CHAPTER 9

INCOME STATEMENT
- A formal statement showing the financial performance of an entity for a
given period of time
Financial performance (results of operations) of an entity is primarily
measured in terms level of income earned by the entity through the effective
and efficient utilization of its resources
Transaction Approach
- Traditional preparation of the income statement in conformity with
accounting standards
COMPREHENSIVE INCOME
- the change in equity during a period resulting from transactions and other
events, other than changes resulting from transactions with owners in their
capacity as owners.
Includes:
a. Components of profit or loss
- Total income less expenses, excluding the components of the
comprehensive income
- “bottom line” in the traditional income statement
b. Components of other comprehensive income
- Comprises items of income and expenses including reclassification
adjustments that are not recognized in profit or loss as required by PFRS
Includes: (7)
1. Unrealized gain or loss on equity investment
2. Unrealized gain or loss on debt investment
3. Gain or loss from translation of FS of a foreign operation
4. Revaluation surplus during the year
5. Unrealized gain or loss from derivative contracts designated as cash flow
hedge
6. "Remeasurements” of defined benefit plan, including actuarial gain or loss
 7. Change in fair value attributable to credit risk
Line items shall be classified by nature and grouped as:
a. OCI that will be reclassified subsequently to profit or loss when specific
conditions are met
b. OCI that will not be reclassified subsequently to profit or loss but to
retained earnings

OCI to profit or loss:

a. Unrealized gain or loss on debt investment
b. Gain or loss from translating FS of a foreign operation
c. Unrealized gain or loss on derivative contracts designated as cash flow
hedge
OCI to retained earnings:
a. Unrealized gain or loss on equity investment measured at fair value thru
OCI
b. Revaluation surplus during the year
c. Remeasurements of defined benefit plan, including actuarial gain or loss
- Those are not reclassified subsequently but are permanently excluded from
profit or loss
d. Change in fair value attributable to credit risk of a financial liability
designated at fair value through profit or loss

PRESENTATION OF COMPREHENSIVE INCOME

1. Two statements:
a. An income statement showing the components of profit or loss
b. Statement of comprehensive income beginning with profit or loss as
shown in the income statement plus or minus the components of other
comprehensive income
2. Single statement of comprehensive income
- Combined statement showing components of profit or loss and
components of OCI in a single statement
- Revised Conceptual Framework calls this statement of financial
performance

Sources of Income
a. Sales of merchandise to customers
b. Rendering of services
c. Use of entity resources
d. Disposal of resources other than products
Components of expense
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expense
c. Administrative expense
d. Other expenses
e. Income tax expense
Classification of expense
- Distribution costs constitute which are directly related to selling,
advertising and delivery of goods to customers
Includes:
a. Salesmen’s salaries
b. Salesmen’s commissions
c. Traveling and marketing expense
d. Advertising and publicity
e. Freight out
f. Depreciation of delivery equipment and store equipment
Administrative expense – constitute cost of administering the business
Include:
a. Doubtful accounts
b. Office Salaries
c. Expense of general executives
 d. Expense of general accounting and credit department
e. Office supplies used
f. Certain taxes
g. Contribution
h. Professional fees
i. Depreciation of office building and office equipment
j. Amortization of intangible assets
Other expenses – not directly related to selling and administrative function
Include:
a. Loss on sale of trading investments
b. Loss on disposal of property, plant and equipment
c. Loss on sale of noncurrent investment
d. Casualty loss – flood, earthquake, fire
Forms of income statement
- PAS 1, paragraph 99, an entity shall present an analysis of expenses
recognized in profit or loss using a classification based on either the
function of expense or their nature within the entity
Functional presentation
- Classifies expense according to their function as part of cost of gods sold,
distribution costs, administrative expenses and other expense
- Cost of goods sold method
Natural presentation
- Nature of expense method
- Expenses are aggregated according to their nature
Which form of income statement?
- PAS 1 does not prescribe any format
- Select the presentation that is reliable and more relevant
Statement of retained earnings
- Shows the changes affecting directly the retained earnings of an entity and
relates the income statement to the statement of financial position
Should be clearly disclosed are:
a. Profit or loss for the period
b. Prior period errors
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings