LIGAO COMMUNITY COLLEGE

GUILID LIGAO CITY

ACCOUNTING (BE 205)

AB-ECONOMICS II-C, D, and D

INCOME STATEMENT
MODULE 11 (WEEK 11)

Introduction:
At the end of the accounting period, the financial information that have
been recorded and summarized are presented to the owner or to management in
the form of formal accounting reports commonly called financial statements.
The financial statements are considered the end product of the information
accumulated and processed during the accounting period. The basic financial
statements are generally prepared at the end of the accounting year. For timely
information, however, financial statements are also prepared at the end of every
month. The basic financial statements are:
a. Income Statement
b. Balance Sheet

Learning Outcome:
Prepare a financial statement.

Self-Assessment Question:
How do you determine profit or loss?

Discussion:
Income Statement
The owner and management would be most interested in knowing how the
business fares, whether operations result in profit or a loss. They would want to
know whether policies and marketing strategies are effective and whether
personnel are efficient and have achieved company objectives. There may be
other factors affecting operations, such as competition and share in the market,
but, successful operations mean profits.

The Income Statement is a formal financial report that presents the results
of operations for a specific period by showing a comparison of activities that
increase and decrease capital; that is sales and income against cost and
expenses, which results in either net income or net loss.

The Income Statement presents the nominal accounts: sales and income,
cost and expenses; and their balances representing the amounts accumulated
over a specified period and the resulting net income or net loss for the period.

Parts of the Income Statement Report

Heading – Name of establishment

Name of the Report
Period covered.

Body of the Report – Proper account name or titles

- Left column for inner computation
- Right column for totals
- Peso sign at the beginning amount and at final answer two
bars under the final answer to close the transactions and
the report.

Single – Step Form

The Income Statement of a merchandising company may be presented in a
single – step procedure, so called, because Net Income or Net Loss is determined
simply by comparing sales and other income against cost and expenses, as
follows:

Net sales and other Income = Total Income

Less: Cost of Sales and Expenses, itemized
=Net Income or Net Loss

Net Sales
Net Sales is the resulting figure after Sales Returns and Allowances and
Sales Discounts have been deducted from Sales, that is:

Sales

Less: Sales Returns and Allowances

Sales Discounts

= Net Sales

Cost of Sales
When the Purchases account is debited every time goods for sale are
acquired, the basic cost is then equal to the Purchases account. If all the goods
purchased were sold, then Cost of Sales is equal to Purchases, unless there is
inventory at the start of the period. In this case, the Inventory, beginning, or the
value of the goods on hand at the start of the period is added to Purchases.

If all the goods acquired for sale have not been sold, that is, there are
goods on hand unsold at the end of the year, termed Inventory end; then the
Inventory is deducted to determine the Cost of Sales or Cost of Goods Sold.

Other considerations in the computation of the cost of goods sold are

Purchase Returns, Purchase Discounts, and Freight-in. Returns and discounts on
purchases are treated as reductions from Purchases while the freight of the
goods acquired for sale is treated as an addition to the cos of goods purchased.

In summary, if the merchandising company carries all the cost accounts,

then the Cost of Sales or Cost of Goods Sold, is determined by identifying the
cost of items and is computed, as follows:

Inventory beginning
Add: Net Purchases
Freight-in
= Total Cost of Goods Available for Sale
Less Inventory ends
= Cost of Sales or Cost of Goods Sold
Total Goods Available for Sale may otherwise be termed Total Goods
Offered for Sale

Net Purchases
Is a result of deducting Purchase Returns and Allowances and Purchase
Discounts from Purchases, to wit:

Purchases
Less: Purchase Returns and Allowances
Purchase Discounts
= Net Purchases

Inventory Beginning
Also termed Merchandise Inventory Beginning, are goods on hand at the
start of the accounting year. Normally, inventory on hand at the start of the year
consists of goods already purchased but were not sold during the preceding
year. Inventory Beginning then was the Inventory End of the previous year.
Inventory End
Also termed Merchandise Inventory End, are goods on hand, unsold at the
end of the year. Since Inventory End logically consists of goods acquired during
the year and included in the Purchases account, then Inventory End is treated as
a reduction from cost. On the other hand, since Inventory End consists of goods
on hand at the end of the year, the account is properly classified as an asset,
among the economic resources of the business as of particular date.

The Income Statement illustrated hereunder is a sample for a professional

practice, for one-year accounting period. Depreciation and Bad Debts are
included, after due adjustment are assumed to have been made.

Juan De La Cruz, CPA

Income Statement
For the year ended December 31. 2020

Income:
Professional Fees P 170,000
Retainer’s Fees 190,000
Total Income P 360,000

Less Expenses:
Salaries and Allowances P 80,000
Rent 40,000
Electricity 8,000
Depreciation 6,400
Office Supplies Used 7,500
Telephone 5,000
Bad Debts 1,800
Miscellaneous Expenses 1,200
Total Expenses 149,900

Net Income for the year P 210,100

Multiple – Step Form

The multiple-step form of the Income Statement is prepared on the

assumption that there are stages in the earning activities of the company
engaged in buying goods for sale in their original form without alteration. These
stages are indicated in the sequence in the multiple-step form, as follows:

Net Sales
Less Cost of Sales
=Gross Profit
Less Operating Expenses
=Net Operating Income/Loss
Add/Less Other Items
=Net Income/Loss

Operating Expenses
Operating Expenses are expenditures necessary to the operation of the
business and are commonly classified into Selling Expenses and General of
Administrative Expenses. These expense accounts may be itemized or presented
in total with an accompanying schedule showing a list of the expense accounts
included.

Selling Expenses
Selling Expenses are expenditures incurred in the process of selling, such
as: Sales Salaries, Salesmen’s Commission, advertising Expense, Delivery
Expense or Freight-out, and Insurance charged to the company for goods sold
and in transit. Store Supplies Used, Storage and Handling, Transportation and
Gasoline for the Transportation Equipment or Delivery Trucks are also
considered selling expenses.

General or administrative Expenses

These are expenses for the general operations of the business, such as,
among others: Office Salaries, Utilities Expense, Office Supplies Used, Repair
and Maintenance, Representation and Entertainment, and Miscellaneous
Expenses.

Rent Income
A merchandising company’s main operation is selling, but the company
owns the building that contains the store outlet on the ground floor and office
spaces for rent on the upper floors. Rent income earned is shown among other
items in the Income Statement.

Interest Income and Dividend Income

The company may have excess Cash, which the owner or management has
decided to invest in stocks or bonds of its suppliers and other companies. The
investment in stocks earn dividends, termed Dividend Income; and the
investment in bonds earn interest, termed Interest Income. Both Dividend Income
and Interest Income are classified as Other Items in the Income Statement.

Interest Expense
A merchandising company have acquired funds through a long-term debt,
for which interest is paid. The interest paid is not strictly classifiable as an
operating expense. Among Other Items then, is presented the Interest Expense
on the long-term debt.

Gain or Loss on Sale of Asset

It may occur when the company sells an asset that was originally acquired
for use and not for sale. The Gain of Asset account is presented among the other
income included under Other Item. The Loss on Sale of Asset is presented along
with other expense account Other Items.

The body of the multiple-step Income Statement for a merchandising

company, is shown below, in detail, with the amounts represented at their proper
placement:

Sales xxx
Less: Sales Returns xxx
Sales Discounts xxx xxx
Net Salaries xxx

Less: Cost of Sales:

Inventory Beginning xxx
Purchase xxx
Less: Purchase Returns xxx
Purchase Discount xxx xxx
Net Purchases xxx
Add: Freight-In xxx
Total Goods Available for sale xxx
Less Inventory End xxx xxx
Gross Profit xxx

Less: Operating Expenses

Selling Expenses, itemized xxx
General Expenses, itemized xxx
Total Operating Expenses xxx
Net Operating Income/Loss xxx

Add/Less: Other Items

Other Income, itemized xxx
Other Expenses, itemized xxx xxx
Net Income/Net Loss for the year xxx
Assessment:
Prepare the Income statement from the following information:

1. Data from the book of Reyes Shoes and Bags Repair for the year ended
December 31, 2020. (Single-step)
Shoes Repair Income P24,100
Bag Repair Income 20,880
Salaries and Wages 7,500
Rent 4,000
Taxes and Permit 1,650
Delivery Expense 3,350
Electricity 3,100
Telephone 1,900
Miscellaneous Expenses 2,700
Interest Expenses 350

2. Given below the data from the book of Marc Inn, Inc. for the year ended
December 31, 2020.
Revenues
Rooms Php 2,037,556.00
Food and Beverage 2,455,000.00
Other Income 925,500.00
Cost of Sales. Payroll and other Expenses
Rooms 556,000.00
Food and Beverage 920,240.00
Administrative and General Expense 453,500.00
Marketing 595,300.00
Property operations and maintenance 245,300.00
Energy Costs 750,000.00
Property Taxes 98,500.00
Interest and Insurance 105,300.00
Depreciation and amortization 250,400.00
Income tax 500,000.00

Self-Learning Module Evaluation:

In the scale of 1 to 4 where 1 is the lowest and 4 is the highest rate yourself
how much have you learned in this module.
1 – I did not learn anything.
2 – I still need guidance.
3 – I learned just right.
4 – I learned a lot.

Reference

Basic Financial Accounting and Reporting, Ballada

Prepared by:

Mr. Marcos P. Garcia III

Instructor 04182021