INCOME STATEMENT

An income statement is a formal statement showing the financial performance of an entity for a given
period of time.

The financial performance of an entity is primarily measured in terms of the level of income earned by
the entity through the effective and efficient utilization of its resources.

The financial performance is also known as the results of operations of the entity.

The transaction approach is the traditional preparation of the income statement in conformity with
accounting standards.

The income statement for a period presents the income, expenses, gains, losses and net income or loss
recognized during the period.

Information about financial performance is useful in predicting future performance and ability to
generate future cash flows.

COMPREHENSIVE INCOME

Comprehensive income is the change in equity during a period resulting from the transactions and other
events, other than changes resulting from transactions with owners in their capacity as owners.

Accordingly, comprehensive income includes:

a. Components of profit or loss

b. Components of other comprehensive income

PROFIT OR LOSS
the term profit or loss is the total of income less expenses, excluding the components of other
comprehensive income.

In other words, this is the “bottom line” in the traditional income statement.

An entity may use “net income” or “net loss” to describe profit or loss.

OTHER COMPREHENSIVE INCOME (OCI)

Other comprehensive income comprises items of income and expenses including reclassification
adjustments that are not recognized in profit or loss as required or permitted by Philippine Financial
Reporting Standards.

The components of “other comprehensive income” include the following.

1. Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income
2. Unrealized gain or loss on debt investment measured at fair value through other comprehensive
income.
3. Gain or loss from translation of the financial statements 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 of a financial liability designated at fair value
through profit or loss.

PRESENTATION OF OTHER COMPREHENSIVE INCOME

PAS 1, paragraph 82A, provides that the statement of comprehensive income shall present line
items for amounts of other comprehensive income during the period classified by nature.

The line items for amounts of OCI shall be grouped as follows:

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 THAT WILL BE RECLASSIFIED TO PROFIT OR LOSS

a. Unrealized gain or loss on debt investment measured at fair value through other comprehensive
income.
b. Gain or loss from translating financial statements of a foreign operation.
c. Unrealized gain or loss on derivative contracts designated as cash flow hedge.

OCI THAT WILL BE RECLASSIFIED TO RETAINED EARNINGS

a. Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income.
The Application Guidance of PFRS 9, paragraph B5.7.1, provides that such unrealized gain or loss
is reclassified to retained earnings upon disposal of the investment.
b. Revaluation surplus during the year
The realization of the revaluation surplus is through retained earnings.
c. Remeasurements of defined benefit plan, including actuarial gain or loss
The remeasurements are not reclassified subsequently but are permanently excluded from
profit or loss.
However, the remeasurements may be transferred within equity or retained earnings.
d. Change in fair value attributable to credit risk of a financial liability designated at fair value
through profit or loss.
Such gain or loss from change in fair value attributable to credit risk of a financial liability may be
transferred within equity or retained earnings.

PRESENTATION OF COMPREHENSIVE INCOME

An entity has two options of presenting comprehensive income, namely:

1. Two statements:
a. An income statement showing the components of profit or loss.
b. A 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

 This is the combined statement showing the components of profit or loss and components of
other comprehensive income in a single statement.
The Revised Conceptual Framework calls this single statement as statement of financial
performance.

SOURCES OF INCOME

a. Sales of merchandise to customers

The income from sales shall include all sales to customers during the period.
Sales returns, allowances and discounts shall be deducted from gross sales to arrive at net sales.
b. Rendering of services
Income from rendering of services, among others, includes professional fees, media advertising
commissions, insurance agency commissions, admission fees for artistic performance and tuition
fees.
c. Use of entity resources
This income category includes interest, rent, royalty and dividend income.
d. Disposal of resources other than products
Examples includes gain on sale of investments, gain on sale of property, plant and equipment
and gain on sale of intangible assets.

COMPONENTS OF EXPENSE

a. Cost of goods sold or cost of sales

b. Distribution costs or selling expenses
c. Administrative expenses
d. Other expenses
e. Income tax expense

COST OF GOODS SOLD OF MERCHANDISING CONCERN

Beginning inventory 500,000

Net purchases 2,000,000

Goods available for sale 2,500,000

Ending inventory ( 300,000)

Cost of goods sold 2,200,000

Gross purchases 1,900,000

Freight in 150,000

Total 2,050,000

Purchase returns, allowances and discounts (50,000)

Net purchases 2,000,000

COST OF GOODS SOLD OF MANUFACTURING CONCERN

Beginning raw materials 500,000

Net purchases 2,000,000

Raw materials available for use 2,500,000

Ending raw materials (300,000)

Raw materials used 2,200,000

Direct labor 3,000,000

Factory overhead 1,300,000

Total manufacturing cost 6,500,000

Beginning goods in process 900,000

Total cost of goods in process 7,400,000

Ending goods in process (1,000,000)

Cost of goods manufactured 6,400,000

Beginning finished goods 1,600,000

Goods available for sale 8,000,000

Ending finished goods (1,500,000)

Cost of goods sold 6,500,000

CLASSIFICATION OF EXPENSES

Distribution costs constitute cost which are directly related to selling, advertising and delivery of goods
to customers.

Distribution costs ordinarily include:

a. Salesmen’s salaries
b. Salesmen’s commissions
c. Traveling and marketing expenses
d. Advertising and publicity
e. Freight out
f. Depreciation of delivery equipment and store equipment

Administrative expenses constitute cost of administering the business.

Administrative expenses ordinarily include all operating expenses not related to selling and cost of
goods sold.
 Examples include:

a. Doubtful accounts
b. Office salaries
c. Expenses of general executives
d. Expenses 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 are those expenses which are not directly related to the selling and administrative
function.
Examples 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

NO MORE EXTRAORDINARY ITEMS

PAS 1, paragraph 87, specifically mandates that an entity shall not present any items of income and
expense as extraordinary either on the face of the income statement or statement of comprehensive
income or in the notes.

LINE ITEMS

PAS 1, paragraph 82, provides that as a minimum, the income statement and statement of
comprehensive income shall include the following line items:

a. Revenue
b. Gain and loss from the derecognition of financial asset measured at amortized cost as require by
PFRS 9.
c. Financial cost
d. Share in income or loss of associate and joint venture accounted for using the equity method
e. Gain or loss on the reclassification of financial asset from amortized cost to fair value profit or
less.
f. Gain or loss on the reclassification of financial asset from fair value other comprehensive income
to fair value profit or loss.
g. Income tax expense
h. A single amount comprising discontinued operations
i. Profit or loss for the period
j. Total other comprehensive income
k. Comprehensive income for the period being the total of profit or loss and other comprehensive
income.
 The following items shall be disclosed on the face of the income statement and statement of
comprehensive income:

a. Profit or loss for the period attributable to noncontrolling interest and owners of the parent.
b. Total comprehensive income for the period attributable to noncontrolling interest and owners
of the parent.

FORMS OF INCOME STATEMENT

PAS 1, paragraph 99, provides that an entity shall present an analysis of expenses recognized in profit or
loss using a classification based on either the function of expenses or their nature within the entity,
whichever provides information that is reliable and more relevant.

Accordingly, the income statement may be presented in two ways, namely functional and natural.

FUNCTIONAL PRESENTATION

This form classifies expenses according to their function as part of cost of goods sold, distribution costs,
administrative expenses and other expenses.

The functional presentation is also known as the cost of goods sold method.

An entity classifying expenses by function shall disclose additional information on the nature of
expenses, including depreciation, amortization and employee benefit costs.

NATURAL PRESENTATION

The natural presentation is referred to as the nature of expense method

Under this form, expenses are aggregated according to their nature and not allocated among the various
functions within the entity.

In other words, the expenses are no longer classified as cost of goods, sod, distribution costs,
administrative expenses and other expenses.

The expenses which are of the same nature are grouped or aggregated and presented as one item.

For example, depreciation, purchases of raw materials, transport cost employee benefit costs and
advertising costs are presented separately.

“Functional” income statement

EXAMPLAR COMPANY

Income statement

Year ended December 31,2020

Net sales (1) 9,000,000

Cost of goods sold (2) (5,400,000)

Gross income 3,600,000

Other income (3) 900,000

Investment income (4) 500,000

Total income 5,000,000

Expenses:

Distribution (5) 1,350,000

Administrative expenses (6) 1,000,000

Other expenses (7) 320,000

Finance cost (8) 200,000 2,870,000

Income before tax 2,130,000

Income tax expense 580,000

Net income 1,550,000

Note 1 – Net sales

Gross sales 9,300,000

Sales return and allowance (100,000)

Sales discount (200,000)

Net sales 9,000,000

Note 2- Cost of goods sold

Inventory, January 1 1,500,000
Purchases 6,000,000

Freight in 300,000

Total 6,300,000

Purchase return and allowance (150,000)

Purchase discount (250,000) 5,900,000

Goods available for sale 7,400,000

Inventory, December 31 (2,000,000)

Cost of sales 5,400,000

WHICH FORM OF INCOME STATEMENT?

PAS 1 does not prescribe any format.

Paragraph 105 simply states that because each method of presentation has merit for different types of
entities, management is required to select the presentation that is reliable and more relevant.

STATEMENT OF COMPREHENSIVE INCOME

As stated earlier, in addition to the income statement, a statement of comprehensive income is also
prepared in order to show the total comprehensive income.
The statement of comprehensive income starts with the profit or loss as shown in the income statement
plus or minus the components of other comprehensive

The purpose of this statement is to provide a more comprehensive information on financial

performance measured more broadly than the income as traditionally computed.

ILLUSTRATION

Using the data in the preceding illustration, the statement of comprehensive income may appear as
follows:

EXAMPLAR COMPANY

Statement of Comprehensive Income

Year Ended December 31, 2020

Net income 1,550,000

Other comprehensive income to be reclassified to profit or loss:

Foreign currency translation gain 150,000

Unrealized loss on derivative contract

Designated as cash flow (100,000) 50,000

hedge

Comprehensive income 1,600,000

Comprehensive income for a period includes the net income or loss for the period plus or minus the
components of other comprehensive income.

However, the comprehensive income of ₱1,600,000 is not carried to retained earnings. Only the net
income of ₱1,550,000 is included in the determination of retained earnings unappropriated.

The net other comprehensive income of ₱50,000 is carried to “reserves” or shown separately in the
statement of changes in equity.

SINGLE STATEMENT OF COMPREHENSIVE INCOME

Another option in presenting the components of profit or loss and components of other comprehensive
income is to prepare a single statement of comprehensive income.

Again, this single statement is the combined income statement and statement of comprehensive
income.
Using the preceding data, the single statement of comprehensive income following the “functional
presentation” may appear as follows:

STATEMENT OF RETAINED EARNINGS

The 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.

The important data affecting the retained earnings that should be clearly disclosed in the statement of
retained earnings are:

a. Profit or loss for the period

b. Prior period errors
c. Dividends declared and paid to share holders
d. Effect of change in accounting policy
e. Appropriation of retained earnings

STATEMENT OF CHANGES IN EQUITY

The statement of changes in equity is a basic statement that shows the movements in the elements or
components of the shareholders’ equity

The statement of retained earnings is no longer a required basic statement but it is a part of the
statement of changes in equity.

An entity shall present a statement of changes in equity showing the following:

1. Comprehensive income for the period

2. For each component of equity, the effects of changes in accounting policies and corrections of
errors.
3. For each component of equity, a reconciliation between the carrying amount at the beginning
and end of the period, separately disclosing changes from:
a. profit or loss
b. Each item of other comprehensive income
c. Transactions with owners in their capacity as owners showing separately contributions by and
distributions to owners.