COLLEGE OF COMMERCE

BACHELOR OF SCIENCE IN ACCOUNTANCY

MODULE 4 PACKET
AE 17 - INTERMEDIATE ACCOUNTING 3
STATEMENT OF COMPREHENSIVE INCOME AND STATEMENT OF CHANGES IN EQUITY

Welcome to Module 4
In this module, we will discuss the nature, purpose and relevance of the statement of comprehensive
income and statement of changes in equity. Further, we shall also be discussing the concept of
comprehensive income, profit or loss, other comprehensive income and equity. During the discussion,
you should be able to actively participate by giving examples of transactions and determining the element
of the transactions related to comprehensive income and proper classification for presentation in the
statement of comprehensive income. You will also be required to appraise yourselves with the
recognition of the adjustments related to comprehensive income and be able to prepare a properly
classified statement of comprehensive income following the functional and natural presentation. We shall
also identify the items directly affecting the retained earnings and the components that comprise equity.
When you see this symbol that is shown across the printed discussion, this represents an important
point for discussion or appreciation/appraisal to be rendered by the student. At the end of this module,
you will be answering multiple choice questions and straight problems focusing on the requirements to be
disclosed in the notes to the financial statements.

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Thursday from 8am to 11am and 1pm to
4pm

LEARNING OUTCOMES:
By the end of this module, the students will be able to:
1. Discuss the nature, relevance and importance of the income statement, statement of retained
earnings and statement of changes in equity.
2. Understand the concept of comprehensive income, profit or loss and other comprehensive income as
well as retained earnings and equity.
3. Identify the components of other comprehensive income, statement of retained earnings and
changes in equity.
4. Present the income statement, statement of retained earnings and changes in equity in its proper
format as required under PFRS.

ASSESSMENT PLAN:
1. Graded recitation through interactive participation in a question and answer format during discussion
2. Problem solving games (points awarded to the first 5 students who can submit the correct answer
and solution)
3. Individual Submission and discussion of homework or learning tasks through research online
4. Summative examinations in multiple choice question format

LEARNING PLAN/SCHEDULE OF ACTIVITIES

2020-2021 Module Packets for AE 15 and ELEC 1 (Intermediate Accounting) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines Page 1 of 18

BACHELOR OF SCIENCE IN ACCOUNTANCY
ACTIVITIES
A. Assigned Reading
 Read
1. Conceptual
Framework on
Statement of
Financial Position
& Recognition
Concepts
2. Basic Accounting on
Components of
Statement of
Financial Position
3. Intermediate
Accounting on Line
Items Required for
Statement of
Financial Position
B. Lecture discussion
1. Read Chapter 2 of IA3
2. Watch Video
3. Interactive
participation thru Q&A
4. Graded recitation
C. Synthesize the main points
 Graded recitation
2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
COLLEGE OF COMMERCE
STRATEGIES/DESCRIPTION/TOPICS/ TIME TO
COURSE CONTENT COMPLETE
1. Read the definition and the transactions that 0.5 hours
are required to be classified and presented
as comprehensive income and other 2.0 hours
comprehensive income
2. Discuss your understanding of the nature,
relevance and purpose of the comprehensive
income, profit or loss and other comprehensive
income as well as retained earnings and
equity.
3. Understand and give examples for each of
the components of comprehensive and other
comprehensive income
4. Determine how retained earnings and equity
specifically are presented in the financial
statements.
1. Discuss the concept and significance of the 0.5 hours
statement of comprehensive income; 4.0 hours
2. Identify the components and forms of the
statement of comprehensive income;
1.0 hour
3. Prepare the statement of comprehensive
income complying with the requirements of 2.0 hours
PAS 1;
4. Enumerate material items of income 1.5 hours
and expense requiring separate
disclosure
5. Differentiate separate statement of
comprehensive income from single
statement of comprehensive income
6. Discuss the requirements and steps in
preparing the statement of retained earnings
7. Discuss the requirements and steps in
preparing the statement of changes in equity
1. Teacher summarizes the main 1.5 hours
points discussed.
2. Students will be required to recite by sharing 1.0 hour
their understanding/learnings specifically
pointing out the important aspects that have
just been discussed regarding the transactions
and/or factors that must be considered in
preparing the statements of comprehensive
Page 2 of 18
 income, retained earnings and changes in
equity.
3. This will validate the achievement of learning
outcomes.
D. Assignment 1. Search for a complete set of financial 2.0 hours
statements of business entity(ies) that include
the statements of comprehensive income,
retained earnings and changes in equity.
2. Identify and give examples of each of the
components of the other comprehensive
income as well as the retained earnings and
changes in equity and what is the nature of
each and what each represents.
3. Answer all questions and solve all problems
from the textbook.
E. Summative Quiz 1. Take multiple question quiz for (to be 1 hour
announced)

REFERENCES

1. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Conceptual framework and

accounting standards. 2019 edition. Manila : GIC Enterprises & Co., Inc. FIL 657.0218
V173c 2019
2. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume
one. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019
v. 1
3. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume
two. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019
v. 2
4. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume
three. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019
v. 3
5. Cabrera, M. E. B. & Cabrera, G. A. B. (2019). Financial accounting and
reporting fundamentals. 2019-2020 edition. FIL 657.48 C117f 2019
6. Millan, Zeus Vernon B. Intermediate Financial Accounting III. Baguio City:
Bandolin Enterprise 2016

COURSE CONTENT DISCUSSION

4.1 STATEMENT OF COMPREHENSIVE INCOME

 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 specified 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 efficient utilization of resources.
 What is financial performance?
 The financial performance refers to the results of operations.

 What does income statement show ?

 The income statement for a period presents the income, expenses, gains, losses and net
income or loss recognized during the specified period of time.

 How is the income statement prepared accordingly with PFRS?

 The transaction approach is the conventional or traditional preparation of income statement
in conformity with PFRS.
 How is transaction approach undertaken in computing for net income or loss of an entity?
 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.
 Why do entities need to measure its financial performance ?
 Information about the financial performance of an entity, in particular its profitability, is useful
in predicting the capacity of the entity to generate cash flows from existing resources.

 What is a comprehensive income?

 Comprehensive income is the change in equity during a period resulting from transactions and
other events, other than the changes resulting from transactions with owners in their own
capacity as owners.
 This includes the profit or loss and other comprehensive income.

 What is profit or loss ?

 Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income.
 We often call it the “bottom line” in the traditional income statement where a red “bottom line”
means a loss.
 Alternatively, an entity may use net income or net loss to describe profit or loss.

 What is other comprehensive income or OCI?

 Other comprehensive income comprises items of income and expense 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 other comprehensive income?

a. Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income
b. Unrealized gain or loss on debt investment measured at fair value through other
comprehensive income
 c. Gain or loss from translating the financial statements of a foreign operation
d. Revaluation surplus during the year
e. Unrealized gain or loss from derivative contracts designated as cash flow hedge
f. Change in fair value attributable to credit risk of a financial liability designated at fair value
profit or loss
 How is the other comprehensive income presented in the financial statements?
 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.
 How should we classify OCI for presentation in the financial statements?
 The line items for amounts of OCI shall be grouped as follows:
a. OCI that will be reclassified subsequently to profit or loss when specific conditions
are met
1. Gain or loss from translating financial statements of a foreign operation
2. Unrealized gain or loss on derivative contracts designated as cash flow hedge
3. Unrealized gain or loss on debt investment measured at fair value through OCI
b. OCI that will not be reclassified subsequently to profit or loss but to retained
earnings
1. Unrealized gain or loss on equity investment measured at fair value through OCI
o Under PFRS 9, the unrealized gain or loss is reclassified to retained earnings
upon the disposal of the investment.
2. Change in revaluation surplus
o The realization of the revaluation surplus is through retained earnings
3. Remeasurements of a defined benefit plan.
o The remeasurements are not recycled subsequently to profit or loss but
may be transferred within equity or retained earnings
4. Gain or loss attributable to credit risk of a financial liability designated at fair
value through profit or loss
o The gain or loss may be recycled subsequently within equity or
retained earnings.
 What are reclassification adjustments?
 Reclassification adjustments refer to amounts reclassified to profit or loss in the current
period that were recognized in other comprehensive income in the current or previous
periods.
 What is the presentation format for the statement of comprehensive income?
 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
 o 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,

 What are the sources of income?

a. Sales of merchandise to customers
 The income from sales shall include all sales to customers minus sales
returns, allowances and discounts
b. rendering of services
 Income from rendering of services, among others, includes professional fees,
media advertising commission, 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 investment, gain on sale of property, plant and
equipment and gain on sale of intangible assets

 What are the components of expense?

a. cost of goods sold or cost of sales
b. distribution costs or selling expenses
c. administrative expenses
d. Other expenses.
e. income tax expense

 What comprises the cost of goods sold of a merchandising entity?

Beginning inventory 500,000
Net purchases 2,000,000
Goods available for sale 2,500,000
Ending inventory (300,000)
Cost of goods sold 2,,200,000

Gross purchases 1,900,000

Freight in 150,000
Total 2,50,000
Purchase returns, allowances and discounts (50,000)
Net purchases 2,000,000

 What comprises the cost of goods sold of a manufacturing entity?

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

 What are the classifications of expenses?

a. Distribution cost for selling expenses constitute costs which are directly related to selling,
advertising and delivery of goods to customers.
1. Salesmen’s salaries
2. Sales commissions
3. Traveling and marketing expenses
4. Advertising and publicity expenses
5. Freight out
6. Depreciation of delivery equipment and store equipment
b. Administrative expenses constitute cost of administering the business.
 This ordinarily includes all operating expenses not related to selling and cost of
goods sold.
1. administrative expenses include:
2. doubtful accounts
3. office salaries and expenses of general executives
4. office supplies expense
5. contributions to charity
6. professional fees
7. depreciation of office building and office equipment
8. amortisation of intangible asset
c. 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
1. loss on sale of trading investment
2. Loss on sale of property, plant and equipment
3. loss on sale of noncurrent investment
4. loss on sale of intangible asset
5. casualty loss from earthquake, typhoon, hurricane, tsunami, flood, fire, storm
surge and other natural disaster
6. expropriation loss

 Are entities still required to present extraordinary items?

 PAS 1 paragraph 87 specifically mandates that an entity shall not present any items of income
and expense as extraordinary items, in the income statement or statement of comprehensive
income or in the notes.
 Unusual and infrequent items of income and expense are considered components of income
from continuing operations
 Examples of extraordinary items:
 a. expropriation loss
b. casualty loss from earthquake, typhoon, flood, fire and other natural disasters

 What disclosure is required for items of income and expense?

 PAS 1 paragraph 97 provides that when items of income and expense are material,
their nature and amount shall be disclosed separately.

 What are these circumstances that may result in the materiality of income and expense that will
require separate disclosure?
 Paragraph 98 provides the circumstances that would give rise to the separate disclosure
of items of income and expense
a. Write down of inventory to net realizable value and reversal of such write down
b. Write down of property, plant and equipment to recoverable amount and reversal of such
write down
c. Restructuring of the activities of an entity and reversal of any provision for the cost of
restructuring
d. Disposal of an item of property, plant and equipment
e. Disposal of investment
f. Discontinued operation
g. Litigation settlement other reversal of provision

 What are the line items required in the presentation to the statement of comprehensive income?
 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. A single amount comprising discontinued operations
g. Profit or loss for the period
h. Other comprehensive income
i. Comprehensive income for the period

 What items are required to be presented on the face of the income statement and statement of
comprehensive income?
 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

 Can entities still add some more line items, headings and/or subtotals other than those prescribed
under PAS 1?
  An entity shall present additional line items, headings and subtotals in the statement of
comprehensive income when presentation is relevant to an understanding of the financial
performance of the entity.

 What are the formats 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, which ever provides information that is reliable
and more relevant. (Conceptual framework of financial reporting qualitative characteristics)
a. Functional presentation
 Traditional and common form
 Also known as the cost of goods sold method
 Classifies expenses according to their function as part of the cost of goods
sold, distribution costs, administrative expenses or activities and other activities
 Entities classifying expenses by function shall disclose additional information on the
nature of expenses, including depreciation, amortization and employee benefit costs.

b. Natural presentation
 Referred to as the nature of expense method
 Expenses are aggregated according to their nature and not allocated among the
various functions within the entity
 Expenses are not classified as cost of goods sold, distribution costs, administrative
and other activities
 the expense which are of the same nature are grouped or aggregated and presented
as one item
 Illustration of Functional Income Statement
  Which form of income statement is preferred?
 PAS1 paragraph 105 simply states that because each method of presentation vary for
different types of entities, management is required to select the presentation that is
reliable and more relevant.
 The cost of goods sold method usually would provide more relevant information to
the users.

 What is the purpose of the statement of comprehensive income?

 The purpose of this statement is to provide more comprehensive information on financial
performance measured more broadly than the income as traditionally computed.
 How is the statement of comprehensive income presented?
 It starts with the net income or loss as shown in the income statement plus or minus the
components of other comprehensive income.

 Illustration of Statement of Comprehensive Income in a Two-Statement Approach

 Using the net income in the preceding illustration, in a two-statement method, the separate
statement of comprehensive income may appear as follows:

EXEMPLAR COMPANY
Statement of Comprehensive Income
Year Ended December 31, 2019

Net income 1,550,000

OCI to be reclassified to profit or loss:
Foreign currency translation gain 150,000
Unrealized loss on derivative contract
designated as cash flow hedge (100,000) 50,000
Comprehensive income 1,600,000

 Comprehensive income includes the net income or loss for the period plus or minus the
components of other comprehensive income
 However, the comprehensive income of 1,600,000 is not carried to retained earnings.
 Only the net income of 1,550,000 is included in the determination of retained earnings
unappropriated
 The net other comprehensive income of 50,000 is carried to “reserves” or shown separately in
the statement of changes in equity.

 What is a single statement of comprehensive income?

 Another option in presenting the components of profit or loss and components of other
comprehensive income is to prepare a single statement of comprehensive income
 This single statement is the combined income statement and statement of comprehensive
income.
 Illustration of the single statement of comprehensive income following the
functional presentation

4.2 STATEMENT OF CHANGES IN EQUITY

 What is equity ?
 Equity is defined as the residual interest in the assets of an entity after deducting all of the
liabilities.
 Equity is the equivalent of net assets, meaning, total assets minus total liabilities.

 Where is the equity reported?

 It is subclassified and considered the third group of the major components presented in the
statement of financial position.

 How is the subclassification presented in the statement of financial position?

 In a corporate entity, the following sub classifications may be shown separately:
a. Share capital - funds contributed by shareholders equal to the par or stated value
 The holders of instruments classified as equity are simply known as ”owners”.
b. Share premium - funds contributed by shareholders in excess of par or stated value
c. Retained earnings which may be unappropriated and appropriated
  What is the statement of changes in equity
 The statement of changes in equity is a formal statement that shows the movements in the
elements or components of the shareholders’ equity.

 How is the statement of changes in equity presented?

 An entity shall present a statement of changes in equity showing:
a. Comprehensive income for the period
b. For each component of equity, the effects of changes in accounting policies and correction
of errors
c. For each component of equity, a reconciliation between the carrying amount at the
beginning and end of the period, separately disclosing changes from:
1. Profit or loss
2. Each item of other comprehensive income
3. Transactions with owners in their capacity as owners showing separately contributions
by and distributions to owners

 ILLUSTRATION OF STATEMENT OF CHANGES IN EQUITY

EXEMPLAR COMPANY
Statement of Changes in Equity
Year ended December 31, 2019

Retained
Share Capital Reserves Earnings
Balance - January 1 5,000,000 2,000,000 1,000,000
Correction of error resulting from prior year under (100,000)
depreciation
Change in accounting policy from weighted- 300,000
average to FIFO - credit
Issuance of 10,000 ordinary shares with p100 par 1,000,000 500,000
at p150 per share
Issuance of 5,000 preference shares with p50 par 250,000 250,000
at p100 per share
Comprehensive income:
Net Income 1,550,000
Other comprehensive income 50,000
Dividends declared during the year (400,000)
Current appropriation for contingencies 200,000 (200,000)
Balances - December 31 6,250,000 3,000,000 2,150,000
4.3 STATEMENT OF RETAINED EARNINGS

 What is a statement of retained earnings ?

 The statement of retained earnings shows the changes affecting directly the retained earnings of
equity.

 Is the statement of retained earnings presented apart or separate from the basic financial
statements?
 It is consolidated in the statement of changes in equity.

 What are the important information that must be disclosed in the statement of retained earnings?
a. Net income or loss for the period
 Net income is added because it increases retained earnings and net loss is deducted
because it decreases retained earnings
b. Prior period errors
 The prior period errors are shown as adjustment of the beginning balance of
retained earnings to arrive at the corrected beginning balance
o if the net income of the prior period is understated, the amount of error is added to
retained earnings.
o if the net income of the prior period is overstated, the amount of the error is deducted
from retained earnings
c. Dividends declared and paid to shareholders
 The dividends declared or paid during the year shall be deducted from the retained
earnings
d. Effect of change in accounting policy
 this is shown as an adjustment of the beginning balance of retained earnings
o if the net income of prior period is understated because of change in accounting policy,
the effect is added to the beginning retained earnings.
o if the net income of prior period is overstated because of change in accounting policy,
the effect is deducted from the beginning retained earnings
e. Appropriation of retained earnings
 the amount of appropriation is deducted from the unappropriated balance of retained
earnings
 conversely, if appropriation is subsequently cancelled, it is reverted or added back to the
unappropriated balance
 What are the instances when the retained earnings can be appropriated?
1. Legal requirement, as in the case of treasury shares
2. Contractual requirements, as in the case of bond redemption
3. Equity policy, as approach appropriation for contingencies
 ILLUSTRATION OF STATEMENT OF RETAINED EARNINGS

EXEMPLAR COMPANY
Statement of Changes in Equity
Year ended December 31, 2019

Retained earnings, January 1 1,000,000

Correction of error - priori under depreciation (100,000)

Change in accounting policy for weighted average to FIFO

inventory valuation resulting in increased 300,000

Corrected beginning balance 1,200,000

Net income for the period 1,550,000

Dividends declared during the year (400,000)

Appropriated for contingencies (200,000)

Retained earnings, December 31 2,150,000