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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:
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Module
Example 1:
Solution:
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
5
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>
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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.
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
Statement of Comprehensive Income Part II 7
References and Supplementary Materials
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:
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
7
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 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
Financing Activities
These are activities which involve changes in the equity and liability accounts
in the accounting records.
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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.
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.
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