Results of the Company’s Operations

The SCI is a statement that reports the results of the operations of the business
for one accounting period. This statement contains the following information:
a. Revenue generated by operating the business;
b. Costs spent to generate the revenue; and
c. Income, which is the excess of revenue over costs
The SCI is described as a “for the period” report. This means that the amounts
presented on the report include only those that occurred within the given period.

Revenue - Expenses = net income

Components of the Statement of Comprehensive Income

Income and Expense are the general terms used to describe the element of the SCI.
Income refers to a transaction that increases assets and/or decreases liabilities
leading to increase in equity resulting from the operations of the business and not from
the owner’s contribution.
Expenses, on the other hand, are transactions that decrease assets and/or increase
liabilities leading to decrease in equity resulting from the operations of the business
and not because of distributions to owners.

Two kinds of income

Revenues are income generated from the primary operations of the business.
Gains, on the other hand are income derived from other activities of the business.

Two kinds of expenses

Expenses are related to the primary operations of the business.
Losses are from other activities of the business.
Elements of the Statement of Comprehensive Income
Revenue
Service Income
The Service Income account is generally used to describe revenue derived from
rendering of services.

The Sales Revenue account is generally used to describe revenue derived from
selling of goods.

NOTE:
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.

Expenses
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 of inventory, brokerage, and shipment cost to bring the
goods to the premises of the company. This shipment cost is called Freight-In.
Two ways of keeping records of inventory
Perpetual means that the inventory and Cost of Goods Sold accounts are
“perpetually” updated. The inventory account is increased when goods for sales
are acquired and decreased when goods are sold. The Cost of Goods sold account is
updated every time a sale is made

Periodic inventory system is the inventory account is only “periodically” updated.

“Periodically” means that the inventory account is updated only at the end of the
year or end of the month.

Cost of merchandise acquired is collected using the Purchases account.

There are two contra-Purchase accounts:
Returns of defective goods are reported under Purchase Returns and Allowances.
Discounts taken are reported under Purchase Discount.
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 (electricity, telephone and water bills), gasoline expense, representation, bad
debts expense, depreciation and amortization.
Bad debts expense is an estimated operating expense related to accounts
receivable. Accounts Receivable is the right to collect payment from customers.
Presentation of Statement of Comprehensive Income
There are two formats for the SCI, namely, the single-step and the multi-step.

Single-Step Statement of Comprehensive Income

It is called single-step SCI because net income is computed using only one step,
deducting total expenses from total revenues.
General and Administrative Expenses refer to those incurred in the daily operations
and management of the business.
Selling Expenses are costs related to marketing, selling and distributing the company’s
merchandise.

Statement of Changes in Equity

The Statement of Changes in Equity (SoCE) is prepared to meet the requirements of
the readers to understand the transactions that caused the movements in the equity
accounts.
The SoCE is an statement dated “for the year ended.” The report shows a
reconciliation of the beginning and ending balances of the equity accounts. It
summarizes the equity transactions with the owners of the business that occurred
during the year.
Preparation of Statement of Changes in Equity
The form of business organization determines the equity accounts reported on the
financial statements. The form of business organization differ in terms of number of
owners and the transferability of ownership. These inherent characteristics of business
organizations led to the difference in the presentation of equity.
Sole Proprietorship
The SFP and SoCE will present one capital account because there is only one
owner. The owner’s Capital account tracks the following transactions of the owner:
1. capital contributions
2. withdrawals
3. net income or loss generated by the business
Partnership
A partnership is owned by two or more partners. The number of capital accounts
that will be reported in the SoCE and the SFP is equal to the number of partners.
Each partner’s capital account will track his contributions to the business, his share in
the net income and his drawings.
Net income of the partnership is allocated among the partners based on the profit
and loss sharing agreement stipulated in the partnership contract. Allocation of net
income is unique only to partnership.
Corporation
A corporation is owned by many stockholders that could number to thousands.
Moreover, the ease of transferring ownership in corporation results in fast
turnover of owners. In corporation, we do not have a capital account for each
shareholder.
The stockholders’ equity section is divided into two parts:
1. Paid- in capital – the amount of contributions given or will be given to the corporation
in exchange for its common stocks. Paid-in capital is composed of:
a. Capital Stock – reflects the par value of the issued common shares. Par
value is the minimum price by which corporations can issue stocks to
stockholders.
b. Additional Paid-in Capital – excess of issue price over par value.
2. Retained Earnings – reports the undistributed earnings of the corporation. The
balance of the retained earnings is computed as follows:
net income - net losses and dividends from the date of incorporation up to the cut-off
or date of SFP.
Dividends are distributions to stockholders and are deducted from retained earnings
because dividends are taken from income generated by the corporation.

Statement of Cash Flows

Cash receipts may come from:
(1) cash sales to customers
 (2) collection of customer accounts
(3) loans and other borrowings
(4) owner’s contributions.
On the other hand, cash disbursements maybe for payments of:
(1) business expenses,
(2) purchases of inventories and other assets
(3) liabilities to creditors,
(4) dividends to owners.

The Statement of Cash Flow (SCF) is the financial statement that explains the
net change in cash for the year. Like the Statement of Comprehensive Income and
the Statement of Changes in Equity, the Statement of Cash Flow is dated “for the year
ended.” The statement shows the transactions for the year that reconciles the
beginning balance of cash to its year-end balance. The report is presented base on the
three major activities of the business:

Sections of the Statement of Cash Flow

The SCF reports cash flow transactions during the year classified by
operating, investing and financing activities.
Operating activities are related to the main revenue-producing activities of the
business.
Investing activities are cash transactions related to the acquisition and disposal
of long-term assets such as property, plant and equipment, and intangible assets.
Financing activities are cash transactions with equity owners and creditors.

Operating Activities
Cash flows from operations reveals the present ability of the company to
generate cash from its operations. Positive cash flows from operations suggests that
there is excess cash that can be used to purchase long-term assets, pay debts or
distribute to owners.
The following are examples of cash flow transactions reported under operating
activities:
 a. Cash received from customers (cash receipts from sale of goods and rendering of
services) (+)
b. Cash received from fees, commissions and other income (+)
c. Cash payments to suppliers (-)
d. Cash payments to employees (-)
e. Cash payments for other operating expenses (-)
f. Interest payments (-)
g. Interest received (+)
h. Dividends received (+)

The indirect method, however presents the operating activities starting with
the pre-tax income. It then reconciles the pre-tax income for non-cash income and
expenditures.
Investing Activities
Cash flows from investing activities is the second section in the SCF.
Reported within this classification are cash used for acquisition of property, plant
and equipment, intangible assets, and other long-term assets as well as cash
proceeds from the disposals of such long-term assets. Cash flows from investing
activities hints on the company’s ability to generate cash in the future. A negative cash
flows from investing activities implies that the company used cash to acquire long-term
assets intended to generate cash and revenue in the future. On the other hand, a
positive cash flow from investing activities may indicate that the company is divesting or
downsizing.
The following are examples of cash flow transactions reported under investing
activities:
a. Cash payments to acquire property, plant and equipment, intangibles and other
long-term assets (-)
b. Cash receipts from sale of property, plant and equipment, intangibles and other
long-term assets. (+)
c. Cash loans made to other parties (long-term note receivable (-)
d. Cash collection on long-term note receivable. (+)

Financing Activities
 The last section of the SCF is cash flow from financing activities. This
section reports cash received and cash paid to equity owners and long-term
creditors.
Below are examples of cash flow transactions under financing activities:
a. Cash received from issuing common shares (or capital contribution from owners) (+)
b. Cash received from issuing notes or getting a long-term loan from a bank (+)
c. Cash dividends distributed to shareholders (-)
d. Cash withdrawals of owners (-)
e. Cash payment for principal of long-term loan (-)

Decision Rule in Determining Classification of Cash Transactions

● Operating activities – items that will affect net income or profit or loss

● Investing activities – items affecting non-current assets

● Financing activities – items affecting non-current liabilities and equity