulness of Income Statement?

 It is primarily measured in terms of the level of income earned, by the entity through the
effective and efficient utilization of resources.
 It is also known as the results of operations.
 It presents the income, expenses, gains, losses and net income or loss recognized during the
period.
 Information, in particular its profitability, is useful in predicting the capacity of the entity to
generate cash flows from existing resources.
 Information from its performance is also useful in forming judgement about the effectiveness
of employing additional resources.
The transaction approach is the conventional or traditional preparation of income statement in
conformity with PFRS.

 This approach of computing net income or loss requires the determination of how much
income was earned during the year and how much expenses were incurred in earning the
revenue.

What is a 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 profit or loss and other comprehensive income.

What are Other Comprehensive Income?

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.

What are the components of a “other comprehensive income?”

The component of “other comprehensive income” includes 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 translating 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, such as actuarial gain and loss, the
difference between actual return on plan assets and interest income on fair value of plan
assets and change in the effect of the asset ceiling.
7. Gain or loss attributes to credit risk of a financial liability designated at fair value through
profit or loss.
How is the Other Comprehensive Income presented?
The amended PAS 1, paragraph 82A, provides that the other comprehensive income section shall
present line items for amounts of other comprehensive income in the period, classified by nature.

The line items for amounts of OCI shall be grouped as follows:

1. OCI that will be reclassified subsequently to profit or loss when specific conditions are met
2. OCI that will not be reclassified subsequently to profit or loss.
OCI that will be reclassified subsequently to profit or loss
a. Gain or loss from translating financial statements of a foreign operation.
b. Unrealized gain or loss on derivative contracts designated as a cash flow hedge.
c. Unrealized gain or loss on debt investment measured at fair value through OCI.

OCI that will not be reclassified subsequently to retained earnings.

a. Unrealized gain or loss on equity investment measured at fair value through OCI.
Under PFRS 9. The unrealized gain or loss is reclassified to retained earnings upon disposal of
the investment.

b. Change in revaluation surplus. The realization of the revaluation surplus is through retained
earnings.
c. Remeasurements of a defined benefit plan.
The measurements are not recycled subsequently to profit or loss but may be transferred
within equity or retained earnings.

d. Gain or loss attributable to credit risk of a financial liability designated at fair value through
profit or loss.

The gain or loss may be recycled subsequently within equity or retained earnings.
What is a Profit or loss?
Profit or loss is the total of income less expenses, excluding the components of other comprehensive
income.

 It is considered a LOSS if the expenses exceed the total revenue, thus it is a negative result of
operation.
 It is considered a PROFIT if the revenue exceeds expenses.
 Profit or loss is the amount that is found at the bottom line of the traditional income
statement.
 An entity may use net income or net loss to describe profit or loss.

For example, an entity may use “net income” or “net loss” to describe profit or loss.

Revenue or Income P xx
-Cost and Expenses xx
=Profit/Loss P xx

What is the difference between Income Statement and Comprehensive Income Statement?

• The “Statement of profit or loss and other comprehensive income” is different from the
“Income Statement.”
 The Income Statement (or statement of profit or loss) shows only the profit or loss
 While the “Statement of profit or loss and other comprehensive income” shows profit
or loss and “other comprehensive income”
• The Information presented in the Statement of Comprehensive Income is usually considered
the most important information provided by financial accounting because profitability is the
paramount concern to those interested in the economic activities of the enterprise.

How is the Statement of Comprehensive Income presented?

PAS 1, paragraph 81, provides that an entity has two options of presenting comprehensive income,
namely:

1. Two-statement approach
a. An income statement showing the components of profit or loss.
b. A statement of comprehensive income beginning with profit or loss as shown in the
income statement plus or minus the components of other comprehensive income.

2. Single statement approach

This is the combined statement showing the components of profit or loss and components of
other comprehensive income in a single statement of comprehensive income.

Elements of Statement of Comprehensive Income

1. Income./revenue
2. Cost of Sales or Cost of Goods Sold or Cost of Services
3. Expenses
What are the sources of Income?
Specifically, income is derived from the following ordinary activities:

A. Sales of merchandise to customers

 The income from sale shall include all sales to customers during the period. Sales Return
and Allowances and Sales Discounts shall be deducted from gross sales to arrive at net sales.

B. Rendering of services
Income from rendering of services, among others includes professional fees, media
advertising commissions, insurance agency commissions, admission fees for artistic performance
and tuition fees.

C. Use of entity resources

The income includes interest, rent, royalty and dividend income.

D. Disposal of resources other than products.

Examples include gain on sale of investments, gain on sale of property, plant and
equipment and gain on sale of intangible assets.

Components of expense
A. Cost of goods sold or cost of s ales
B. Operating Expenses
1. Distribution costs or selling expenses
2. Administrative expenses
3. Other expenses
4. Income tax expense

A. Cost of Sale or Cost of Goods Sold refers to cost of manufacturing or selling the merchandise. It
includes the cost of purchases less Purchase Returns and Allowances and Purchase Discounts which
are both reduction from Purchases.
 Purchase Return and Allowances is deducted from Purchase’s account representing the
returns of merchandise due to damages or not conforming with the order.
 Purchase Discounts refer incentives given to suppliers for early payment of their accounts
within the discount period.
 Forming part of the cost of sales is Freight-In or Transportation-In which refers to
transportation cost in bringing the merchandise within the premise of the business to
become ready for sale.

Cost of goods sold of a merchandising entity

Beginning inventory ₱ 500,000.00
Net purchases 2,000,000.00
Goods available for sale 2,500,000.00
less: Ending inventory 300,000.00
Cost of goods sold ₱ 2,200,000.00

Gross purchases ₱ 1,900,000.00

Freight in 150,000.00
Total 2,050,000.00
less: Purchase returns, allowances and discounts 50,000.00
Net purchases ₱ 2,000,000.00
Cost of goods sold of a manufacturing entity

Beginning raw materials ₱ 500,000.00

Net purchases 2,000,000.00
Raw materials available for use 2,500,000.00
less: Ending raw materials 300,000.00
Raw materials used 2,200,000.00
Direct labor 3,000,000.00
Factory overhead 1,300,000.00
Total manufacturing cost 6,500,000.00
Beginning goods in process 900,000.00
Total cost of goods in process 7,400,000.00
less: Ending goods in process 1,000,000.00
Cost of goods manufactured 6,400,000.00
Beginning finished goods 1,600,000.00
Goods available for sale 8,000,000.00
less: Ending finished goods 1,500,000.00
Cost of goods sold ₱ 6,500,000.00

B. Operating Expenses is the 3rd and the last element that will completely form part of the Statement
of Comprehensive Income. This consists of expense that is generally classified as to function of
expenses and the nature of expenses. Under the function of expenses method, there is proper
classification of expenses as to selling or general and administrative such as:
Classifications of Operating Expenses
1. Distribution costs or selling expenses constitute costs which are directly related to selling,
advertising and delivery of goods to customers.
Distribution costs include:
a. Salesmen's salaries
b. Sales commissions
c. Traveling and marketing expenses
d. Advertising and publicity expenses
e. Freight out
f. Depreciation of delivery equipment and store equipment

2. Administrative expenses constitute cost of administering the business. These ordinarily include all
operating expenses not related to selling and cost of goods sold.
Administrative expenses include:
a. Doubtful accounts
b. Office salaries and expenses of general executives
c. Office supplies expense
d. Contributions to charity
e. Professional fees
f. Depreciation of office building and office equipment
 g. Amortization of intangible assets / leasehold improvements

3. Other expenses are those expenses which are not directly related to the distribution and
administrative function. The other expenses are the expenses and losses from peripheral or
incidental transactions of the entity.
Other expenses include:
a. Loss on sale of trading investment
b. loss on sale of property, plant, and equipment
c. Loss on sale of noncurrent investment
d. Loss on sale of intangible asset
e. Casualty loss from earthquake, typhoon, hurricane, tsunami, flood, fire, storm surge and other
natural disaster
f. Expropriation loss

4. Income tax expense – includes taxes on income. Other taxes are presented in the administrative
expense’s category under the “taxes and licenses” account.
ASSIGNMENT: RETENTION EXERCISES AND SEATWORKS

APPLY New Knowledge

B. Assessment (Formative Seatwork)
Instruction: All answers must be written on a separate clean piece of white
intermediate paper. Copy the questions and write the answers neatly and legibly.

Multiple Choice: Choose the letter which corresponds to the correct answer.

1. Statement I – Statement of Comprehensive Income was previously known as “Income

Statement” Statement II – The Statement of Comprehensive Income tells us whether the
business makes profit or incurs a loss.
a. Both Statements are true
b. Only Statement I is true
c. Only Statement II is true
d. Both Statements are false

2. Statement I – Revenue and Expenses are temporary accounts of an Owner’s Equity.

Statement II – revenue and Expenses are closed at the end of the accounting period.
a. Both Statements are true
b. Only Statement I is true
c. Only Statement II is true
d. Both Statements are false
3. Statement I – Statement of Comprehensive Income accounts are also called “nominal
accounts” Statement II – The normal balance of Revenue or Income account is Credit and
Expense is Debit.
a. Both Statements are true
b. Only Statement I is true
c. Only Statement II is true
d. Both Statements are false

4. Statement I – Revenue decreases Owner’s Equity. Conversely, Expense increases Owner’s Equity.
Statement II – Profit and Loss are closed to Owner’s Equity.
a. Both Statements are true
b. Only Statement I is true
c. Only Statement II is true
d. Both Statements are false

5. Statement I – The Statement of Comprehensive Income is dated “for the period ended.
 Statement II – In the Multi-Step form of Statement of Comprehensive Income preparation,
operating expenses are directly deducted from Sales Revenue to arrive at Profit.
a. Both Statements are true
b. Only Statement I is true
c. Only Statement II is true
d. Both Statements are false

6. Statement I – Service Concern usually follows the single-step form while Merchandising business
follows the multi-step form.
Statement II – Operating Expenses are classified into functional and natural expense.
a. Both Statements are true
b. Only Statement I is true
c. Only Statement II is true
d. Both Statements are false

7. Statement I – The Revenue that derived from service company is “Service Revenue” while the
revenue derived from Merchandising business is “Sales Revenue”.
Statement II – Gross Profit is arrived at deducting Sales from Cost of Sales.
a. Both Statements are true
b. Only Statement I is true
c. Only Statement II is true
d. Both Statements are false

Test your Memory and Understanding:

1. What is an Income Statement?
2. What is a Statement of Comprehensive Income?
3. What are the components of Comprehensive Income?
4. Explain the presentation of Comprehensive Income?
5. What are the components of other Comprehensive Income?
6. What are the (3) sections comprising the Statement of Comprehensive Income under
Merchandising concern?
7. What are revenues?
8. What are the sources of Income?
9. What are the components of expense?
10. What are the classification of expenses?
11. When does business make profit?
12. When does business incur a loss?
13. How is gross profit computed?
14. How is profit from operations arrived at when Single-Step form is used?
15. Explain the term profit or loss.
SESSION 15. FORMS OF INCOME STATEMENT

Forms of income statement

PAS 1, paragraph 99, provides that an entity shall present on the face of the income statement 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. Accordingly, the
income statement may be presented in two ways, namely functional and natural.

Two (2) Forms of Income Statement

Expenses may be presented in the statement of comprehensive using either of the following methods.

1. Nature of expense method or Natural form presentation

2. Function of expense method (Cost of sales method) or Functional form presentation

1. Nature of Expense Method

Under this method, expenses are presented according to their nature (for example, depreciation,
purchases of materials, transport costs, employee benefits, advertising costs, etc.) and are not
reallocated among their functions within the entity. This method is simple to apply because no
reallocations of expenses are necessary.

In other words, the natural expenses are no longer classified as cost of goods sold, distribution cost,
administrative costs and other activities.

This type of income statement is used in a service or merchandising business under “perpetual
inventory system”.

It is also called the single-step income statement since a single step of deducting expenses from revenue
is performed to arrive at the net income or net loss.

The expenses which are the same in nature are grouped or aggregated and presented as one item.

A Statement of Comprehensive Income that shows expenses by their nature is referred to as prepared
using a single-step approach.

Example of Nature Expense Method

a. Purchases
b. Employee benefit costs which include sales salaries, office salaries, SSS contribution, Medicare
contribution, bonuses and other employee benefit.
c. Advertising cost
d. Transport costs including freight out and other delivery expenses.
e. Supplies which includes store supplies and office supplies
f. Depreciation
g. Other expenses
Natural Income Statement

EXEMPLAR COMPANY
Income Statement
Year Ended December 31, 2020

Note
Net Sales 1 ₱ 9,000,000.00
Other Income 2 900,000.00
Investment Income 3 500,000.00
Total Income 10,400,000.00

Expenses:
Increase in inventory 4 ₱ (500,000.00)
Net purchases 5 5,900,000.00
Employee benefit costs 6 1,400,000.00
Sales commission 180,000.00
Advertising 100,000.00
Supplies expense 7 120,000.00
Delivery expense 250,000.00
Depreciation 8 240,000.00
Taxes and licenses 20,000.00
Doubtful accounts 40,000.00
Other expenses 9 320,000.00
Finance cost 10 200,000.00 ₱ 8,270,000.00
Income before tax 2,130,000.00
Income tax expense 580,000.00
Net income ₱ 1,550,000.00

Note 1 – Net sales

Gross sales ₱ 9,300,000.00
Sales return and allowance 100,000.00
Sales discount 200,000.00
Net sales ₱ 9,000,000.00

Note 2 – Other income

Interest revenue ₱ 180,000.00
Dividend revenue 120,000.00
Rent revenue 100,000.00
Gain from expropriation 500,000.00
Total ₱ 900,000.00

Note 3 - Investment income

Share in net income of associate (25%) ₱ 500,000.00

Note 4 - Increase in inventory

Inventory - December 31 ₱ 2,000,000.00
Inventory - January 1 1,500,000.00
Increase in inventory 500,000.00
 Note 5 - Net purchases
Purchases ₱ 6,000,000.00
Freight in 300,000.00
Purchase return and allowance (150,000.00)
Purchase discount (250,000.00)
Net purchases ₱ 5,900,000.00

Note 6 - Employee benefit costs

Sales salaries ₱ 600,000.00
SSS and Philhealth - sales 20,000.00
Office salaries 650,000.00
SSS and Philhealth - office 30,000.00
Bonuses 100,000.00
Total employee costs ₱ 1,400,000.00

Note 7 - Supplies expense

Store supplies ₱ 50,000.00
Office supplies 70,000.00
Total supplies expense ₱ 120,000.00

Note 8 - Depreciation
Depreciation - store ₱ 150,000.00
Depreciation - office 90,000.00
Total depreciation ₱ 240,000.00

2. Function of Expense Method

Under this method, expenses are classified and presented according to their function as part of cost of
sales or, for example, the cost of distribution or administrative activities. At a minimum, cost of sales is
presented separately from other expenses.

A Statement of Comprehensive Income that shows expenses by their function is referred to as prepared
using a multi-step approach.

The following are the major categories of expenses under the function of expenses method:

1. Cost of sales (or Cost of goods sold)

2. Distribution costs (or Selling expense)
3. Administrative expenses (or General and administrative expenses)
4. Other expenses
5. Interest expenses (or Finance cost)
6. Income tax expense
Functional Income Statement
EXEMPLAR COMPANY
Income Statement
Year Ended December 31, 2020

Note
Net sales 1 ₱ 9,000,000.00
Cost of goods sold 2 (5,400,000.00)
Gross income 3,600,000.00
Other income 3 900,000.00
Investment income 4 500,000.00
Total income 5,000,000.00
Expenses:
Distribution costs 5 ₱ 1,350,000.00
Administrative expenses 6 1,000,000
Other expenses 7 320,000
Finance cost 8 200,000 2,870,000.00
Income before tax 2,130,000.00
Income tax expense 580,000.00
Net income ₱ 1,550,000.00

Note 1 - Net sales

Gross sales ₱ 9,300,000.00
Sales return and allowance (100,000.00)
Sales discount (200,000.00)
Net sales ₱ 9,000,000.00

Note 2 - Cost of goods sold

Inventory, January 1 ₱ 1,500,000.00
Purchases ₱ 6,000,000.00
Freight in 300,000.00
Total 6,300,000.00
Purchase return and allowance (150,000.00)
Purchase discount (250,000.00) 5,900,000.00
Goods available for sale 7,400,000.00
Inventory, December 31 (2,000,000.00)
Cost of goods sold ₱ 5,400,000.00

Note 3 — Other income

Interest revenue ₱ 180,000.00
Dividend revenue 120,000.00
Rent revenue 100,000.00
Gain from expropriation 500,000.00
Total ₱ 900,000.00

Note 4 — Investment income

Share in net income of associate (25%) ₱ 500,000.00
Note 5 — Distribution costs
Sales salaries ₱ 600,000.00
SSS and Philhealth sales 20,000.00
Sales commission 180,000.00
Advertising 100,000.00
Store supplies expense 50,000.00
Delivery expense 250,000.00
Depreciation - store equipment 150,000.00
Total distribution costs ₱ 1,350,000.00

Note 6 - Administrative expenses

Office salaries ₱ 650,000.00
SSS and Philhealth - office 30,000.00
Bonuses 100,000.00
Office supplies expense 70,000.00
Taxes and licenses 20,000.00
Doubtful accounts 40,000.00
Depreciation - office equipment 90,000.00
Total administrative expenses ₱ 1,000,000.00

Note 7 - Other expenses

Loss on sale of investment ₱ 30,000.00
Loss on sale of property 120,000.00
Casualty loss from earthquake 170,000.00
Total ₱ 320,000.00

Note 8 - Finance cost

Interest expense on bank loan ₱ 50,000.00
Interest expense on bonds payable 150,000.00
Total finance cost ₱ 200,000.00
Line items
PAS 1, paragraph 82, provides that the line items in the statement of comprehensive income are:

a. Revenue
b. Gain or loss from derecognition of financial asset measured at amortized cost as required by PFRS 9
c. Finance cost
d. Share of income or loss of associate and joint venture accounted for using the equity method
e. Income tax expense
f. Gain or loss on reclassification of a financial asset from amortized cost to fair value through profit or loss.
g. Gain or loss on reclassification of a financial asset from fair value through OCI to fair value though profit or
loss. The cumulative amount in OCI is reclassified to profit or loss.
h. A single amount comprising discontinued operations
i. Profit or loss for the period
j. Other comprehensive income
k. Comprehensive income for the period

The following items shall be disclosed on the face of the income statement and statement of
comprehensive income:

A. Profit or loss attributable to noncontrolling interest and owners of the parent.

B. Total comprehensive income attributable to noncontrolling interest and owners of the parent.

An entity shall present additional line items, headings and subtotals in the statement of comprehensive
income or separate income statement when such presentation is relevant to an understanding of the
financial performance of the entity.

NOTE: Regardless of what format is followed, such statement should bear the following headings:

o Who – the name of the company or proprietor’s name if there is no trade name.
o What – the name or title of the report
o When – the period covered by the report. It might be for the month ended, for the quarter
ended, or for the year ended depending upon the cut-off date for the submission of the
report..

How to Prepare the Statement of Comprehensive Income?

Step 1: Write the heading, the title of the report and the date covered (for the period ended).

Step 2: Determine the Net Sales (Gross Sales Less Sales Discount and Sales Returns and allowances).

Step 3: Group the Cost of Sales accounts starting from Merchandise Inventory, Beg. to arrive at Cost of
Goods Available for sale. Then, deduct Merchandise Inventory, End to arrive at the Cost of Goods Sold.

Step 4: Determine Gross Profit by deducting Cost of Sales from Net Sales.

Step 5: Group the operating expenses as to Selling or Distribution and General and Administrative
Expense.

Step 6: Deduct classified Operating Expenses from Gross Profit and you will arrive at PROFIT.
Following the aforementioned steps, the Statement of Comprehensive Income under Multiple Step
form is shown hereunder:

Steps 1 and 2: Combining steps 1 and 2, first partial format will appear as follows:

Ichiro Supermart
Statement of Comprehensive Income
For the month ended January 31, 20A

Revenue from Sales:

Sales ₱ 902,000.00
Less: Sales Discount ₱ 5,000.00
Sales Returns and Allowances 8,000.00 13,000.00
Net Sales ₱ 889,000.00

Steps 3 and 4: Combining steps 3 and 4, the second partial format will appear as follows.

Cost of Good Sold

Merchandise Inventory, Jan.1 ₱ 45,000.00
Purchases ₱ 675,000.00
Less: Purchase Discounts ₱ 3,600.00
Purchase Return & Allowances 6,500.00 10,100.00
Net Purchases 664,900.00
Add: Freight In 5,000.00
Net Cost of Purchases 669,900.00
Goods Available for Sale 714,900.00
Less:Merchandise Inventoruy, Jan.31 102,000.00 ₱ 612,900.00
Gross Profit ₱ 276,100.00

Note: Net Sales – Cost of Goods Sold = Gross Profit

P 889,000 – 612,900 = P 276,000

Steps 5 and 6: Combining steps 5 and 6, the third and final format of the statement will appear as
follows.

Operating Expenses:
Selling or Distribution:
Salaries Expense ₱50,000
Freight Out 3,920
Taxes and Licenses 15,000
Uncollectible Account Expense 19,100 ₱88,020

General and Administrative:

Rent Expense 30,000
Depreciation Expense 11,250
Utilities Expense 18,000 59,250 ₱147,270
Profit before Finance Charges ₱128,830
Less: Interest Expense 3,800
Profit for the month ₱125,030
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, & MANAGEMENT 2 18

The complete Statement of Comprehensive Income under Multiple Step form.

Ichiro Supermarket
Statement of Comprehensive Income
For the month ended January 31,20A

Revenue from Sales:

Sales ₱ 902,000.00
Less: Sales Discount ₱ 5,000.00
Sales Returns and Allowances 8,000.00 13,000.00
Net Sales 889,000.00
Cost of Goods Sold:
Merchandise Inventory,Jan.1 45,000.00
Purchases ₱ 675,000.00
Less: Purchase Discount ₱ 3,600.00
Purchase Returns and Allowances 6,500.00 10,100.00
Net Purchases 664,900.00
Add: Freight In 5,000.00
Delivered Cost of Purchases 669,900.00
Goods Available for Sale 714,900.00
Less: Merchandise Inventory,Jan.31 102,000.00 612,900.00
Gross Profit 276,100.00
Operating Expenses:
Selling and Distribution:
Salaries Expense 50,000.00
Freight Out 3,920.00
Uncollectible Account Expense 19,100.00
Taxes and Licenses 15,000.00 88,020.00

General and Administrative:

Rent Expense 30,000.00
Depreciation Expense 11,250.00
Utilities Expense 18,000.00 59,250.00 147,270.00
Profit before Finance Charges 128,830.00
Less: Interest Expense 3,800.00
Profit for the month ₱ 125,030.00
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, & MANAGEMENT 2 19

There are variations in the Statement of Comprehensive Income preparation.

In this instance, only Statement of Comprehensive Income is shown for illustration purposes wherein
various schedules are prepared which form part of the body of statement.

Ichiro Supermarket
Statement of Comprehensive Income
For the year ended January 31,20A

NOTES
Net Sales 1 ₱889,000
Less: Cost of Goods Sold 2 612,900
Gross Profit ₱276,100
Less:Operating Expenses
Selling or Distribution 3 ₱88,020
General and Administrative 4 59,250 147,270
Profit before Finance Charges ₱128,830
Less: Interest Expense 3,800
Profit for the month ₱125,030

NOTE 1: Net Sales

Sales ₱902,000
Less: Sales Discount ₱5,000
Sales Return and Allowances 8,000 ₱13,000
Net Sales ₱889,000
NOTE 2: Cost of Goods Sold

Merchandise Inventory,Jan.1 ₱ 45,000.00

Purchases ₱ 675,000.00
Less: Purchase Discount ₱ 3,600.00
Purchase Return and Allowances 6,500.00 10,100.00
Net Purchases 664,900.00
Add: Freight In 5,000.00
Net Cost of Purchases 669,900.00
Goods Available for Sales 714,900.00
Less:Merchandise Inventory,Jan.31 102,000.00
Cost of Goods Sold ₱ 612,900.00

NOTE 3: Selling Expense

Salaries Expense ₱ 50,000.00

Freight Out 3,920.00
Uncollectible Accounts 19,100.00
Taxes and Licenses 15,000.00
Total Selling Expenses ₱ 88,020.00

NOTE 4: General and Administrative

Rent Expense ₱ 30,000.00

Depreciation Expense 11,250.00
Utilities Expense 18,000.00
Total General and Administrative ₱ 59,250.00
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, & MANAGEMENT 2 20

The Statement of Comprehensive Income, tell us whether the business makes profit or incurs a loss

Does the Does the

business make business incur
profit? loss?

The business makes profit because the revenue earned is bigger than cost and expenses incurred.
However, the business may have suffered losses if cost and expenses incurred exceeds revenue
earned.

If the business makes profits, the following series of questions can be asked.

What cost can I Can I afford to

cut down to hire additional
maximize profit? employees?
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, & MANAGEMENT 2 21

Points to Remember

 Income Statement - The Income Statement shows the result of operations for a given period. It
consists of the Revenue, Cost, and Expenses

 Forms of Income Statement

1. Natural Form - otherwise called the nature of expense method, it presents expenses
according to nature. This type of income statement is used in a service business. It is also
called the single-step income statement since a single step of deducting expenses from
revenue is performed to arrive at the net income or net loss.

2. Functional Form - otherwise known as the cost of sales method, it presents expenses
according to function. (e.g., cost of sales, selling expenses, administrative expenses). This
type is used in a merchandising business. It is also called the multiple-step income
statement since a series of steps is performed to arrive at the net income or net loss.

 Comparison of the Natural Form and the Functional Form Income Statements

NATURAL FORM FUNCTIONAL FORM

Income Form Services P xxx Net Sales P xxx
Less: Operating Expenses xxx Less: Cost Of Sales xxx
Net Income/ Less Pxxx Gross Profit P xxx
Less: Operating Expense xxx
Net Income/Loss Pxxx