ILOCOS SUR POLYTECHNIC STATE COLLEGE

College of Business Management and Entrepreneurship Main Campus

CHAPTER 2

STATEMENT OF COMPREHENSIVE INCOME

STATEMET
Learning Objectives:
At the end of the chapter, the students shall be able to:
• Prepare a statement of comprehensive income for a service business using the single-step approach and
prepare a statement of comprehensive income for a merchandising business using the multiple approach.
• Create a list of information that is to be presented in the Income Statement based on student’s stock
knowledge.
• Prepare the proper pro-forma of the statement of comprehensive income.
• Analyze the methods of presenting Income Statement.
• Distinguish the Nature Expense Method and function of expense

INTRODUCTION
The end-product or output of accounting (financial accounting, to be specific) is useful financial
information. This useful financial information is the “story” that accounting tells the interested users. Useful
financial information helps the owner to answer the question, “Should I invest more cash in the business?
Creditors are also guided by this information in answering the question, “Should we lend more money to
the business?”
Financial information is contained and communicated through the financial statements. Financial
statements are like chapters of a novel, telling different stories of an interrelated subject. Specially, financial
statements are organized depictions of the events that happened in a business.

Statement of Comprehensive Income, also known as the income statement. Contains the results of the
company’s operations for a specific period of time which is called net income if it is a net positive result while a net
loss if it is a net negative result. This can be prepared for a month, a quarter or a year. (Haddock, Price,& Farina,
2012).
The information presented in the statement of comprehensive income is usually considered the most
important information provided by financial accounting because profitability is the paramount concern to those
interested in the economic activities of the enterprise. The Statement of Comprehensive Income tells us whether
the business makes profit or incurs a loss. The business makes profit because the revenue earned is bigger than
cost and expenses incurred. However, the business have suffered losses if cost and expenses incurred exceeds
revenue earned.

NATURE OF STATEMENT OF COMPREHENSIVE INCOME

The Statement of Comprehensive Income informs the reader about the “performance” and activities of the
company for a certain period (e.g. for the period ended December 31, 2019). It generally contains the revenues
and expenses incurred by an entity for the specified period.
A Statement of Comprehensive Income is conventionally compared to a running video because it
presents an entity’s business activities from the start to the end of a period.

Course
Course Code:
Code: FinFM157PROF 7
Descriptive Title: Financial
Descriptive Title: Capital Analysis and Reporting
Markets Instructor: MICHAEL JERROLD F. HADLOC, MBA, CFMA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

College of Business Management and Entrepreneurship Main Campus

CHAPTER 2

Key Features of Statement of Comprehensive Income (Income Statement)

1. The Heading
The statement of comprehensive income is a financial report. As a financial report, it must be properly
identified and dated. The appropriate title of the statement will enable the user to differentiate the statement of
comprehensive income from the other financial reports issued by the entity. The heading includes the Name of
the Entity, the Title of the Report (i.e.,Statement of Comprehensive Income, and the period it covers (i.e., For
theperiod ended December 31, 2019)

2. Revenues
Revenues arise in the course of the ordinary activities of an entity and are referred to by a variety of
different names including sales, fees, interest, dividend, royalties, and rent (IASB 2010). Revenues are the first
line item in the statement of comprehensive income. Smaller and less complex entities will have one or two
sources of revenues. Larger and more complex entities, on the other hand, will have multiple sources of
revenues, recorded when earned.

3. Expenses
Expenses arising in the course of the ordinary activities of the entity include, for example, cost of sales,
wages, and depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash
equivalent, inventory, property, plant and equipment. Classifying expenses for merchandizing concern is more
complex than in a service concern. For a merchandizing concern, the expenses are classified as cost of sales,
selling expenses, and administrative (operating)expenses.

The cost of sales is the amount paid or payable by the business entity to its supplier for the merchandize
sold to the business entity’s customers. Cost of sales will take a general formula as seen below:

Net purchases for the year are the total amount paid or payable to suppliers for the period. Net purchases
follow a formula as shown below:

4. Gain and Losses

Gains represent other items that meet the definition of income and mayor may not, arise in the course of
the ordinary activities of an entity. To reiterate, gains are incidental to the operation of a business. For example, if
alaw firm sells its office printer for P 5,000.00 when the carrying amount of the printer is P 4,000.00, a gain
amounting to P 1,000.00 must be recorded.
Losses, on the other hand, represent other items that meet the definition of expense and may or may not
arise in the course of the ordinary activities of the entity.

Course
Course Code:
Code: FinFM157PROF 7
Descriptive Title: Financial
Descriptive Title: Capital Analysis and Reporting
Markets Instructor: MICHAEL JERROLD F. HADLOC, MBA, CFMA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

College of Business Management and Entrepreneurship Main Campus

CHAPTER 2
5. Other Items
Other items included in the computation of the total comprehensive income are taxes and items of other
comprehensive income. Income tax is the sum of money payable to the government.

TWO APPROACHES IN MAKING STATEMENT OF COMPREHENSIVE INCOME

1. Single-step
Called single-step because all revenues are listed down in one section while all expenses are listed in
another. Net income is computed using a “single step” which is Total Revenues minus Total Expenses. (Haddock,
Price, & Farina, 2012)

2. Multi-step
Called multi-step because there are several steps needed in order to arrive at the company’s net income.
(Haddock, Price, & Farina, 2012)

The two are only formats and will yield the same amount of net income/loss. The single-step SCI is more
commonly used by service companies while multi-step format is more commonly used by merchandising
companies

Sample Format of Statement of Comprehensive Income

Using a Single-Step Approach. This is commonly used in Service Concern Type of Business

Steps in Preparing a Statement of Comprehensive Income using Single-Step Approach

1. Draft the Appropriate Title
The appropriate title for the for Learning is Fun Company as shown above is;

2. Determine Total Revenue from the Trial Balances

Refer to the example above, the total revenue which came from the total sales is P 100,000.00.

3. Determine total Operating Expenses

Based on the example above, our expenses can be determined as follows;

Course
Course Code:
Code: FinFM157PROF 7
Descriptive Title: Financial
Descriptive Title: Capital Analysis and Reporting
Markets Instructor: MICHAEL JERROLD F. HADLOC, MBA, CFMA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

College of Business Management and Entrepreneurship Main Campus

CHAPTER 2
4. Determine the effect of other items
Based on our worksheet, there are no items pertaining to gains, losses, and other
comprehensive income. Income taxes are also ignored in the case. Having noticed such items, net
income can now be determined by deducting Sales Revenue from Operating Expenses as shown on
the example above.

Sample Statement of Comprehensive Income using Multiple-Step Approach

Steps in Preparing SCI Using Multiple-Step Approach:

1. Determine the revenues.

Since the entity is a merchandising concern, its revenue will come from sales. The revenue to
be presented in the statement of comprehensive income must be net of the discounts, return and
allowances. Sales discounts and returns and allowances are called contra revenue because it is on the
opposite side of the sales account. The sales account is on the credit side while the reductions to sales
accounts are on the debit side. This is “contrary” to the normal balance of the sales or revenue
accounts. (Haddock, Price, & Farina,2012)

Sales returns and allowances

–This account is debited in order to record returns of customers or allowances for such returns.
(Haddock, Price, & Farina, 2012) Sales returns occur when customers return their products for reasons
such as but not limited to defects or change of preference.

Sales discount
–This is where discounts given to customers who pay early are recorded. (Haddock, Price, &
Farina, 2012) also known as cash discount. This is different from trade discounts which are given when
customers buy in bulk. Sales discount is awarded to customers who pay earlier or before the deadline.
(Sales less Sales Discounts and Returns is equal to Net Sales).

2. Determine the Net Purchases, Cost of Sales and Gross Profit

This account represents the actual cost of merchandise that the company was able to sell
during the year. (Haddock, Price, & Farina, 2012).

Beginning inventory
–This is the amount of inventory at the beginning of the accounting period. This is also the
amount of ending inventory from the previous period.

Course
Course Code:
Code: FinFM157PROF 7
Descriptive Title: Financial
Descriptive Title: Capital Analysis and Reporting
Markets Instructor: MICHAEL JERROLD F. HADLOC, MBA, CFMA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

College of Business Management and Entrepreneurship Main Campus

CHAPTER 2
Net Cost of Purchases = Purchases + Freight In
Net Purchases = Purchases– (Purchase discount and purchase returns)

Purchases
–amount of goods bought during the current accounting period with the aim of reselling in the
ordinary course of the business

Contra Purchases
–An account that is credited being “contrary” to the normal balance of Purchases account.

Purchase discount
–Account used to record early payments by the company to the suppliers of merchandise.
(Haddock, Price, & Farina, 2012). This is how buyers see a sales discount given to them by a supplier.

Purchase returns and allowances

–Account used to record merchandise returned by the company to their suppliers. (Haddock,
Price, &Farina,2012) This is how buyers see a sales return recorded by their supplier.

Freight In
–This account is used to record transportation costs of merchandise purchased by the
company. (Haddock, Price, & Farina, 2012).
Note that there is a difference between freight-in and freight-out. Freight-in denotes charges pertaining
to the receipts or purchase of goods. Freight-in is accounted for as an addition to purchases.
Freight-out, on the other hand, pertains to the delivery of cost of goods sold. Freight-out is treated as a
selling expense.

Add Beginning inventory and Net cost of Purchases to get Cost of Goods Available for Sale

Ending Inventory
–amount of inventory presented in the Statement of Financial Position. Total cost of inventory
unsold at the end of the accounting cycle.

Sales less Cost of Goods Sold is Gross Profit

3. Determine the Administrative and Operating Expenses

Operating expenses is the 3rd and the last element that will completely form part of the Statement of
Comprehensive Income. This consists of expense that is generally classified as to function of
expenses or the nature of expenses.

Under the function of expense method, there is proper classification of expenses as to selling or
general and administrative expenses such as:

Selling or Distribution (related to sales)

a. Freight Out
b. Store Supplies
c. Uncollectible accounts
d. Taxes and Licenses
e. Sales Salaries, etc

General and Administrative Expenses

a. Utilities Expense
b. Rental Expense
c. Depreciation Expense
d. Insurance Expense
e. Office Salaries, etc.

Course
Course Code:
Code: FinFM157PROF 7
Descriptive Title: Financial
Descriptive Title: Capital Analysis and Reporting
Markets Instructor: MICHAEL JERROLD F. HADLOC, MBA, CFMA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

College of Business Management and Entrepreneurship Main Campus

CHAPTER 2

General and Administrative Expenses

–These expenses are not directly related to the merchandising function of the company but are
necessary for the business to operate effectively. (Haddock, Price, & Farina,2012) Example of general
and administrative expenses include utilities for home office, salaries of admin personnel

Selling or Operating Expenses

–These expenses are those that are directly related to the main purpose of a merchandising
business: the sale and delivery of merchandise. This does not include the cost of goods sold and contra
revenue accounts. (Haddock, Price, & Farina, 2012) Examples of selling expenses include sales
commissions, delivery expenses, and advertising expenses.

Under the nature of expense method, the operating expenses will be listed down and there is no
need to indicate how these expenses are classified.

“Profit and Losses.” The excess of revenues over expenses is called profit while the excess of
expenses over revenues is called loss. Basically, the Statement of Comprehensive Income features the
following:

Revenue or Income Pxx

Less Cost and Expenses xx
Profit/Loss Pxx

4. Determine the Net Income

Gross Profit less General and Administrative Expenses less Selling Expenses is Net Income for
a positive result while Net Loss for a negative result.

The main difference of the Statements between Service and Merchandising lies on how they
generate their revenue. A service company provides services in-order to generate revenue and the
main cost associated with their service is the cost of labor which is presented under the account
Salaries Expense.

On the other hand, a merchandising company sells goods to customers and the main cost
associated with the activity is the cost of the merchandise which is presented under the line item Cost
of Goods Sold.

In presenting these items on the Statement of Comprehensive Income, a service company will
separate all revenues and expenses (as seen in the single-step format) while a merchandising
company will present total sales and cost of goods sold on the first part of the statement which will net
to the company’s gross profit before presenting the other expenses which are classified as either
administrative expenses or selling expenses (as seen in the multi-step format).

Course
Course Code:
Code: FinFM157PROF 7
Descriptive Title: Financial
Descriptive Title: Capital Analysis and Reporting
Markets Instructor: MICHAEL JERROLD F. HADLOC, MBA, CFMA
ILOCOS SUR POLYTECHNIC STATE COLLEGE

College of Business Management and Entrepreneurship Main Campus

CHAPTER 2

LET’S ARRANGE INTO A STATEMENT!

Instruction: Do this to test your knowledge and ability to answer. Arrange the data given using multiple
step-form (function method) Write your answer on the box provided below.

ARRANGE ME
Instruction: Arrange the following given data of a service business in a single-step form Statement of
Comprehensive Income. Write your answer on the box provided below.

You may now proceed to the next module of this course. I hope you have
learned some information if not a lot in the
lessons discussed earlier.

Course
Course Code:
Code: FinFM157PROF 7
Descriptive Title: Financial
Descriptive Title: Capital Analysis and Reporting
Markets Instructor: MICHAEL JERROLD F. HADLOC, MBA, CFMA