4 STATEMENT OF COMPREHENSIVE INCOM

Technical Knowledge
• To understand the objective and usefulness of an income statement.
• To understand the concept of comprehensive income, profit or loss and other compre
income.
• To identify the components of other comprehensive income.
• To understand the subsequent reclassification of the components of other comprehen
income.
• To know the minimum line items in the statement of comprehensive income.
• To know the natural and functional presentation of income statement.
• To be able to prepare and present a separate income statement and a single stateme
comprehensive income.

A. Definition

An income statement is a 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 in
earned by he entity through the effective and efficient utilization of its resources.

The financial performance is also known as the results of operations of the entity. The income state
for the period presents the income, expenses, gains, losses and net income or loss recognized durin
the period.

B. Comprehensive Income

b1. Definition

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

Accordingly, comprehensive income includes:

a. Components of profit and loss

b. Components of other comprehensive income.

b1a. Profit and loss

The term profit and loss is the total income less expenses excluding the components
comprehensive income. In other words, this is the bottom line in the traditional incom
statement.
 b1b. Other comprehensive income (OCI)

Other comprehensive income comprises items of income and expenses including

reclassification adjustments that are not recognized in profit and loss.

The components of other comprehensive income include the following:

a. Unrealized gain or loss on equity investment measured at fair value.

b. Unrealized gain or loss on debt investment measured at fair value.
c. Gain or loss from translation of 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. Remeasurement of defined benefit plan, including actuarial gain or loss.
g. Change in fair value attributable to credit risk of a financial liability designated at fa
value through profit or loss.

Components that will be reclassified subsequently to profit or loss include:

a.. Unrealized gain or loss on debt investment measured at fair value.

b. Gain or loss from translation of the financial statements of a foreign operation.
c. Unrealized gain or loss from derivative contracts designated as cash flow hedge.

Components that will not be reclassified subsequently to profit or loss include

a. Unrealized gain or loss on equity investment measured at fair value. It is reclassif

retained earnings upon disposal of the investment.
b. Revaluation surplus during the year. Reclassified through retained earnings.
c. Remeasurement of defined benefit plan, including actuarial gain or loss, can be tra
to equity or retained earnings.
d. Change in fair value attributable to credit risk of a financial liability designated at fa
value through profit or loss can be transferred within equity or retained earnings.

b2. Income Statement

b2a. Sources of income

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

b2b. Components of expense

a. Cost of goods sold or cost of sales
b. Distribution cost or selling expenses
c. Administrative expenses
d. Other expenses
e. Income tax expense
 b2c. Forms of income statement

a. Functional presentation

This form classifies expenses according to their functions as part of cost of sales,
distribution costs, administrative activities, and other activities. It is also known as
the cost of sale method.

b. Natural presentation

This presentation is referred to as the nature of expense method. Under this form, ex
are aggregated according to their nature and not allocated among the various functio
the entity.

Under this form, expenses are aggregated according to their nature and not allocated
the various functions within the entity.

b3. Statement of Comprehensive Income

In addition to the income statement, a statement of comprehensive income is also prepared

to show the total comprehensive income.

The purpose of this statement is to provide a more comprehensive information on financial

performance measured more broadly that the income as traditionally computed.

Illustration:
Exemplar Company
Statement of Comprehensive Income
Year Ended December 31, 2017
( in USD)
Net income
Other comprehensive income to be reclassified to profit and loss:
Foreign currency translation gain
Unrealized loss on derivative contract designated as
cash flow hedge
Comprehensive income

Note: A single statement can be prepared to present the comprehensive income. In this the in
statement is combined with the statement of comprehensive income.

However, the comprehensive income of $1,600,000 is not carried to retained earnings. Only t
income of $1,550,000 is included in the determination of retained earnings unappropriated. T
comprehensive income of $50,000 is carried to "reserves" or shown separately in the change

C. Statement of Retained Earnings

The statement of retained earnings shows the changes affecting directly the retained earnings of and
and relates the income statement to the statement of financial position.
 Data or items that should be clearly disclosed in the statement of retained earnings are:

a. Profit or loss for the period

b. Prior period errors
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings

D. Statement of Changes in Equity

The statement of changes in equity is a basic statement that shows the movements in the elements
components of the shareholders' equity.

An entity shall present a statement of changes in equity showing the following:

1. Comprehensive income for the period.

2. For each component of equity, the effects of changes in accounting policies and corrections
of errors.
3. for each component of equity, a reconciliation between the carrying amount at the beginning
and end of the period, separately disclosing changes from:

a. Profit and loss.

b. Each item of other comprehensive income.
c. Transactions with owners in their capacity as owners showing separately contribution
by and distributions to owners.

E. Statement of Cash Flows

The statement of cash flows is a basic component of the financial statements which summarizes the
operating, investing and financing activities of an entity.

In simple language, the statement of cash flows provides information about the cash receipts and ca
payments of an entity during the period.

"Functional" or "Cost of sales Method" Income Statement

SINGLE COMPANY
Income Statement
Year ended December 31, 2017
(in USDollar)

Note
Net sales (1)
Cost of goods sold (2)
Gross income
Other income (3)
Investment income (4)
Total income
Expenses:
Distribution costs (5)
Administrative expenses (6)
Other expenses (7)
Finance cost (8)
Income before tax
Income tax expense
Net income

Note 1 - Net sales

Gross sales
Sales returns and allowances
Sales discount
Net sales

Note 2 - Cost of goods sold

Inventory, January
Purchases
Freight in
Total
Purchase returns and allowance
Purchase discount
Goods available for sale
Inventory, December 31
Cost of sales

Note 3 - Other Income

Interest revenue
Dividend revenue
Rent revenue
Gain from expropriation
Total other income

Note 4 - Investment income

Share in net income of associate (25%)

Note 5 - Distribution costs

Sales salaries
Sales commission
Advertising
Store supplies expense
Delivery expense
Depreciation-store equipment
 Total distribution costs

Note 6 - Administrative expenses

Office salaries
Bonuses
Office supplies expense
Taxes and licenses
Doubtful accounts
Depreciation-office equipment
Total administrative expenses

Note 7 - Other expenses

Loss on sale of investment
Loss on sale of property
Casualty loss from earthquake
Total other expenses

Note 8 - Finance cost

Interest expense on bank loan
Interest expense on bonds payable
Total finance cost

"Natural" or "Nature of Expense" Income Statement

SINGLE COMPANY
Income Statement
Year ended December 31, 2017
(in USDollar)

Note
Net sales (1)
Other income (2)
Investment income (3)
Total income

Expenses:
Increase in inventory (4)
Net purchases (5)
Employee benefit costs (6)
Sales commission
Advertising
Supplies expense (7)
Delivery expense
Depreciation (8)
Taxes and licenses
Doubtful accounts
Other expense (9)
 Finance cost (10)
Income before tax
Income tax expense
Net income

Note 1 - Net sales

Gross sales
Sales returns and allowances
Sales discount
Net sales

Note 2 - Other Income

Interest revenue
Dividend revenue
Rent revenue
Gain from expropriation
Total other income

Note 3 - Investment income

Share in net income of associate (25%)

Note 4 - Increase in inventory

Inventory, December 31
Inventory, January 1
Increase in inventory

Note 5 - Net Purchases

Purchases
Freight in
Total
Purchase returns and allowance
Purchase discount
Net purchases

Note 6 - Employee benefit costs

Sales salaries
Office salaries
Bonuses
Total employee benefit costs

Note 7 - supplies expense

 Store supplies
Office supplies
Total supplies expense

Note 8 - Depreciation
Depreciation - store
Depreciation - office
Total depreciation

Note 9 - Other expenses

Loss on sale of investment

Loss on sale of property
Casualty loss from earthquake
Total other expenses

Note 10 - Finance cost

Interest expense on bank loan

Interest expense on bonds payable
Total finance cost

Illustration 1 - Statement of retained earnings

SINGLE COMPANY
Statement of Retained Earnings
Year ended December 31, 2017
(in USDollar)

Retained earnings, January 1

Correction of error resulting from prior year under depreciation
Change in accounting policy from weighted average to FIFO
inventory valuation resulting in an increase
Corrected beginning balance
Net income for the period
Dividends declared during the year
Appropriated for contingencies
Retained earnings, December 31

Note: All amounts above are just assumptions

Illustration 2 - Single statement of comprehensive income

SINGLE COMPANY
Statement of Comprehensive Income
Year ended December 31, 2017
 (in USDollar)

Net sales
Cost of goods sold
Gross income
Other income
Investment income
Total income
Expenses:
Distribution costs
Administrative expenses
Other expenses
Finance cost
Income before tax
Income tax expense
Net income
Other comprehensive income to be reclassified to profit and loss:
Foreign currency translation gain
Unrealized loss on derivative contract designated as
cash flow hedge
Comprehensive income

Illustration 3 - Statement of changes in equity

SINGLE COMPANY
Statement of Changes in Equity
Year ended December 31, 2017
(in USDollar)

Share Capital
Balances - January 1 5,000,000
Correction of error resulting from prior year
under depreciation
Change in accounting policy from weighted average
to FIFO inventory valuation resulting in
an increase
Issuance of $10,000 ordinary shares with $100
par at $150 per share 1,000,000
Issuance of 5,000 preference shares with $50 par
at $100 per share 250,000
Comprehensive income:
Net income
Other comprehensive income
Dividends paid during the year
Current appropriation for contingencies
Balances, December 31, 6,250,000
HENSIVE INCOME

come statement.
e, profit or loss and other comprehensive

e components of other comprehensive

comprehensive income.
ncome statement.
e statement and a single statement of

erformance of an entity for a given

measured in terms of the level of income
its resources.

s of the entity. The income statement

t income or loss recognized during

period resulting from transactions and

ns with owners in their capacity as

enses excluding the components of other

ottom line in the traditional income
come and expenses including
in profit and loss.

clude the following:

asured at fair value.

ured at fair value.
ments of a foreign operation.

designated as cash flow hedge.

g actuarial gain or loss.
a financial liability designated at fair

profit or loss include:

sured at fair value.

ments of a foreign operation.
designated as cash flow hedge.

y to profit or loss include

asured at fair value. It is reclassified to

through retained earnings.

g actuarial gain or loss, can be transferred

a financial liability designated at fair

thin equity or retained earnings.
ctions as part of cost of sales,
activities. It is also known as

ense method. Under this form, expenses

ocated among the various functions within

g to their nature and not allocated among

ehensive income is also prepared in order

ehensive information on financial

aditionally computed.

mpany
ensive Income
ber 31, 2017

1,550,000

150,000

(100,000) 50,000
1,600,000

mprehensive income. In this the income

hensive income.

arried to retained earnings. Only the net

ained earnings unappropriated. The net other
r shown separately in the changes in equity.

rectly the retained earnings of and entity

etained earnings are:

s the movements in the elements or

e following:

ccounting policies and corrections

carrying amount at the beginning,

s showing separately contributions

tatements which summarizes the

on about the cash receipts and cash

, 2017

Note
9,000,000
(5,400,000)
3,600,000
900,000
 500,000
5,000,000

1,350,000
1,000,000
320,000
200,000 (2,870,000)
2,130,000
(580,000)
1,550,000

9,300,000
(100,000)
(200,000)
9,000,000

1,500,000
6,000,000
300,000
6,300,000
(150,000)
(250,000) 5,900,000
7,400,000
(2,000,000)
5,400,000

180,000
120,000
100,000
500,000
900,000

500,000

620,000
180,000
100,000
50,000
250,000
150,000
 1,350,000

680,000
100,000
70,000
20,000
40,000
90,000
1,000,000

30,000
120,000
170,000
320,000

50,000
150,000
200,000

, 2017

Note
9,000,000
900,000
500,000
10,400,000

(500,000)
5,900,000
1,400,000
180,000
100,000
120,000
250,000
240,000
20,000
40,000
320,000
200,000 (8,270,000)
2,130,000
(580,000)
1,550,000

9,300,000
(100,000)
(200,000)
9,000,000

180,000
120,000
100,000
500,000
900,000

500,000

2,000,000
(1,500,000)
500,000

6,000,000
300,000
6,300,000
(150,000)
(250,000)
5,900,000

620,000
680,000
100,000
1,400,000
 50,000
70,000
120,000

150,000
90,000
240,000

30,000
120,000
170,000
320,000

50,000
150,000
200,000

Y
rnings
, 2017

1,000,000
(100,000)

300,000
1,200,000
1,550,000
(400,000)
(200,000)
2,150,000

e income

Y
e Income
, 2017
 9,000,000
(5,400,000)
3,600,000
900,000
500,000
5,000,000

1,350,000
1,000,000
320,000
200,000 (2,870,000)
2,130,000
(580,000)
1,550,000

150,000

(100,000) 50,000
1,600,000

Y
Equity
, 2017

Retained
Reserves Earnings
2,000,000 1,000,000

(100,000)

300,000

500,000

250,000

1,550,000
50,000
(400,000)
200,000 (200,000)
3,000,000 2,150,000
4 LEARNING CHECK
1. Define an income statement.

2. Define comprehensive income.

3. Distinguish components of profit or loss and components of other

comprehensive income.

4. Identify components of other comprehensive income.

5. Identify the common sources of income.

6. Identify the components of expenses.

7. What is the formula in computing cost of goods sold of a merchandising

concern?

8. What is the formula in computing cost of goods sold of a manufacturing

concern?

10. Explain the two forms of income statement.

11. Define a statement of retained earnings.

12. Define a statement of changes in equity.

13. Define a statement of cash flows.

4 problems
Problem 4-1 Multiple Choice
1. In Accounting for a long-term construction-type contract using the percentage
of completion method, the gross profit recognized during the first year be the
estimated total gross profit from the contract multiplied by the percentage of
the costs incurred during the year to the

a. Total costs incurred to the date.

b. Total estimated cost.
c. Unbilled portion of the contract price.
d. Total contract price.

2. The profitability information that should be reported for each reportable

segment of a business enterprise consists of

a. An operating profit or loss figure consisting of segment revenues less

traceable costs and allocated common costs.
b. An operrating profit or loss figure consisting of segment revenues less
tracebale costs but not allocated common costs.
c. An operating profit of loss figure consisting of segment revenues less
allocated common costs but not tracebale costs.
d. Segment revenues only.

3. Presenting consolidated financial statements this year when statements

of individual companies were presented last year is

a. A correction of an error.
b. An accou ting change that should be reported prospectively.
c. An accounting change that should be reported by restating the financial
statements of all prior periods presented.
d. Not an accounting change.

4. Which one of the following types of losses is excluded from the determination
of net income?

a. Material losses resulting from obsolete merchandise.

b. Material losses resulting from the write-off of intangibles.
c. Material losses resulting from unusual sales of assets not acquired for
resale.
d. Material losses resulting from adjustments specifically related to operations
of prior years.

5. Conventionally acountants measure income

a. By applying a value-added concept.

b. By using a transaction approach.
c. As a change in the value of owner's equity.
 d. As a change in the purchasing power of owner's equity.

6. The percentage-of-completion method of accounting for long-terrm construction

type contracts is preferable when

a. Estimate of costs to complete and extent of progress toward completion

are reasonably dependable.
b. The collectibility of progress billings from the customer is reasonably
assured.
c. A contractor is involved in numerous projects.
d. The contracts ar of a relatively short duration.

7. In order to be classified as an extraordinary item in the income statement,

an event or transaction should be

a. Infrequent and materrial; but it need not be unsual in nature.

b. Unusual in nature and material; but it need not be infrequent.
c. Unusual in nature, infrequent and material.
d. Unusual in nature and infrequent; but it need not be material.

8. Which of the following is characteristic of a change in an accounting estimate?

a. It usually neet not be disclosed.

b. It does not affect the financial statements of prior perriods.
c. It should be reported through the restatement of the financial statements.
d. It makes necessary the reporting of pro forma amounts for prior periods.

9. A foreign exchange gain that is a consequence of transaltion should be

a. Included in net income in the period it occurs.

b. Deferred and amortized over a perriod not to exceed 40 years.
c. Deferred until a subsequent year when a loss occurs and offset againts
that loss.
d. Included as a separate item in the equity section of the statement of
financial position.

10. Gains or losses from th early extinguishment of debt, if material, should be

a. Amortized over the remaining original life of extinguished issue.

b. Amortized over the life of the new issue.
c. Recognized as an extraordinary item in the period of extinguishment.
d. Recognized in income before taxes in the period of extinguishment.

Problem 4-2
An analysis of the records disclosed changes in account balances for 2017 as follows:
Cash, $9,000 increase; accounts receivable, $2,000 decrease; merchandise inventory,
$15,000 increase; account payable, $8,000 increase. During 2017, the owner transferred
marketable securities that he owned to the business and these were sold for $6,000 to
finance purchase of merchandise. Also the owner made withdrawals for $4,000 during
the year.
Required:
How much is the net income for year 2017?

Problem 4-3
On December 31, 2016, the statement of financial position showed total assets of
$1,000,000, total liabilities of $400,000 and contributed capital of $400,000.

During the year 2017, the corporation issued share capital of $100,000 par value at a
premium of $60,000. dividend of $50,000 were paid on December 31, 2017.

The statement of financial position on December 31, 2017 showed total assets of $1,500,000
and total liabilities of $640,000.

Required:
What was the net income (loss) for the year 2017?

Problem 4-4
In January 1, 2017, Builder Associates entered into a $1,000,000 long-term, fixed price
contract to construct a facory building for Manhattan Company. Builder Associates accounts
for this contract under percentage-of-completion method. Estimated percentage of
completion and estimated costs at completionat the end of each quarter for 2017 were
as follows:
Estimated
Estimated Percentage Cost at
Quarterly of Completion Completion
1. 10% 750,000
2 10% 750,000
3 25% 960,000
4 25% 960,000

Required:
What amounts should be reported by Builder Associates as "Income on Construction Contract"
in its quarterly income statements based on the above information?

Problem 4-5
Net income for the year was $75,000. Selling expenses were equal to 15% of sales and also
25% of the cost of sales. All other expenses were 10% of sales.

Required:
What was the amount of cost of sales for the year?

Problem 4-6
Black Panther Company had inventories as follows:
Beginning

Raw materials $ 22,000 $

Work in process 40,000
 Finnished goods 25,000

During the year, the following costs were incurred:

Raw materials purchased $

Direct labor
Indirect labor
Taxes and depreciation of factory building
Taxes and depreciation of salesroom and office
Salesmen's salaries
Office salaries
Utilities (60% applicable to factory, 20% to storeroom, 20% to Office)

Required:
What was the amount of cost of goods sold for the year? Present in good form.

Problem 4-7
Pertinent accounts gathered from the records of Kayla Company for the year 2017 are given
below:

Purchases $
Purchases returns and allowances
Rental income
Selling expenses:
Freight out
Salesmen's commission
Depreciation-store equipment
Merchandise inventory, January 1
Merchandise inventory, December 31
Sales
Sales returns and allowances
Sales discounts
Administrative expenses:
Officers' salaries
Depreciation-office equipment
Freight-in
Income tax
Loss on sale of equipment
Purchase discounts
Dividend revenue
Loss on sale of investment

Required:
a. Prepare an income statement for the year using the "functional" method with supporting
notes.
b. Prepare an income statement for the year using the "natural" method with supporting
notes.

Problem 4-8
Sales $
Inventories-January 1
 Raw materials
Goods in process
Finished goods
Inventories-December 31
Raw materials
Goods in process
Finished goods
Accounting and legal fees
Advertising
Delivery expenses
Depreciation-machinery
Depreciation-office equipment
Depreciation-store equipment
Direct labor
Earthquake loss
Factory supplies used
Gain from expropriation of asset
Gain on sale of equipment
Income tax expense
Indirect labor
Interest income
Light, heat, and power
Office expenses
Office salaries
Purchases
Rent-factory building
Repair and maintenance-machinery
Sales returns and allowances
Sales salaries
Superintendence

Required:
Prepare a multiple-step-income statement with supporting statement of cost of goods
manufactured.

Problem 4-9
The retained earnings account for Golden Company shows the following charges and credits for
the year 2017:

Balance-January 1 $
Loss from fire
Goodwill impairment
Stock dividend
Loss on sale of equipment
Compensation of prior period not accrued
Loss on retirement of preference share at more than issue price
Share premium
Gain on early retirement of bonds payable
Gain on life insurance settlement
Correction of prior period error-credit
Net income for the year
Appropriated for treasury share during the year
Required:
Prepare the statement of retained earnings for the year ended December 31, 2017.
 Assets = liabilities + equity
Additional investmen
Net income
Withdrawal/dividend
Assets - liabilities = equity

Cash $ 9,000 Effect in net aset

Accounts Receivable $ -2,000 Increase
Merchandise Inventory $ 15,000
Accounts Payable $ 8,000 Increased in cash 9000
Marketable Securities $ 6,000 Decreased in receivables
Withdrawals $ 4,000 Increased in merchandise inventory 15000
Increased in accounts payable
total asset $ 22,000 24000
 total liabilities $ 8,000 Net increase in asset
total equity $ 16,000 24000
net income $ 12,000 Net increase in asset
Withdrawal

Total

Additional investment
Net income

Ending

30,000
48,000
 18,000

300,000
120,000
60,000
20,000
15,000
40,000
24,000
50,000

5,250,000
150,000
250,000

175,000
650,000
125,000
1,000,000
1,500,000
7,850,000
140,000
10,000

500,000
300,000
500,000
250,000
50,000
100,000
150,000
50,000

7,500,000
 200,000
240,000
360,000

280,000
170,000
300,000
150,000
160,000
200,000
60,000
40,000
70,000
950,000
300,000
110,000
100,000
100,000
320,000
250,000
10,000
320,000
250,000
150,000
3,000,000
120,000
50,000
50,000
400,000
210,000

2,600,000
50,000
250,000
700,000
200,000
500,000
350,000
600,000
100,000
450,000
400,000
3,000,000
1,000,000
Additional investment Increase in equity
Increse in equity
Withdrawal/dividend Decrease in equity

Decreased

2000

8000
10000
14000
24000
14000
4000

18000

6000
12000