PRACTICAL ACCOUNTING 1

STATEMENT OF COMPREHENSIVE INCOME – Lecture

Method of presentation
a. Two separate statements:
1. An income statement displaying the components of net income or loss
2. A statement of comprehensive income beginning with net income or loss and displaying components of
other comprehensive income

b. Single statement of comprehensive income – this is actually a combined income statement and statement of
comprehensive income

Comprehensive income – includes the components of net income or loss and the components of other comprehensive
income during a period.

Other Comprehensive income – includes items of income and expenses that are not recognized in profit or loss but are
recognized directly as required or permitted by accounting standards. The following are examples of other
comprehensive income:

1. Unrealized gains and losses on investments

2. Gains and losses arising from translating the financial statements of a foreign operation
3. Changes in revaluation surplus
4. Unrealized gains and losses on hedging (cash flow hedge – the effective portion)
5. Actuarial gain or loss on defined benefit obligation (under the immediate recognition approach)

Approach of Presentation
Transaction approach – this is the conventional or traditional preparation of income statement in conformity with the
GAAP. This approach of determining net income or net loss by comparing the total revenues earned against the total
amount of expenses incurred

Forms of income statement:

1. Functional presentation – also known as cost of sales method, this form classifies expenses according to their
function as part of cost of sales, selling activities, administrative activities and other activities

2. Natural presentation – also known as nature of expense method, this form, expenses are aggregated, according
to their nature and not allocated among various functions within the entity, (for example, depreciation,
purchase of materials, transport costs, employee benefits, and advertising costs), and are not reallocated
among various functions within the entity.

Revenue P xxx
Other income Xxx

Changes in inventory of finished goods and work in process P xxx

Raw materials and consumables used xxx
Employee benefits costs xxx
Depreciation and amortization expense xxx
Other expenses xxx Xxx

Profit
xxx
Income tax
xxx

Net income after tax

xxx
Other comprehensive income, net of tax
xxx

Unrealized gains
P xxx
Unrealized loss
(xxx) xxx

Comprehensive income
P xxx
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Function of expense or cost of sales’ method – classifies expenses according to their function as part of cost or sales, or,
for example the cost of distribution or administrative activities. At a minimum, an entity discloses its cost of sales under
this method separately from other expenses.

Revenue P xxx
Cost of sales (xxx)
Gross Profit xxx
Other income xxx
Distribution costs (xxx)
Admininstrative costs (xxx)
Other expenses (xxx)

Profit xxx
Income tax (xxx)

Net income after tax xxx

Unrealized gains
Unrealized loss P xxx xxx
(xxx)
Comprehensive income P xxx

1. Information to be reported on the face of the income statement:

a. Revenue
b. Finance costs
c. Share of profit or loss of associates and joint ventures accounted for using the equity method
d. Profit-tax gain or loss recognized on the disposal of assets or settlement of liabilities attributable to
discontinuing operation
e. Tax expense
f. Profit or loss

2. The following items shall be disclosed on the face of the income statement as allocations of profit or loss for the
period

3. Additional line items, headings and subtotals shall be presented on the face of the income statement when
such presentation is relevant to an understanding of the entity’s financial performance

4. An entity shall not present any items of income and expense as extraordinary items neither on the free face of
the income statement nor in the notes

5. When items of income and expense are material, their nature and amount shall be disclosed separately

6. Circumstances that would give rise to the separate disclosure of items of income and expense include:
a. Write-downs of inventories to net realizable value or of property, plant and equipment to recoverable
amount, as well as reversals of such write-downs
b. Restructuring of the activities of an entity and reversals of any provisions for the costs of restructuring
c. Disposals of items of property, plant and equipment
d. Disposals of investments
e. Discontinuing operations
f. Litigation settlements
g. Other reversals or provisions
h. Entities classifying expenses by function shall disclose additional information on the nature of expenses,
including depreciation and amortization expense and employee benefits expense

REVENUE MEASUREMENT & RECOGNITION

Revenue – is the gross inflow of economic benefits during the period arising in the course of the ordinary
activities of an enterprise when those inflows result in increase in equity other than increases relating to contributions
from equity participants;

MEASUREMENT RECOGNITION
At the FAIR VALUE of the consideration received or 1. From sale of goods
receivable. 2. From rendering of services
3. From interest, royalties and dividends
FAIR VALUE is the amount for which an asset could be 4. Installation fees
exchanged, or a liability settled, between knowledgeable, 5. Advertising commissions, etc. (refer below!)
willing parties in an arm’s length transaction.
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RECOGNITION OF REVENUE
1. From sale of goods: Revenue is recognized when all the following conditions are met:
a. The enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods
b. The enterprise retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold
c. The amount of revenue can be measured reliably
d. It is probable that the economic benefits associated with the transaction will flow to the enterprise
e. The costs incurred or to be incurred in respect of the transaction can be measured reliably

In the absence of any information as to the above criteria, revenue is recognized at the point of sale which is at
point of delivery. However, the following are exception to the point of sale realization:

(1) Bill and hold sales. In which delivery is delayed at the buyer’s request but the buyer takes title and accepts
billing – the seller recognizes revenue when the buyer takes title, provided:
(a) It is probable that delivery will be made
(b) The item is on hand, identified and ready for delivery to the buyer at the time the sale is
recognized
(c) The buyer specifically acknowledges the deferred delivery instructions and
(d) The usual payment terms apply

(2) Good shipped subject to conditions such as installation and inspection – the seller normally recognizes
revenue when the buyer accepts delivery, and installation and inspection are complete. However, revenue
is recognized immediately upon the buyer’s acceptance of delivery when
(a) The installation process is simple
(b) The inspection is performed only for the purpose of final determination of contract prices

(3) Goods shipped subject to conditions such as “on approval when the buyer has negotiated a limited right
of return” – if the uncertainty about the possibility of return, the seller recognizes revenue when the
shipment has been formally accepted by the buyer or the goods have been delivered and the time period
for rejection has elapsed

(4) Goods shipped subject to condition such as “cash on delivery” – the seller recognizes revenue when the
delivery is made and cash is received by the seller

(5) Layaway sales under which the goods are delivered only when the buyer makes the final payment in a
series of instalments – the seller recognizes from such sales when the goods are delivered. However,
when experience indicates that most such sales are consummated, revenue may be recognized when a
significant deposit is received, provided the goods are on hand, identified and ready for delivery to the
buyer.

(6) Sale and repurchase agreements (other than swap transactions) under which the seller concurrently
agrees to repurchase the same goods at a later date, or when the seller has a call option to repurchase,
or the buyer has a put option to require the repurchase, by the seller, of the goods – the seller must
analyze the terms of the agreement to ascertain whether, in substance, the risks and rewards of ownership
have been transferred to the buyer. If they have been transferred, the seller recognizes revenue. When
the seller has retained the risks and rewards of ownership, even though legal title has been transferred,
the transaction is a financing arrangement and does not give rise to revenue.

(7) Sales in intermediate parties such as distributors, dealers or others for resale – the seller generally
recognizes revenue from such sales when the risks and rewards of ownership have been transferred.
However, when the buyer is acting, in substance as an agent, the sale is treated as a consignment sale.

(8) Installment sales, under which the consideration is receivable in instalments – the seller recognizes
revenue attributable to the sales price, exclusive of interest, at the date of sale. The sales price is the
PRESENT VALUE of the consideration, determined by discounting the instalment receivable at the imputed
rate of interest. The seller recognizes the interest element as revenue using the effective interest method.

(9) Sales with customer loyalty award – the seller should allocate the selling price with referenced to their
relative fair values.

(10) Servicing fees included in the price of the product sold – when the selling price of the product includes an
identifiable amount for subsequent servicing, the seller defers that amount and recognizes is as revenue
over the period during which the service is performed. The mount deferred is that which will cover the
expected costs of the services under the agreement, together with a reasonable profit on those services.
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2. From rendering of services- Revenue is recognized when all the following conditions are met:
a. The amount of reenue can be measured reliably
b. It is probable that the economic benefits associated with the transaction will flow to the enterprise
c. The costs incurred or to be incurred in respect of the transaction can be measured reliably
d. The stage of completion of the transaction at the balance sheet date can be measured reliably

3. From interest, royalties and dividends – the use of the enterprise’s assets by others gives rise to revenue for the
enterprise. Revenue arising from the use by others of enterprise assets yielding interest, royalties and dividends
should be recognized on the bases set out below when:
a. It is probable that the economic benefits associated when the transaction will flow to the enterprise, and
b. The amount of the revenue can be measured reliably.

Interest should be recognized on a time proportion basis that takes into account the effective yield on the asset;

Royalties should be recognized on an accrual basis in accordance with the substance of the relevant agreementl

Dividends should be recognized when the shareholder’s right to receive payment is established.

4. Installation fees – the seller recognizes fees as revenue by reference to the stage of completion of the installation,
unless they are incidental to the sale of a product, in which case they are recognized when goods are sold.

5. Advertising commissions – media commissions are recognized when the related advertisement or commercial
appears before the public. Production commissions are recognized by reference to the stage of completion of the
project.

6. Insurance agency commissions – insurance agency commissions received or receivable that do not require the
agent to render further service are recognized as revenue by the agent on the effective commencement or renewal
dates of the related policies. However, when it is probable that the agent will be required to render further
services during the life of the policy, the agent defers the commission, or part of it, and recognizes it as revenue
over the period during which the policy in in force.

7. Admission fees – the seller recognizes revenue from artistic performances, banquets, and other special events
when the event takes place. When a subscription to a number of events is sold, the seller allocates the fee to each
event on a basis that reflects the extent to which services are performed at each event.

8. Tuition fees – the seller recognizes revenue over the period of instruction.

9. Fees from the development of customized software – the software developer recognizes fees from the
development of customized software as revenue by reference to the stage of completion of the development,
including completion of services provided for post-delivery service support

10. License fee and royalties – the licensor recognizes fees paid for the used of an entities assets (such as trademarks,
patents, software music copyright, record masters and motion picture films) in accordance with the substance of
the agreement. As a practical matter, this may be on a straight-line basis over the life of the agreement, for
example, when a license has the right to use specified technology for a specified period of time.
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EXPENSE MEASUREMENT AND RECOGNITION

EXPENSE – are outflows of (or decreases in) assets of a company or incurrence of liabilities (or combination) of both)
during a period from delivering of producing goods, rendering services or carrying out other activities that are the
company’s ongoing major or central operations.

REVENUE
is the gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an
enterprise when those inflows result in increase in equity
other than increases relating to contributions from equity
participants
EXPENSE
are outflows of (or decreases in) assets of a company or
incurrence of liabilities (or combination) of both) during a
period from delivering of producing goods, rendering
services or carrying out other activities that are the
company’s ongoing major or central operations.

RECOGNITION OF EXPENSES:

ASSOCIATIING CAUSE & EFFECT

Expenses are recognized in the income statement when decrease in future economic benefits related to a
decrease in an asset or an increase of a liability has arisen than can be measured reliably. Expenses are recognized in
the income statement on the basis of DIRECT ASSOCIATION between the costs incurred and the earning of specified
items of income

SYSTEMATIC & RATIONAL ALLOCATION

When economic benefits are expected to arise over several accounting periods and the association with income
can only be broadly or indirectly determined, expenses are recognized in the income statement on the basis of
SYSTEMATIC & RATIONAL ALLOCATION

IMMEDIATE RECOGNITION
Expenses are recognized IMMEDIATELY in the income statement when expenditure produces no future
economic benefits or when, and to the extent, that: future economic benefits or when, and to the extent, that: future
economic benefits do not qualify, or cease to qualify, for recognition in the balance sheet as an asset.