Lesson 2: Statement of Comprehensive Income

At the end of the lesson, the students will be able to:

1. understand the purpose of the Statement of Comprehensive Income;
2. identify the elements of the SCI and describe each of these items for a service business and a merchandising business;
3. describe the nature of accounts reported on the Statement of Comprehensive Income;
4. prepare an SCI for a service business using the single-step approach; and
5. prepare an SCI for a merchandising business using the multistep approach.

A statement of comprehensive income (new title for income statement) is a structured financial
statement that shows the financial performance of a business entity for a given period. A period covered
by an income statement may be monthly, quarterly, semi-annually or annually. This statement contains
the following information:
1. Revenue generated by operating the business;
2. Costs spent to generate the revenue; and
3. Income, which is the excess of revenue over costs.

STATEMENT OF COMPREHENSIVE INCOME – Also known as the income statement. It contains the
results of the company’s operations for a specific period of time which is called net income if it is a net
positive result while a net loss if it is a net negative result. This can be prepared for a month, a quarter or
a year. (Haddock, Price, & Farina, 2012)

Differences Between Statement of Financial Position and Statement of Comprehensive Income

Statement of Financial Statement of Comprehensive
Position Income
As to accounting elements Assets, liabilities and equity Income and expenses
presented
As to the nature of the Presents the financial position Presents the result of operation
statement
As to the financial data needed Liquidity, solvency, financial Profitability of the business entity
for decision making structure and capacity for
adaptation
As to the date of the financial As of a given date (one day) For a given period
statement
As to the nature of the account Real accounts Nominal accounts
in the statement

TEMPORARY ACCOUNTS – Also known as nominal accounts are the accounts found under the SCI. They
are called such because at the end of the accounting period, balances under these accounts are
transferred to the capital account, thus having only temporary amounts and resulting to zero beginning
balances at the beginning of the following year.(Haddock, Price, & Farina, 2012)Examples of temporary
accounts include revenues, sales, utilities expense, supplies expense, salaries expense, depreciation
expense, interest expense among others.
 Income refers to increases in economic benefits during the accounting period in the form of
inflows or enhancement of assets or decreases of liabilities that result in increases in equity other than
those relating to contributions from equity participants.

Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletion of assets or incurrences of liabilities that result in decrease in equity other than
those relating to distribution of equity participants.

Accrual Concept of Accounting

Accrual is one of the fundamental concepts of financial accounting. Specifically, this is the
concept that dictates when an item must be reported on the SCI. Accrual states that revenue must be
reported on the accounting period that it was earned. Similarly, expenses must be reported during the
same reporting period they were incurred.
Generally, revenue is earned upon delivery of goods and services, not when payment is received
from the customer. More specifically, sale of goods are reported on the SCI on the period of delivery. On
the other hand, revenues from services are counted on the period when services are rendered. Neither
order from a customer nor signed contract of service count as sales. More importantly, cash collections
are not revenue.
By following the concept of accrual, expense is recognized when an item is used to generate
revenue. Expenses are recognized in the income statement based on matching costs with revenues,
systematic and rational allocation, and immediate recognition.
Matching Principle - Expenses are matched and recognized in the same period that the revenue
it generated was recognized.
Rational Allocation – Requires the cost of long-term expenditure to be rationally allocated over
the period of usage on the expected pattern of usage. An example of expenses estimated using rational
allocation is the depreciation of equipment.
Immediate Recognition - In cases when accountants cannot determine how long the
expenditure will benefit the business or if there is any benefit at all, then conservatism dictates that the
cost of the expenditure should be charged to expense immediately. Why? Because we cannot rationally
estimate the “life” of the benefit. Hence, the cost is charged to expense immediately, generally in the
year it was spent. This method is used for costs of advertising.
To summarize, revenue is recognized on the period of delivery. Expense, on the other hand, is
recorded in the same period of the revenue it was able to generate. The allocation maybe direct one to
one correspondence or indirect estimate based on rational allocation. However, should there be no
rational way to allocate, the costs is expensed immediately.

Elements of the Statement of Comprehensive Income

I. Revenue
a. Service Income. The Service Income account is generally used to describe revenue
derived from rendering of services. A more specific account name may be used to
identify the services rendered such as Rental Income, Professional Fee and Tuition Fee
Revenue.

Example 1. Tuition fee revenue

Little Lab pre-school collected tuition fee of ₱1,250,000
and ₱1,455,000 for the school year 2011-2012 and 2012-
2013, respectively. The school closed in April and May.
Determine the tuition fee revenue to be reported on SCI for
the calendar year 2012.

Answer:

School Year 2011-2012 ₱1,250,000

Number of months from January – March 2012 3
Number of months in one school year 10
Tuition fee revenue for calendar year 2012 ₱375,000

School Year 2012-2013 ₱1,455,000

Number of months from June-December 2012 7
Number of months in one school year 10
Tuition fee revenue for calendar year 2012 ₱1,018,500

Total Tuition fee revenue for the year 2012 ₱1,393,500

b. Sales. The Sales Revenue account is generally used to describe revenue derived from
selling of goods. A more specific account name may be used to identify the foods such
as Office Supplies Sales, Book Sales, Food Sales, etc.

Revenue from sales of goods is recognized when goods have been delivered. However,
customers are allowed to return goods that do not meet their quality standards. When
goods are returned, it is not deducted from Sales. Rather, normal accounting practice is
to report it under the account name Sales Return and Allowances – a Contra Sales
account. Also, accounting practice does not deduct discount from sales revenue. Rather,
use another contra sales account called Sales Discount.

Only Net Sales is reported on the face of SCI. Net Sales refer to Gross Sales less Sales
Return and Allowances and Sales Discount.

Example 2. Friendly Convenience Store: Sales Revenue

Juana Dela Cruz, owner of friendly Convenience Store, sold 3

boxes of ballpoint pens to Mrs. Susan Gonzales on account at
a price of P150 per box or P15 per pen. Juana gave Mrs.
Gonzales two weeks to pay the account. Moreover, Juana
told Mrs. Gonzales that she will deduct 2% discount if she
pays within a week.

Mrs. Gonzales return one week later. She returned five pens
and took advantage of the discount.

Determine the amount of Sales, Sales Return, Sales Discount

and Net Sales from the transaction with Mrs. Gonzales.
 Answer:

Sales 150 x 3 ₱ 450.00

Sales Return 15 x 5 (75.00)
Amount to be paid by Mrs. Gonzales before discount 375.00
Sales discount (375 x 2%) 2% (7.50)
Amount paid by Mrs. Gonzales ₱367.50

Alternatively:

Sales ₱ 450.00
Less: Sales returns and allowances (75.00)
Less: Sales discount (7.50)
Net sales ₱367.50

II. Expenses
a. Cost of Goods Sold (Cost of Sales). This is an account used by companies that sells
goods instead of services. For trading operations, Cost of Sales collects the cost of
merchandise sold. This includes the purchase price inventory, brokerage, and shipment
cost to bring the goods to the premises of the company. This shipment cost is called
Freight-In.

Cost of sales is part of inventory accounting. Accountants have two ways of keeping
records of inventory – perpetual and periodic inventory system. Perpetual means that
the Inventory and Cost of Goods Sold accounts are “perpetually” updated. The inventory
account is increased when goods for sale are acquired and decreased when goods are
sold. The Cost of Goods Sold account is updated every time a sale is made.

The other method is called periodic inventory system. The Inventory account is only
periodically updated. “periodically” means that the inventory account is updated only at
end of the year or end of the month. Cost of merchandise acquired is collected using the
Purchases account. Returns of defective goods are reported under Purchase Returns
and Allowances. Discounts taken are reported under Purchase Discounts. “Net
Purchases” is equivalent to Purchases plus Freight-In less Purchase Returns and
Purchase Discount.

Cost of Sales under periodic inventory system is computed as follows:

Beginning Inventory
Add: Net Purchases (Purchases + Freight In- Purchase Returns – Purchase
Discount)
Cost of Goods Available for Sale
Less: ending Inventory
Cost of Goods Sold
 Example 3. Friendly Convenience Store: Cost of Goods Sold
Juana Dela Cruz, owner of friendly convenience store, asked for
your help to determine the cost of sales of her store. This is the
first year of operations for Juana’s store. She provided the
following data to you.

Purchases (Based on supplier’s receipts) P55,344

Freight-In (based on receipts of taxi fares she incurred when she 430
shops for merchandise at Divisoria
Purchase returns 760

Based on the inventory count taken at the last day of the year, the ending inventory is valued at
P2,320. How much is cost of sales?

Answer:

Beginning inventory ₱0
Purchases ₱ 55,344
Add: Freight-in 430
Less: Purchase Returns (760)
Net purchases 55,014
Cost of Goods Available for Sale 55,014
Less: Ending inventory (2,320)
Cost of goods sold ₱52,694

b. Operating Expenses. Operating expenses refer to all other expenses related to the
operation of the business, other than cost of sales. These include salaries of employees,
supplies, utilities, gasoline expense, representation, bad debts expense, depreciation
and amortization.

Bad debt expense is an operating expense related to accounts receivable. It is an

estimated expense. Accounts Receivable is the right to collect payment from customers.
However, some accounts become uncollectible. The accounting rule is (1) to periodically
analyze the collectability of Accounts Receivable and; (2) to immediately charge to
expense the amount deemed uncollectible. We will refer to this account as bad debts
expense. We can estimate bad debts expense using percentage of sales. This method
requires the determination of the historical relationship between bad debts and sales
(or credit sales).

Example 4. Friendly Convenience Store: Bad Debts Expense

Current year sales of the store amounted to p128,865. Of this,
only p70,000 is cash sales. Based on the company’s experience,
bad debts is 3% of total sales of 6.5% of credit sales.
Determine the bad debts expense if the owner decided to use
the following:
 1. percentage of total sales method
2. percentage of credit sales method

Answer
3% of total sales 6.5% of credit sales
Total sales ₱128,865
Total credit sales ₱ 58,865
Historical experience 3% 6.5%
Bad debts expense ₱3,866 ₱3,826

III. Other Expenses and Other Income

Losses and other expenses as well as gains and other income are reported after the operating
section of the SCI. Line items included under this section are interest income from investment of
excess cash, interest expense from borrowing and gain or loss from sales of equipment
(proceeds from sales less net book value of PPE on date of sale).

Presentation of Statement of Comprehensive Income

Philippine Accounting Standard (PAS) 1 mentions two methods of presenting the statement of
comprehensive income:
1. Nature of expense method – expenses are aggregated according to their nature.
2. Function of expense / cost of sales method – expenses are classified according to their function
as part of cost of sales, distribution or administrative activities. This method can provide more
relevant information to users.

There are two format for SCI, namely, the single-step and the multi-step. The single-step is
closely related to the nature of expense format. On the other hand, the multi-step approach is
associated with the function of expense.

Single-step – Called single-step because all revenues are listed down in one section while all expenses
are listed in another. Net income is computed using a “single-step” which is Total Revenues minus Total
Expenses. (Haddock, Price, & Farina, 2012)

Multi-step – Called multi-step because there are several steps needed in order to arrive at the
company’s net income. (Haddock, Price, & Farina, 2012)

Statement of Comprehensive Income of a Service Company and of a Merchandising Company

The main difference of the Statements of the two types of business lies on how they generate their
revenue. A service company provides services in order to generate revenue and the main cost
associated with their service is the cost of labor which is presented under the account Salaries Expense.
On the other hand, a merchandising company sells goods to customers and the main cost associated
with the activity is the cost of the merchandise which is presented under the line item Cost of Goods
Sold. In presenting these items on the Statement of Comprehensive Income, a service company will
separate all revenues and expenses (as seen in the single-step format) while a merchandising company
will present total sales and cost of goods sold on the first part of the statement which will net to the
company’s gross profit before presenting the other expenses which are classified as either
administrative expenses or selling expenses (as seen in the multi-step format).

Parts of the Statement of Comprehensive Income

Single-Step SCI
Multi-Step SCI