Topic 3 – Statement of Comprehensive Income

Results of the Company’s Operations

The SCI is a statement that reports the results of the operations of the business
for one accounting period. This statement contains the following information:
a. Revenue generated by operating the business;
b. Costs spent to generate the revenue; and
c. Income, which is the excess of revenue over costs
The SCI is described as a “for the period” report. This means that the amounts
presented on the report include only those that occurred within the given period.
ABC Company
Statement of Comprehensive Income
For the Year Ended December 31, 20x3

Revenues P 1,290,000
Less: Expenses 890,000
Net income P 400,000
The SCI in the above figure is described as “for the year ended December 31, 20x3”.
This means that the reported revenue of P1.29 Million was generated from January 1,
20x3 to December 31, 20x3.
Components of the Statement of Comprehensive Income
The Statement of Comprehensive Income is an action-packed financial
statement. It explains some of the changes that occur between two SFPs taken one
year apart.
Income and Expense are the general terms used to describe the element of the
SCI. Income refers to a transaction that increases assets and/or decreases liabilities
leading to increase in equity resulting from the operations of the business and not from
the owner’s contribution. Expenses, on the other hand, are transactions that decrease
assets and/or increase liabilities leading to decrease in equity resulting from the
operations of the business and not because of distributions to owners.
There are two kinds of income – revenue and gains. Revenues are income
generated from the primary operations of the business. Gains, on the other hand are
income derived from other activities of the business. Sale of merchandise of a grocery
store is an example of revenue because the primary operation of the store is to sell its
inventories. Interest income for the time deposit is considered gains and other income
because investment in time deposit is not part of the primary operations of the store.

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 Like income, there are also two kinds of expenses - expenses and losses.
Expenses are related to the primary operations of the business. Losses are from other
activities of the business. The cost of the merchandise being sold by a grocery store is
part of its selling activities. Therefore, it is classified as an expense. However, interest
expense from notes payable is not part of the selling activities of the store and should
be classified as losses and other expenses.
Elements of the Statement of Comprehensive Income
Revenue
Service Income
The Service Income account is generally used to describe revenue derived from
rendering of services. A more specific account name may be used to identify the
services rendered such as Rental Income, Professional Fee and Tuition Fee Revenue.
Sales
The Sales Revenue account is generally used to describe revenue derived from
selling of goods. A more specific account name may be used to identify the goods sold
such as Office Supplies Sales, Book Sales, Food Sales, etc.
Revenue from sales of goods is recognized when goods have been delivered.
However, customers are allowed to return goods that do not meet their quality
standards. When goods are returned, it is not deducted from Sales. Rather, normal
accounting practice is to report it under the account name Sales Return and
Allowances – a Contra Sales account.
Suppliers give discounts to their customers to encourage early payments. The
supplier delivered the goods to the buyer and appropriately recorded Sales Revenue
based on full selling price. The buyer is usually given the credit terms of 2/10, n/30. The
customer took advantage of the discount and paid within the ten day discount period.
Accounting practice does not deduct the discount from Sales Revenue but use another
Contra-Sales account called Sales Discount.
Net Sales using assumed figures is computed as follows
Sales P 45,000
Less: Sales returns and allowances 7,500
Sales discount 750
Net sales P36,750

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Expenses
Cost of Goods Sold (Cost of Sales)
This is an account used by companies that sells goods instead of services. For
trading operations, Cost of Sales collects the cost of merchandise sold. This includes
the purchase price of inventory, brokerage, and shipment cost to bring the goods to the
premises of the company. This shipment cost is called Freight-In.
Cost of sales is part of inventory accounting. There are two ways of keeping
records of inventory – perpetual and periodic inventory system. Perpetual means that
the inventory and Cost of Goods Sold accounts are “perpetually” updated. The inventory
account is increased when goods for sales are acquired and decreased when goods are
sold. The Cost of Goods sold account is updated every time a sale is made.
The other method is called the periodic inventory system. The inventory account
is only “periodically” updated. “Periodically” means that the inventory account is
updated only at the end of the year or end of the month. Cost of merchandise acquired
is collected using the Purchases account. There are two contra-Purchase accounts:
Purchase Returns and Allowances and Purchase Discount. Returns of defective
goods are reported under Purchase Returns and Allowances. Discounts taken are
reported under Purchase Discount.
Purchases P 30,000
Add: Freight-In 1,000
Less: Purchase Returns and Allowances 3,000
Purchase Discount 500
Net Purchases P27,500

Using the balances of the periodic inventory system accounts, Cost of Sales is
computed as follows:
Beginning inventory P 5,000
Add: Net purchases 27,500
Cost of goods available for sale 32,500
Less: Ending inventory 2,320
Cost of goods sold P 30,180

Beginning and ending inventory are determined based on the physical count of
the merchandise owned by the company. The ending inventory of the prior-period is
also the beginning inventory of the current period. The “periodic” adjustment updates
the inventory account to bring it to the balance based on year-end physical count.

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Operating Expenses
Operating expenses refer to all other expenses related to the operation of the
business other than cost of sales. These include salaries of employees, supplies,
utilities (electricity, telephone and water bills), gasoline expense, representation, bad
debts expense, depreciation and amortization.
Bad debts expense is an estimated operating expense related to accounts
receivable. Accounts Receivable is the right to collect payment from customers.
However, some accounts become uncollectible. The accounting rule is to periodically
analyze the collectability of Accounts Receivable and: (2) to immediately charge to
expense the amount deemed uncollectible. One of the methods of estimating bad debts
expense is the percentage of sales.
Illustration:
Current year sale of the store amounted to P128,865. Of this, only P70,000 is cash
sales. Based on the company’s experience, bad debts is 3% of total sales or 6.5% of
credit sales. Determine bad debts expense given the following:
1. The owner of the store decided to use percentage of total sales method.
2. The owner of the store decided to use percentage of credit sales method.
3% of total sales 6.5% of credit sales
Total sales P 128,865
Total credit sales P 58,865
Historical experience 3% 6.5%
Bad debts expense P 3,866 P 3,826

Other Expenses and Other Income

Losses and other expenses as well as gains and other income are reported after
the operating section of the SCI. Line items included under this section are interest
income from investments of excess cash, interest expense from borrowings and gain or
loss from sale of equipment (proceeds from sale less net book value of PPE on date of
sale)
Presentation of Statement of Comprehensive Income
There are two formats for the SCI, namely, the single-step and the multi-step.
Single-Step Statement of Comprehensive Income
The single-step SCI groups all revenue items together and all expense items
together. It is called single-step SCI because net income is computed using only one
step, deducting total expenses from total revenues. This format is generally used by
small businesses and service businesses because of its simplicity.

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 The single-step SCI is also closely linked to the nature of expense format. It lists
down the expenses based on the source of expenses such as salaries, purchases,
supplies, utilities, fuel and depreciation.
ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20x1
Service revenue xxx
Rental income xxx
Interest income xxx
Increase in inventory* xxx
Total revenues and income XXX
Net purchases yyy
Depreciation expense yyy
Utilities expense yyy
Salaries expense yyy
Interest expense yyy
Insurance expense yyy
Supplies expense yyy
Total expenses YYY
Net income XXX – YYY
*Increase in inventory = Ending inventory – Beginning inventory
Multi-Step Statement of Comprehensive Income
The multi-step SCI is characterized by the presentation of several subtotals until
net income is determined. The multi-step SCI is more popularly used in business.
ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20x1
Gross sales A
Sales returns and allowances B
Sales discounts C
Net Sales D = A-B-C
Cost of Goods Sold E
Gross Profit F = D-E
Operating Expenses:
General and administrative expense G
Selling expense H I = G+H
Income from operations J=F–I
Interest income K
Interest expense L
Net income J+K-L

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 The multi-step approach is also associated with the function of expense format.
The function of expense classifies operating expenses into three categories based on
usage. The categories are Cost of Sales, General and Administrative Expenses and
Selling Expenses. General and Administrative Expenses refer to those incurred in the
daily operations and management of the business. On the other hand, Selling Expenses
are costs related to marketing, selling and distributing the company’s merchandise.
ABC Company
Statement of Comprehensive Income Nature of Expense Format
For the year ended December 31, 20x1
Sales
Less: ABC Company
Purchases Statement of Comprehensive Income
Inventory adjustment For the year ended December 31, 20x1
Salaries expense Sales
Utilities Less: Cost of goods sold
Depreciation Gross Profit
Supplies Less: Operating expenses
Representation General and administrative expenses
Operating income Selling expenses
Other income Operating income
Other expenses Other income
Net income Other expenses
Net income
Function of Expense Format

Normal Balances
An account is increased by an entry on the side of its normal balance. Similarly, it
is decreased by an entry on the opposite side of its normal balance. The normal
balance of equity account is credit. Income increases equity and equity is increased by
credit. Therefore, the normal balance of all income accounts is credit. Expenses
decrease equity and equity is decreased by debit. Therefore, the normal balance of all
expense account is debit.
References:
Salazar, Dani Rose C. 2017 Fundamentals of Accountancy, Business, and
Management 2 First Edition

Beticon et al 2016 Fundamentals of Accountancy, Business, and Management 2

First Edition

Activities:

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1 - The following are the accounts of Regina Merchandising for December 31, 2023:
Sales P 2,500,000 Ending inventory P 100,000
Salaries expense 50,000 Utilities expense 40,000
Supplies expense 75,000 Insurance expense 20,000
Depreciation expense 60,000 Rent expense 90,000
Beginning inventory 50,000 Sales discount 5,000
Purchases 1,500,000

You were employed by the entity as its bookkeeper in its first year of operations. You
are now to prepare the necessary financial statements for the current year.
Accordingly, 15% of rent, depreciation and utility expenses pertain to the sales office
while the rest pertains to the corporate office.
Instructions:
1. How much is the net sales for the year?
2. How much is the cost of sales for the year?
3. How much is the gross profit for the year?
4. How much is the net income for the year?
5. Prepare a statement of comprehensive income

II - Comprehensive Problem
The following are taken from the records of ABC Company for the year ended
December 31, 20x2:
Debit Credit
Sales P 764,985
Purchase discount 8,200
Purchase returns and allowances 5,465
Purchases P 459,990
Freight-in 9,180
Sales discount 13,300
Sales returns and allowances 5,455
Depreciation expense 25,000
Amortization expense 10,000
Salaries expense 80,000
Utilities expense 55,000
Advertising expense 35,000

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Rent expense 60,000
Interest income 5,444
Interest expense 5,677
Gain on sale of PPE 5,465
Bad debts expense ???

Based on actual physical count, inventory balance are as follows:

January 1, 20x2 P 25, 455
December 31, 20x2 P 20,765

Bad debts expense is 4% of net sales. Classify the bad debts expense as a
general and administrative expense.
1. Determine the following:
a. Net sales
b. Net purchases
c. Cost of goods sold
d. Bad debts expense
2. Prepare a nature of expense Statement of Comprehensive Income.
3. Prepare a function of expense Statement of Comprehensive Income. Additional
information:
a. Deprecation of P5,000 is for computer equipment used in the administrative office.
b. Amortization is attributed to office leasehold improvements.
c. 40% of salaries are attributed to sales personnel.
d. Utilities for the store represent 35% of the utilities expense.
e. Rent for the office space is P20,000.
Activity I – assigned to Ms. Montellano and Mr. Osicos
Activity II – assigned to Mr. Sabado. Mr. Chueh, Ms. Mandia, Ms. Ampeloquio and
Ms. de los Santos.

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