Professional Documents
Culture Documents
1
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:
Example 1:
Solution:
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
Example 2:
Sales ₱ 90,000
Solution:
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.
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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
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
<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.
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
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Statement of Comprehensive Income Part II
References and Supplementary
Materials
Course Module
Fundamentals of Accountancy, Business, and Management 2
1
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:
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.
Usually it consists of the owner’s investment and the earned profit less any
withdrawals made during a given period.
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Forms of Business Organizations and the Equity Accounts
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
Corporation
The following are the usual account titles used for the equity of the owner or
owners considering the forms of business organizations.
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.
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
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Statement of Changes in Equity
Net income increases capital hence it is added to the beginning capital balance. Net
income is equal to all revenues minus all expenses.
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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.
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:
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
Jimenez, C.E., Palo, R.R, &Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and
Practice. Manila: JMS Publishing House
Course Module
Fundamentals of Accountancy, Business, and Management 2
Cash Flow Statement 1
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:
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.
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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.
Operating Activities
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
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
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Cash Flow Statement
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.
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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.
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
Jimenez, C.E., Palo, R.R, &Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and
Practice. Manila: JMS Publishing House