Fundamentals of Accountancy, Business, and Management 2

1
Statement of Comprehensive Income Part II

Module 005 Statement of Comprehensive

Income Part II

These accounts in the income statement reflect the inflows and outflows of
resources within the firm and their relationship is an indicator of how
successful the business operation was for a given period. The story of the
success, or failure, of operations is shown in the statement of income.At the
end of this module, you will be able to:

1. Discuss the difference in the structure of the statement of income

between a service business and a merchandising business

2. Prepare a statement of income for a service business using a single-step

approach.

3. Construct a statement of income for a merchandising business using a

multiple-step approach.

The following is an example of an Income Statement for service business:

Example 1:

Marla spa, a service business, has the following accounts

for the year ending 2017:

Service revenue ₱ 75,000

Operating expenses 30,000

Gain from sale of equipment 15,000

Loss from sale of investment 5,000

Net Profit for the year ending 2017 is ₱55,000.

Solution:

(75,000 + 15,000) – (30,000 + 5000) = 55,000

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The above income statement is prepared using a single-step approach
because after getting the totals of revenue and expense items, the difference
was arrived at by simply subtracting the two.

A single-step income statement is one of two commonly used formats for

the income statement or profit and loss statement. The single-step format
uses only one subtraction to arrive at net income.

It is also to be noted from the above report that the heading of a statement of
income usually consists of the following:

 Business name

 Statement of income

 Period covered by the statement

Example 2:

Happy Store, a merchandising business, has the following

accounts for the year ending 2017:

Sales ₱ 90,000

Cost of goods sold 45,000

Operating expenses 65,000

Gain from sale of equipment 3,000

Loss from sale of investment 5,000

Net Loss for the year ending 2017 is ₱22,000.

Solution:

(90,000 + 3,000) – (45,000 + 65,000 + 5,000) = 22,000

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Statement of Comprehensive Income Part II

On the other hand, here is an example of an Income Statement for

merchandising business:

The multiple-step profit and loss statement segregates the operating

revenues and operating expenses from the no operating revenues, no
operating expenses, gains, and losses. The multiple-step income statement
also shows the gross profit (net sales minus the cost of goods sold).

The income statement for merchandising businesses usually has seven

sections:
 Net sales
 Cost of goods sold
 Gross profit
 Operating expenses
 Operating income or operating loss
 Other revenues and gains (expenses and losses)
 Net profit or net loss

There are three benefits to using a multiple-step income statement:

1. Multiple-step income statement clearly states the gross profit amount. Many
readers of financial statements monitor a company's gross margin (gross profit
as a percentage of net sales). Readers may compare a company's gross margin to
its past gross margins and to the gross margins of the industry.

2. The multiple-step income statement presents the subtotal operating income,

which indicates the profit earned from the company's primary activities of
buying and selling merchandise.

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 3. The bottom line of a multiple-step income statement reports the net amount for
all the items on the income statement. If the net amount is positive, it is labeled
as net income. If the net amount is negative, it is labeled as net loss

Important Terms

Some important definitions in relation to understanding the merchandising

business of an income statement are the following:

Net sales refer to total or gross sales less any sales discounts, and sales
returns and allowances.

Sales discounts are reductions in the total sales price given to the customer if
the account will be paid within a short period of time. Assuming the credit
term is 1/10, n/30, the customer will be given a 1% discount if payment is
received within 10 days from the invoice date. Assuming total credit sales of
₱50,000 was made on September 1 and the customer paid on or before
September 11, an amount of ₱5,000, representing 1% of ₱50,000, will be
deducted from the total amount due.

Sales returns and allowances are also reductions in the total selling price.
Sales returns represent the actual price of returned merchandise by the
customer; sales allowances are reductions in the price because of possible
defects or damages in the products sold.

Cost of goods sold is the actual cost of the merchandise sold. It is the sum of
the cost of merchandise in the beginning inventory plus the net cost of goods
purchased this period less the merchandise in the ending inventory.

Cost of goods sold = Beginning inventory + Net cost of goods purchased – Ending inventory
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Statement of Comprehensive Income Part II

Merchandise inventory represents the total amount of inventory on hand.

Beginning inventory is the amount of inventory at the beginning of the period
and ending inventory is the amount remaining at the end of the period.
Net cost of goods purchased is the total or gross purchases less any purchase
discounts and purchase returns and allowances.
Purchase discounts are cash discounts representing reductions in the
purchase price because the buyer settled the account within the credit term.
Purchase returns and allowances are deducted in the purchase price either
because of returns or reductions due to defects or damages of goods
purchased.

<Figure 1.The main difference on the income between a Service and Merchandising business is that revenue of
service business comes from fees on rendered services while the income of a merchandising business comes from
sales of the products>

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Glossary

Net sales: refer to total or gross sales less any sales discounts, and sales returns and
allowances.

Sales discounts: are reductions in the total sales price given to the customer if the
account will be paid within a short period of time.

Sales returns and allowances:represent the actual price of returned merchandise by

the customer; sales allowances are reductions in the price because of possible defects or
damages in the products sold.

Cost of goods sold: is the actual cost of the merchandise sold. It is the sum of the cost of
merchandise in the beginning inventory plus the net cost of goods purchased this period
less the merchandise in the ending inventory.

Merchandise inventory: represents the total amount of inventory on hand.

Beginning inventory: is the amount of inventory at the beginning of the period and
ending inventory is the amount remaining at the end of the period.

Net cost of goods purchased: is the total or gross purchases less any purchase discounts
and purchase returns and allowances.

Purchase discounts: are cash discounts representing reductions in the purchase price
because the buyer settled the account within the credit term.

Purchase returns and allowances: are deducted in the purchase price either because of
returns or reductions due to defects or damages of goods purchased.
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Statement of Comprehensive Income Part II

References and Supplementary Materials

Books and Journals

Jimenez, C.E., Palo, R.R, &Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and
Practice. Manila: JMS Publishing House

Jimenez, C.E., &Ocampo, L.B. (2015). Fundamentals of Accounting, Quicknotes and

Exercises. Manila: JMS Publishing House

Online Supplementary Reading Materials

Income Statement (explanation);https://www.accountingcoach.com/income-

statement/explanation; 10 April 2017

Single Step & Multiple Step Approach: https://www.accountingcoach.com/income-

statement/explanation/3-4

Online Instructional Videos

Income Statement Explained: Comprehensive Income Statement Tutorial - Profit & Loss
Statement; https://www.youtube.com/watch?v=EdHQ646zrDI&feature=youtu.be; 23
March 2017

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