FABM 2 LT2 REVIEWER
related cash is received.
Statement of Comprehensive Income
❖ “Performance” and activities of the company
for a certain period (e.g., for the period ended
December 31, 2017)
❖ Generally contains the revenues and
expenses incurred by an entity for the specific
period
❖ Presents an entity’s business activities from
the start to the end of the period
KEY FEATURES OF A STATEMENT OF
COMPREHENSIVE INCOME (INCOME
STATEMENT)
1. The Title
❖ SIC is a financial report. It must be properly
identified and dated.
❖ An appropriate title will enable the users to
differentiate the statement from other
financial reports issued by the entity.
❖ Includes the name of the entity, the title of the
report, and the period it covers
2. Revenues
❖ Arises in the course of the ordinary activities
of an entity and is referred to by a variety of
different names including sales, fees,
interests, dividends, royalties, and rent
❖ First line item in the SIC
Revenues earned by the business vary according to
the nature of the entity.
❖ Small retail store – sales as its main revenue
❖ Small law firm – professional fees
Revenues may come from interests and dividends
that are earned on financial instruments such as time
deposits and equity shares, respectively.
Certain entities may charge royalties from
individuals who would like to use their established
brand and technology.
Owners of fixed properties (e.g., land and building)
may charge third parties with rent.
Smaller and less complex entities – one or two
sources of revenue
Larger and more complex entities – multiple sources
of revenues
Revenues are recorded when earned rather when the
3. 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 equivalents,
inventory, property, plant and equipment.
Revenues are matched with expenses.
❖ Service entities – categorized as cost of
services or operating expenses
❖ Law firm – costs of services include the
salaries paid to lawyers who render services
to legal clients in behalf of the law firm
❖ Operating expenses – rent for office space,
salaries for office staff, permits paid to local
government units, depreciation of office
equipment, and other similar expenses
Classifying expense for merchandising concern is
more complex than that for a service concern. For a
merchandising concern, the expenses are classified
as either cost of sales, selling expenses, or
administrative (operating expenses).
Cost of sales – amount paid or payable by the
business entity to its suppliers for the merchandise
sold to the business entity’s customers
Beginning Inventory
Add: Net Purchases
Total Goods Available for Sale
Less: Ending Inventory
Cost of Sales
Beginning inventory – stock of goods carried over
from prior reporting period
As real accounts, ending inventory balances are
carried over to the subsequent year.
Net purchase for the year – total amount paid or
payable to suppliers for the period
Gross Purchases
Less: Purchase Discounts
Less: Purchase Returns and Allowances
Add: Freight in
Net Purchases
Gross purchases – general ledger balance of the
purchases account for the period
Purchase discounts – usually granted by suppliers
to buyers to encourage prompt payment of the latter’s
account
Freight-in – expense incurred to transport the
merchandise to the place of buyer
4. Determine the effect of other items.
Professional Fees – Operating Expense (Note A) =
Net Income
Preparing a Statement of Comprehensive Income
for a Merchandising Concern
1. Determine the Revenues.

Selling expenses – commissions paid to salesmen, Note 1 – Net Sales

salaries of sale staff, and delivery expenses Sales
Less: Sales Discounts
Operating expense – also called general and Sales Returns and Allowances
administrative expenses; expenses not covered in the Net Sales
previous expense types; e.g., general depreciation
expenses, general rent expenses, office salaries, 2. Determine the Net Purchases, Cost of Sales, and
taxes, and licenses Gross Profit.

Examples of expense by nature – salaries and Note 2 – Net Purchases

depreciation Purchases
Add: Freight-In
4. Gains and Losses Less: Purchase Discounts
Purchase Returns and Allowances
Gains Net Purchase
❖ Represent other items that meet the definition
of income and may, or may not, arise in the Freight-in – addition to purchases
course of the ordinary activities of an entity Freight-out – treated as a selling expense
❖ Incidental to the operations of a business
Note 3 – Cost of Sales
Losses Inventory, 1/1/year
❖ Represent other items that meet the definition Add: Net Purchase (Note 2)
of expenses and may, or may not, arise in the Total Goods Available for Sale
course of the ordinary activities of the entity Less: Inventory, 12/31/year
❖ A loss is not expected to be incurred Cost of Sales
periodically by business organizations.
Gross Profit = Net Sales – Cost of Sales
5. Other Items Gross Loss if Cost of Sales > Net Sales
❖ Income taxes and items of other
comprehensive income 3. Determine the Selling Expenses.

Income tax – sum of money payable to the Salaries, rent, utilities, and depreciation expenses
government pertain to both selling and administrative expenses.

Items of other comprehensive income – increases 4. Determine the Administrative Expenses.

or decreases in economic benefit for a period 5. Determine the Net Income.

Preparing a Statement of Comprehensive Income Net Income = Gross Profit – (Selling Expenses +
1. Draft the appropriate title. Administrative Expenses)
2. Determine the total revenue from the Trial
Balance. JOANNA FRONDA (7/27/19)
3. Determine the total Operating Expenses.