Fundamentals of Accountancy, Business, and Management 2

1
Statement of Comprehensive Income Part II

Module 005 Statement of Comprehensive

Income Part II

These accounts in the income statement reflect the inflows and outflows of
resources within the firm and their relationship is an indicator of how
successful the business operation was for a given period. The story of the
success, or failure, of operations is shown in the statement of income.At the
end of this module, you will be able to:

1. Discuss the difference in the structure of the statement of income

between a service business and a merchandising business

2. Prepare a statement of income for a service business using a single-step

approach.

3. Construct a statement of income for a merchandising business using a

multiple-step approach.

The following is an example of an Income Statement for service business:

Example 1:

Marla spa, a service business, has the following accounts

for the year ending 2017:

Service revenue ₱ 75,000

Operating expenses 30,000

Gain from sale of equipment 15,000

Loss from sale of investment 5,000

Net Profit for the year ending 2017 is ₱55,000.

Solution:

(75,000 + 15,000) – (30,000 + 5000) = 55,000

Course
Module
The above income statement is prepared using a single-step approach because
after getting the totals of revenue and expense items, the difference was
arrived at by simply subtracting the two.

A single-step income statement is one of two commonly used formats for the
income statement or profit and loss statement. The single-step format uses
only one subtraction to arrive at net income.

It is also to be noted from the above report that the heading of a statement of
income usually consists of the following:

 Business name

 Statement of income

 Period covered by the statement

Example 2:

Happy Store, a merchandising business, has the following

accounts for the year ending 2017:

Sales ₱ 90,000

Cost of goods sold 45,000

Operating expenses 65,000

Gain from sale of equipment 3,000

Loss from sale of investment 5,000

Net Loss for the year ending 2017 is ₱22,000.

Solution:

(90,000 + 3,000) – (45,000 + 65,000 + 5,000) = 22,000

 Fundamentals of Accountancy, Business, and Management 2
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Statement of Comprehensive Income Part II

On the other hand, here is an example of an Income Statement for

merchandising business:

The multiple-step profit and loss statement segregates the operating

revenues and operating expenses from the no operating revenues, no
operating expenses, gains, and losses. The multiple-step income statement
also shows the gross profit (net sales minus the cost of goods sold).

The income statement for merchandising businesses usually has seven

sections:
 Net sales
 Cost of goods sold
 Gross profit
 Operating expenses
 Operating income or operating loss
 Other revenues and gains (expenses and losses)
 Net profit or net loss

There are three benefits to using a multiple-step income statement:

1. Multiple-step income statement clearly states the gross profit amount. Many
readers of financial statements monitor a company's gross margin (gross profit as
a percentage of net sales). Readers may compare a company's gross margin to its
past gross margins and to the gross margins of the industry.

2. The multiple-step income statement presents the subtotal operating income,

which indicates the profit earned from the company's primary activities of buying
and selling merchandise.

Course Module
 3. The bottom line of a multiple-step income statement reports the net amount for
all the items on the income statement. If the net amount is positive, it is labeled as
net income. If the net amount is negative, it is labeled as net loss

Important Terms

Some important definitions in relation to understanding the merchandising

business of an income statement are the following:

Net sales refer to total or gross sales less any sales discounts, and sales returns
and allowances.

Sales discounts are reductions in the total sales price given to the customer if
the account will be paid within a short period of time. Assuming the credit
term is 1/10, n/30, the customer will be given a 1% discount if payment is
received within 10 days from the invoice date. Assuming total credit sales of
₱50,000 was made on September 1 and the customer paid on or before
September 11, an amount of ₱5,000, representing 1% of ₱50,000, will be
deducted from the total amount due.

Sales returns and allowances are also reductions in the total selling price. Sales
returns represent the actual price of returned merchandise by the customer;
sales allowances are reductions in the price because of possible defects or
damages in the products sold.

Cost of goods sold is the actual cost of the merchandise sold. It is the sum of
the cost of merchandise in the beginning inventory plus the net cost of goods
purchased this period less the merchandise in the ending inventory.

Cost of goods sold = Beginning inventory + Net cost of goods purchased – Ending inventory
 Fundamentals of Accountancy, Business, and Management 2
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Statement of Comprehensive Income Part II

Merchandise inventory represents the total amount of inventory on hand.

Beginning inventory is the amount of inventory at the beginning of the period
and ending inventory is the amount remaining at the end of the period.
Net cost of goods purchased is the total or gross purchases less any purchase
discounts and purchase returns and allowances.
Purchase discounts are cash discounts representing reductions in the
purchase price because the buyer settled the account within the credit term.
Purchase returns and allowances are deducted in the purchase price either
because of returns or reductions due to defects or damages of goods
purchased.

<Figure 1.The main difference on the income between a Service and Merchandising business is that revenue of
service business comes from fees on rendered services while the income of a merchandising business comes from
sales of the products>

Course Module
Glossary

Net sales: refer to total or gross sales less any sales discounts, and sales returns and
allowances.

Sales discounts: are reductions in the total sales price given to the customer if the account
will be paid within a short period of time.

Sales returns and allowances:represent the actual price of returned merchandise by the
customer; sales allowances are reductions in the price because of possible defects or
damages in the products sold.

Cost of goods sold: is the actual cost of the merchandise sold. It is the sum of the cost of
merchandise in the beginning inventory plus the net cost of goods purchased this period
less the merchandise in the ending inventory.

Merchandise inventory: represents the total amount of inventory on hand.

Beginning inventory: is the amount of inventory at the beginning of the period and ending
inventory is the amount remaining at the end of the period.

Net cost of goods purchased: is the total or gross purchases less any purchase discounts
and purchase returns and allowances.

Purchase discounts: are cash discounts representing reductions in the purchase price
because the buyer settled the account within the credit term.

Purchase returns and allowances: are deducted in the purchase price either because of
returns or reductions due to defects or damages of goods purchased.
Fundamentals of Accountancy, Business, and Management 2
7
Statement of Comprehensive Income Part II
References and Supplementary
Materials

Books and Journals

Jimenez, C.E., Palo, R.R, &Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and
Practice. Manila: JMS Publishing House

Jimenez, C.E., &Ocampo, L.B. (2015). Fundamentals of Accounting, Quicknotes and

Exercises. Manila: JMS Publishing House

Online Supplementary Reading Materials

Income Statement
(explanation);https://www.accountingcoach.com/income-
statement/explanation; 10 April 2017

Single Step & Multiple Step Approach:

https://www.accountingcoach.com/income- statement/explanation/3-4

Online Instructional Videos

Income Statement Explained: Comprehensive Income Statement Tutorial - Profit &
Loss Statement;
https://www.youtube.com/watch?v=EdHQ646zrDI&feature=youtu.be; 23
March 2017

Course Module
Fundamentals of Accountancy, Business, and Management 2
1
 Statement of Changes in Equity

Module 006 Statement of Changes in Equity

Since the owner will bear the ultimate responsibility and will be accountable
for the success or failure of the business, it is important to understand the
changes in the owner’s equity or capital in the business. The statement of
changes in equity tells this story. At the end of this module, you will be able to:

1. Discuss the forms of business organizations and the unique equity

accounts used by each of these organizations.

2. To differentiate the forms of business organization and identify the

advantages and disadvantages of each.

3. Identify the parts of the Statement of Changes in Equity.

4. Construct a Statement of Changes in Equity for a Sole Proprietorship.

Owner’s Equity
Capital is also known as Owner’s equity. It represents the right of the owner
over the resources of the firm. It is also called net assets, or residual assets.
From the accounting equation, we can derive owner’s equity.

Owner’s equity = Assets - Liabilities

Usually it consists of the owner’s investment and the earned profit less any
withdrawals made during a given period.

Course Module
Forms of Business Organizations and the Equity Accounts

Sole or single proprietorship

This is a type of business which is owned by only one person. Usually a sole
proprietor (owner of the business), is also the manager or boss of his own
business.

Partnership

By the contract of partnership, two or more people join together to contribute

money, property or industry for purposes of dividing the profits (or loss)
among themselves.

Corporation

It is composed of five to fifteen people. It is organized by operation of the law

and considered the most complex form of a business organization.

The following are the usual account titles used for the equity of the owner or
owners considering the forms of business organizations.

Form of Business Account Titles

Sole proprietorship Name of owner, capital

Name of owner, capital (create as many

Partnership
capital accounts as there are owners)

Corporation Stockholders’ equity

 Fundamentals of Accountancy, Business, and Management 2
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Statement of Changes in Equity

Parts of the Statement of Changes in Equity

Like the Statement of Financial Position and Statement of Income, which have
different elements, the Statement of Changes in Equity also has its own. These
are as follows:

Beginning capital represents the total capital at the start of the business. If the
firm has been operating in the past year, the beginning capital of the current
year is the same the ending capital of the previous year.

Investments made by the owner may represent the original investment made
at the start of business, and any additional investments thereafter.
Investments are added to the capital beginning to arrive at the total
investments used during the year.

Net profit is also derived from the income statement and is also added to the
beginning capital and additional investments done during the year. If the
business incurred a net loss, the same is deducted.

Withdrawals or drawings are resources of the firm which were taken by the
owner for personal use.

Ending capital is the difference arrived at after deducting withdrawals from

the sum of the beginning capital, additional investments, and profit. Ending
capital also represents the residual claim of the owner on the total resources
or assets of the firm after deducting the claims of creditors.
Course Module
 The following is an example of a Statement of Changes in Equity for a sole-
proprietorship.

Similar to the heading of a statement of income, the statement of changes in

equity will have to show:

 Name of business
 Statement of changes in equity
 Period covered by the statement

<Figure 1.The Statement of Changes in Equity is a Financial Statement that focuses on the residual interest of the
owner in the business.>
 Fundamentals of Accountancy, Business, and Management 2
5
Statement of Changes in Equity

Steps in Preparing the Statement of Owner’s Equity

Step 1. Gather the needed information
The Statement of Changes in Owner's Equity is prepared second to the Income
Statement. We will still be using the same source of information. Again, the most
appropriate source of information in preparing financial statements would be the
adjusted trial balance. Nonetheless, any report with a complete list of updated
accounts may be used. We will also be using the Income Statement later in the
process.

Step 2. Prepare the Heading

The heading is made up of three lines. The first line contains the name of the company.
The second line shows the title of the report: it would be Statement of Changes in
Owner's Equity, Statement of Owner's Equity, or simply Statement of Changes in Equity.
The third line shows the period covered. The report covers a span of time; hence we
use For the Year Ended, For the Quarter Ended, For the Month Ended, etc.

Step 3. Capital at the beginning of the period

Report the capital balance at the beginning of the period reported – or the amount at
the end of the previous period. Remember that the ending balance of the last period
is the beginning balance of the current period.

Step 4. Add Additional Contribution

Contributions from the owner capital, hence added to the capital balance.

Step 5. Add Additional Contribution

Net income increases capital hence it is added to the beginning capital balance. Net
income is equal to all revenues minus all expenses.

Course Module
 Step 6. Deduct Owner’s withdrawals

Withdrawals made by the owner are recorded separately from contributions. You
can easily find it in the adjusted trial balance as "Owner, Drawings", "Owner,
Withdrawals", or any other appropriate account. Withdrawals decrease capital,
hence are deducted.

Step 7. Compute for the ending balance

Compute for the balance of the capital account at the end of the period and draw the
lines. One horizontal line means that a mathematical operation has been performed.
Two horizontal lines (double-rule) are drawn below the final amount

Statement of Changes in Equity is a report that shows the items that affect the capital or equity
account. Simply, we are just presenting this formula in a formal report:

Capital, ending = Capital, beg. + Additional Contributions + Net Income - Withdrawals

where: Net Income = Income - Expenses

Glossary

Equity: refers to the right of the owner over the resources of the firm after deducting the
claims of creditors.
Equity accounts: used by the firm will vary depending on the form of business
organization.
Capital: the account title usually used for sole proprietorships and partnerships
Stockholders’ equity is the account title used for corporations.
Statement of changes in equity is arrived at by adding the beginning capital, any
additional investments made during the period, net income, and deducting any withdrawals
made by the owner.
 Fundamentals of Accountancy, Business, and Management 2
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Statement of Changes in Equity

References and Supplementary Materials

Books and Journals

Jimenez, C.E., Palo, R.R, &Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and
Practice. Manila: JMS Publishing House

Jimenez, C.E., &Ocampo, L.B. (2015). Fundamentals of Accounting, Quicknotes and

Exercises. Manila: JMS Publishing House

Online Supplementary Reading Materials

How to prepare a statement of owner’s

equity;http://www.accountingverse.com/accounting-basics/how-to-prepare-a-
statement-of-owners-equity.html; 10 April 2017

Preparation of SCI : http://www.accountingverse.com/accounting-basics/how-to-

prepare-a-statement-of-owners-equity.html

Online Instructional Videos

Statement of Owner’s Equity; https://www.youtube.com/watch?v=Qg_FySV73wk; 23

March 2017

Course Module
 Fundamentals of Accountancy, Business, and Management 2
Cash Flow Statement 1

Module 007 Cash Flow Statement

Cash is a common account title in the financial statements. You may commonly
hear “Cash is King” as an common adage in business. This is so since cash is
the most used asset in business. It is therefore necessary for any business-
minded individual to understand how cash affects, move, and reconcile in their
business financials. At the end of this module, you will be able to:

1. Enumerate the different types of cash flow transactions.

2. Identify which different types of accounting transactions shall fall on each
type of cash flow category.
3. Differentiate accrual basis from cash basis accounting.

Cash is the most commonly used accounting title in the financial statements.
This is because (a) when you pay for a good or services, you pay cash; (b) when
you pay a liability or expense, you pay cash; (c) when you are paid for goods
or services, you pay cash; (d) and when your borrower pays what they owe
you, you receive cash. These transactions are common and therefore, cash as
an account title is commonly used. Cash also includes other cash equivalents
and short-term investments. For example, when you purchase an investment
that will mature within the next three months from the date of acquisition,
then this shall already be categorized as cash equivalent and may be recorded
as cash in the accounting records.

Cash Basis vs. Accrual Basis Accounting

For us to appreciate the cash flow statement, where cash basis of accounting
is being presented, we would need to understand the difference between the
cash basis and accrual basis of accounting.

Course Module
 Accrual basis of accounting is a basic accounting principle that states that
income is earned regardless of when cash is received, and expenses are
incurred regardless of when cash is paid. This means that companies who sell
their goods on credit will record the said transactions as sales even if they have
not paid cash. When a firm receives billing for their utilities, they recognize the
corresponding expenses in their records even if they have not paid for it. That
is because their products were already sold and delivered and the expenses
already used or incurred.

On the other hand, the Cash basis accounting relies entirely on the payment
and receipt of cash. Meaning, income shall only be recognized when cash is
received, and expenses shall only be recorded when cash is paid. This is not
acceptable in the accounting industry though we need to understand this in
order to prepare our cash flow statement.

Types of Cash Flows

Cash flows are categorized into three types: operating, investing, and financing
activities. These activities determine the purpose for which the cash has been
used. Thus, the purpose of the transaction shall determine its type of cash flow.

Operating Activities

These are activities related to revenue-producing activities. The transactions

falling under these activities shall primarily involve cash received from
customers and paid to suppliers, lenders, or employees.

Before discussing the two other cash flow activities, it is noteworthy to know
the two ways operating activities are presented: Direct and Indirect. In this
module, however, we shall only discuss the former, which is more accepted.

Direct Method

Direct method involves transactions showing those related to gross cash

receipts and gross cash payments. Presentation is as follows:
 Fundamentals of Accountancy, Business, and Management 2
3
Cash Flow Statement

Cash receipts from customers xxx

Cash paid to suppliers (xxx)

Cash paid to employees (xxx)
Cash paid for other operating
(xxx)
expenses
Interest paid (xxx)

Income taxes paid (xxx)

Net cash from operating activities xxx

Among all the activities, only operating activities have different ways of being
presented. Most probably because they are the common transactions
happening in the organization.

Investing Activities

These are activities related to the acquisition and disposal of long-term assets
like Investments and Property, Plant and Equipment (PPE).

Financing Activities

These are activities which involve changes in the equity and liability accounts
in the accounting records.

Course Module
Statement of Cash Flows – sample

<Figure 1.If all business transactions uses cash, then income between accrual basis and cash basis of accounting
shall be the same.>
 Fundamentals of Accountancy, Business, and Management 2
5
Cash Flow Statement

Basic reconciliation of cash flow and accrual method of

accounting
A business that uses accrual-basis accounting can assemble its cash flow statement
one of two ways: using the direct method or the indirect method. The indirect method,
which is far more common, involves reconciling the company's net income with its
operational cash flow.

The direct method requires building a cash-flow statement from the ground up, using data
from what might be thousands of individual transactions.

The indirect method, on the other hand, uses information already available on the income
statement and balance sheet. To use the indirect method, you start with your company's net
income -- its profit -- for the period covered by the cash flow statement. This figure comes
from the income statement for the period.
Non-Cash Items

In accrual accounting, some things change your profit but don't actually change your
cash flow. Other things have an effect on cash flow but don't actually affect your profit.
Reconciling net income and operational cash flow involves adding or subtracting such
items based on whether they affected profit or cash flow. The first step here is to add
up all non-cash expenses you reported during the period. Depreciation and
amortization are examples of non-cash expenses. Because they were reported as
expenses, they reduced net income as shown on the income statement, but they had
no effect on cash flow. Write this figure down.
Current Assets

Current assets include inventory, accounts receivable and prepaid expenses. When a
current asset increases, it reduces operational cash flow in relation to net income. For
example, if an item is in inventory that means you've laid out cash for it. But because
you haven't sold it yet, you haven't reported its cost as an expense -- and therefore,
its cost hasn't changed net income. That needs to be reconciled. For each category of
current assets (except cash), take the figure from the balance sheet at the beginning
of the period and the figure from the balance sheet at the end. Subtract the beginning
figure from the ending figure. That's the period change for that particular current
asset. Do this for all categories of current assets.

Course Module
 Current Liabilities

Current liabilities on the balance sheet include accounts payable and expenses such
as wages and rent that have accrued -- that is, they've been incurred and reported --
but have not been paid in cash. Current liabilities have the opposite effect on cash flow
as current assets. When a current liability increases, cash flow goes up relative to net
income. For example, as workers earn wages, you report what they earn as an
expense, which reduces net income. But until you actually issue pay checks, wages
don't affect cash flow. Calculate the period change in each category of current
liabilities the same way you did for current assets -- by subtracting the beginning
figure from the ending figure.
Reconciliation

To do the reconciliation, start with net income. Add the total value of non-cash
expenses. Then subtract the period change in each category of current asset. Next add
the period change in each category of current liabilities. (Some of these period
changes might be negative. Subtracting a negative change has the effect of increasing
cash flow; adding a negative change has the effect of decreasing it.) The result is your
reconciled cash flow from operations. Add to this figure your net cash flow from
investment activities and financing activities and your cash flow statement is
complete.
 Fundamentals of Accountancy, Business, and Management 2
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Cash Flow Statement

Glossary

Cash: the legal tender being used in exchange for a good, debt, or service.

Cash equivalents: short-term investments with a maturity of, for example, less than three
months.

Operating activities: may be presented using direct method or indirect method.

Accrual basis of accounting: the principle that states that income is earned regardless of
when cash is received and expenses are recognized when incurred regardless of when cash
is paid.

Cash flow Statement: is the financial statement that details the movement of cash in the
business.

Liquidity: is the ability of an entity to pay its liabilities in a timely manner, as they come due
for payment under their original payment terms. Having a large amount of cash and current
assets on hand is considered evidence of a high level of liquidity. When applied to an
individual asset, liquidity refers to the ability to convert the asset into cash on short notice
and at a minimal discount.

Course Module
References and Supplementary Materials

Books and Journals

Jimenez, C.E., Palo, R.R, &Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and
Practice. Manila: JMS Publishing House

Jimenez, C.E., &Ocampo, L.B. (2015). Fundamentals of Accounting, Quicknotes and

Exercises. Manila: JMS Publishing House

Online Supplementary Reading Materials

Cash Flow Statement;https://www.inc.com/encyclopedia/cashflowstatement.html; 10

April 2017

Reconciliation of cash flow and accrual method of accounting:

http://smallbusiness.chron.com/reconcile-net-income-cash-flow-operations-67852.html

Online Instructional Videos

Cashflow Statement – Episode 1; https://www.youtube.com/watch?v=nguya6u0zLk; 23

March 2017