Republic of the Philippines

Department of Education
REGION I
SCHOOLS DIVISION OF CANDON CITY
Candon City, Ilocos Sur

Fundamentals of Accounting, Business &

Management 2 - 12
Quarter 1 - Week 4 – Module 4
Prepared by: Sadiri Mat T. del Rosario

Lesson
Statement of Comprehensive Income
1 (SCI) for a Merchandising Business

I. OBJECTIVES:
1. Determine the applicable components of a Statement of Comprehensive Income
employing the multi-step approach;
2. Prepare a SCI for a merchandising business using the multi-step approach
II. GUIDE QUESTIONS:
1. What are the features of a SCI for a merchandising business using the multi-step
approach?
2. What are the steps in preparing a multi-step approach SCI for a merchandising
business?
III. DISCUSSION:
In the previous lesson, you have learned that a single-step approach presents all the
revenues and directly deducts all operating expenses from it then carefully presenting ancillary
items at the end to arrive at the total or net comprehensive income. On the other hand, a multi-
step approach presents the items especially for a merchandising concern in three main sections
namely; the operating revenue section, the operating expense section, and the non-operating
section.
In this lesson, we will particularly focus on preparing the SCI using the multi-step
approach for a merchandising-type business activity.
Key Notes on the SCI of a Merchandising Business Entity
Here is a pro-form model of an SCI for a merchandising organization:

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 Operating
Revenue
section
Operating
Expense
section

Non-operating
section

Take note of the following features of the above statement of comprehensive income:
1. The statement starts with the name of the entity as the heading followed by the period
covered.
2. The first line of the content presents the main source of revenue of the organization. Notice
that, “sales” is the appropriate revenue term for all types of merchandising businesses.
Sometimes, only the “net sales” is presented in the SCI. If this is the case, a separate
supporting schedule of computation on how the net amount is arrived at must be provided
as reference. However, if preferred, the amount of gross sales is reflected as the starting
point and all deductions such as “sales discounts” and “sales returns and allowances” are
presented in order to arrive at the net sales. This will be dealt with in detail in just a short
while.
3. Cost of sales is usually presented with details on a separate schedule of computation. The
details include the computations of net purchases in order to arrive at the total goods
available for sale taking into account merchandise inventory beginning and ending. This
will be discussed further as we go through the example.
4. Gross income is computed through the formula: G.I = Net Sales – Cost of Sales.
5. Operating Expenses are segregated as “selling” and “administrative.” The first refers to
expenses related directly to the selling activities while the second refers to all non-selling
expenses typically from those office-related functions. Sometimes, a percentage is
assigned for both for expenses such as salaries, rent, utilities, and depreciation.
6. Operating income is computed through the formula: O.I. = G.I. – Operating expenses.
7. One of the features that makes a multi-step approach distinctive is the separate presentation
of all income or losses arising out of non-operational transactions. Such transactions are
not related to the principal activities of the business. For example, if a huge truck
accidentally losses out of control and goes directly hitting the business shop by the roadside,
the business will receive an amount of money from the insurance company that covered its
building insurance. This amount will not be included in the revenues (or, as “sales”) but

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 rather, it will be a non-operating income which will be reported under this section in the
statement of comprehensive income on a multi-step approach of presentation.
Other accounts included in this section are interest income from investing cash in
financial institutions or financial markets or incurring interest expense from the company’s
loans. Sometimes, the company sells less functional properties to create liquid cash for
operations. When the proceeds of the sale is higher than the scrap value of such asset being
disposed, a gain is obtained while if the proceeds is lower than the scrap value of the asset,
the business incur a loss. All these are presented in this section as having net effect to the
operating income.

8. The resulting income before taxes is the net effect of adding other non-operating income
and deducting non-operating losses. Provision for income tax is then computed out of this
amount and becomes the final deduction to arrive at the net comprehensive income.

IV. EXAMPLE
Refer to the partial trial balance of Fair Trades below:

Fair Trades operates as a merchandising concern. It buys ready-to-wear apparels from

various clothing factories as its supplier and re-sells them in wholesale prices at a margin to
local clothing stores nationwide. You will make the statement of comprehensive income of
Fair Trades. Ignore the effect of income taxes. Inventory base on a year-end count on
December 31, 2020 amounts to ₱1,350,000. Salaries, rent, utilities, and depreciation expenses
pertaining to selling is 20% and administrative functions is 80%. Use the function of expense
format.

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Follow this step-by-step procedure:

1. Determine the Revenues

The revenue to be presented in the SCI must be the net of discounts, returns and
allowances. Hence, a supporting schedule must be made to reflect all these indicated as “Note
1” for reference purposes.

2. Determine the Net Purchases

Based on the partial trial balance given above, net purchases must first be determined.
Below is the schedule following the formula for computing net purchases:

You might be wondering about the difference of “freight-in” and “freight-out.” Freight-
in denotes charges either by supplier or the shipping company for the delivery of goods being
purchased by the company. Hence, these charges are additions to the cost of purchases.
Meanwhile, “freight-out” pertains to the charges by the shipping company that is shouldered
by the business for the delivery of its goods to the client it supplies. Therefore, this is treated
as a selling expense.

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3. Determine the Cost of Sales
Now that the net purchase has been determined, the cost of sale can now be computed.
Applying the cost formula, the cost of sales is computed and is reflected in a separate schedule
and marked as “Note 3” for referencing.

4. Determine Gross Profit

In case the cost of sales is larger than the Net sales, it becomes a gross loss.
Nevertheless, this may be far-fetch because no management would overlook such loss by
intentionally selling its products below its cost.
5. Determine selling expenses
Salaries, rent, utilities, and depreciation expenses pertain to both selling and
administrative expenses. Since there was an indicated percentages for both, we use them to
determine the allocation of these expenses. The allocation table is used below:

6. Determine Selling Expenses

After such allocation, selling expenses can now be determined through the schedule
below marked as “Note 4” for referencing:

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 The total of selling expenses can now be placed in the SCI as follows:

7. Determine Administrative Expense

Administrative expenses can now be computed through the schedule below marked as
“Note 5” for referencing:

The total of administrative expenses can now be placed in the SCI as follows:

Fundamentals of Accounting, Business and Management 2 - Page 6 of 10

8. Determine the operating income/ profit

9. Determine if there are non-operating income or losses

Interest income and loss from sale of office equipment are items considered as not
related to the usual course of business operations. A separate schedule is now prepared below
to determine the net effect of these items on the operating income. This is now marked as
“Note 6.”

Finally, the total comprehensive income can now be determined to finalize the SCI.

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V. GENERALIZATION
The multi-step approach of presenting the Statement of Comprehensive Income is the
most appropriate way of reflecting the result of operations of a merchandising business because
it composes all three most important sections: the operating revenue section reflecting net sales,
cost of sales, and gross profit; the operating expenses section segregating selling and
administrative expenses; and, the non-operating section, where all elements that are not part
of the main course of operations but should affect the final result of computing the net income,
is reflected.

VI. EXERCISES
A. Multiple Choice. Choose the letter of the correct answer and write your answer on the space
provided before the number.
___1. Which of the following is an element that appears in the Statement of Comprehensive
Income for a merchandising concern?
A. Accrued rental income C. Rent expense
B. Prepaid rent D. Rental income

___2. Which of the following is PURELY an administrative expense?

A. Depreciation expense C. Salaries expense
B. Permits and Licenses D. Utilities Expense

___3. Which of the following is classified as selling expense?

A. Salaries of salesman
B. Salaries of corporate executives
C. Depreciation of corporate headquarters
D. Depreciation of company issued car to manager

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___4. Which of the following is a non-operating element of the SCI?
A. Depreciation C. Interest expense
B. Freight-out D. Rent expense

___5. Which of the following is a mixed formula that will result in a correct computation of
gross profit?
A. Gross Sales – Sales returns + Cost of Sales = Gross Profit
B. Net Sales – Net Purchases – Cost of Sales = Gross Profit
C. Net Sales + Beginning inventory + net purchases - Ending inventory = Gross Profit
D. Net Sales – Beginning inventory – net purchases + Ending inventory = Gross Profit

B. True or False. Write “TRUE” if the statement is a fact and “FALSE” if the statement is a
hoax. Write your answers in bold letters.

__________1. It is customary to prepare separate schedules of the breakdown of computations

of the major components of the SCI such as net sales, net purchases, cost of
sales, selling & administrative expenses and net effect of non-operating
elements.
__________2. Sales is the only revenue that will appear in the SCI of a merchandising
business.
__________3. In the multi-step approach of SCI preparation, there are usually two sections
that present all elements of the result of operations.
__________4. A freight-in is a company expense billed by the shipping agency for delivering
the products of the business to its client.
__________5. A freight-out is a selling expense.

Fundamentals of Accounting, Business and Management 2 - Page 9 of 10

VII. REFERENCES:
Book Section:

Andres, C. S., Barrido, A. J., & Honorario, C. B. n.d. Teaching Guide for Senior High
School: Fundamentals of Accountancy, Business, and Management 1. Quezon City:
Commission on Higher Education.
Josefina L. Beticon, et.al. 2016. "Elements and Classification of Statement of Financial
Position." In Fundamentals of Accountancy, Business and Management 2 Teachers's
Manual, by et.al. Josefina L. Beticon, 10-40. Quezon City: Vibal Group, Inc.

Websites:
Thakur, Madhuri. 2021. Wall Street Mojo. Accessed September 29, 2021.
https://www.wallstreetmojo.com/multi-step-income-statement/.

VIII. ANSWER KEY:

5. TRUE
4. FALSE – that is the definition of freight-out
3. FALSE – three sections
2. FALSE – non-operating revenues also
1. TRUE
Exercise B.

4. C 2. B
5. D 3. A 1. C
Exercise A.

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