For the FABM 2 First Grading Exam, focus on these learning competencies.

1. distinguish between income statements of service and merchandising entities

2. identify the elements of the SCI and describe each item for a service business and a merchandising business
3. compare cash discounts and trade discounts
4. summarize the treatment of transportation costs, debit memo and credit memo
5. compare and contrast the inventory systems of merchandising business
6. prepare an Income Statement for a service business using the single-step approach
7. determine the closing and adjusting entries for merchandise inventory
8. prepare the entries showing the effects of value-added tax on merchandising transactions.
9. describe the nature, usefulness and limitations of the statement of financial position
10. identify the elements of the statement of financial position and describe each item
11. prepare the Statement of Financial Position of a single proprietorship using the report form and account
form
12. explain the relationship between the Statement of Financial Position, Statement of (Comprehensive) Income
and the Statement of Changes in Owner’s Equity.
13. understand the components of the Statement of Changes in Equity

Here are additional points to remember per learning competency:

1. Income statements
a. Service Entity – Service Revenue less Expenses equals Net Income/Loss
b. Merchandising/Trading/Buy&Sell – Sales less COGS equals Gross Profit less Selling and
Administrative Expenses equals Operating Income/Loss less Finance Costs equals Net
Income/Loss
2. Elements of the Income Statement
a. Income/Revenue
i. Sales (for merchandising and manufacturing entities only)
b. Expenses
i. Cost of Goods Sold – Product cost, cost of producing the product
1. Beginning inventory plus Net cost of purchases equals Goods available
for sale minus Ending inventory
ii. Operating Expenses – Period cost
1. Selling Expenses/ Distribution Costs (related to selling the product)
2. Administrative/General Expenses (related to office expenses, general
expenses)
iii. Finance Costs – cost of borrowing money for financing activities, its interest
expense of borrowings
3. Cash discounts vs Trade discounts
a. Cash Discounts (invoice price x cash discount)
i. Encourage early payment
ii. Recorded as Sales Discounts on the part of the Seller (upon collection within the
discount period)
iii. Recorded as Purchase Discounts on the part of the Buyer (upon payment within
the discount period)
b. Trade Discounts (list price x trade discount)
 i. Encourage bulk buying
ii. Not recorded as discounts
iii. Automatically deducted from the list price to get the invoice price which is then
recorded as Sales by the Seller and Purchases by the Buyer
4. Transportation Costs, Debit Memo and Credit Memo
a. Transportation Costs
i. Who should pay the shipping costs (the owner of the goods in transit)
1. FOB Shipping Point
a. Transfer of ownership is upon reaching the shipping point
b. Owner of goods in transit is the Buyer
c. Entry – Debit Transportation In by the buyer (part of net cost of
purchases)
2. FOB Destination
a. Transfer of ownership is upon reaching the destination
b. Owner of goods in transit is the Seller
c. Entry – Debit Transportation Out by the seller (part of selling
expenses)
ii. Who actually paid
1. Freight collect
a. By the buyer
b. Entry – Credit Cash by the buyer in the amount of the shipping
2. Freight prepaid
a. Paid in advance by the seller
b. Entry – Credit Cash by the seller in the amount of the shipping
b. Debit Memo
i. Accounts Payable is debited by the buyer
ii. To show that the goods are returned to the seller
c. Credit Memo
i. Accounts Receivable is credited by the seller
ii. To show that the goods are acknowledged by the seller as returned, and thus
deducted the customer’s payable
5. Inventory Systems
a. Perpetual Inventory System
i. The inventory is constantly updated by adjusting the inventory account every
time it is affected (e. g. purchase, sale, returns)
b. Periodic Inventory System
i. The inventory is only updated at the end of the period (an adjusting entry is
made to reflect the ending inventory balance)
c. The following accounts are used in Periodic but not in Perpetual
i. Purchases
ii. Purchase Returns and Allowances
iii. Purchase Discounts
iv. Transportation In
d. The following account is used in Perpetual but not in Periodic
 i. Cost of Goods Sold
e. The following accounts are used in both Perpetual and Periodic
i. Sales
ii. Sales Discounts
iii. Sales Returns and Allowances
iv. Merchandise Inventory
6. Income Statement (prepare)
7. Closing and Adjusting entries for inventory
8. VAT Entries
9. Statement of Financial Position
10. Statement of Financial Position (elements)
a. Assets
i. Current Assets
ii. Non-current Assets
b. Liabilities
i. Current Liabilities
ii. Non-current Liabilities
c. Owner’s Equity
i. Owner, Capital
ii. Owner, Withdrawals (temporary/nominal account)
iii. Income Summary (temporary/nominal account)
11. Statement of Financial Position (prepare)
12. Statement of Financial Position, Income Statement, Statement of Changes in Owner’s Equity
(relationship)
13. Statement of Changes in Owner’s Equity (components)
14. Review the Excel file sent before (the exercises)