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.

The customer took advantage of the discount and paid within the ten day discount
period. Accounting practice does not deduct the discount from Sales Revenue but use
another Contra-Sales account called Sales Discount.
Net Sales using assumed figures is computed as follows
Sales P 45,000
Less: Sales returns and allowances 7,500
Sales discount 750
Net sales P36,750

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.
Purchases P 30,000
Add: Freight-In 1,000
Less: Purchase Returns and Allowances 3,000
Purchase Discount 500
Net Purchases P27,500

Using the balances of the periodic inventory system accounts, Cost of Sales is
computed as follows:
Beginning inventory P 5,000
Add: Net purchases 27,500
Cost of goods available for sale 32,500
Less: Ending inventory 2,320
Cost of goods sold P 30,180

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.

Current year sale 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 or 6.5% of
credit sales. Determine bad debts expense given the following:
1. The owner of the store decided to use percentage of total sales method.
2. The owner of the store decided to use percentage of credit sales method.
3% of total sales 6.5% of credit sales
Total sales P 128,865
Total credit sales P 58,865
Historical experience 3% 6.5%
Bad debts expense P 3,866 P 3,826

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.

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.
The single-step SCI is also closely linked to the nature of expense format. It lists
down the expenses based on the source of expenses such as salaries, purchases,
supplies, utilities, fuel and depreciation.
ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20x1
Service revenue xxx
Rental income xxx
Interest income xxx
Increase in inventory* xxx
Total revenues and income XXX
Net purchases yyy
Depreciation expense yyy
Utilities expense yyy
Salaries expense yyy
Interest expense yyy
Insurance expense yyy
Supplies expense yyy
Total expenses YYY
Net income XXX – YYY
*Increase in inventory = Ending inventory – Beginning inventory

Multi-Step Statement of Comprehensive Income

The multi-step SCI is characterized by the presentation of several subtotals until
net income is determined. The multi-step SCI is more popularly used in business.
ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20x1
Gross sales A
Sales returns and allowances B
Sales discounts C
Net Sales D = A-B-C
Cost of Goods Sold E
Gross Profit F = D-E
Operating Expenses:
General and administrative expense G
Selling expense H I = G+H
Income from operations J=F–I
Interest income K
Interest expense L
Net income J+K-L
The multi-step approach is also associated with the function of expense format. The
function of expense classifies operating expenses into three categories based on
usage.
The categories are:
Cost of Sales,
General and Administrative Expenses
Selling Expenses.
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.

Normal Balances
An account is increased by an entry on the side of its normal balance. Similarly, it
is decreased by an entry on the opposite side of its normal balance. The normal
balance of equity account is credit. Income increases equity and equity is increased
by credit. Therefore, the normal balance of all income accounts is credit. Expenses
decrease equity and equity is decreased by debit. Therefore, the normal balance of all
expense account is debit.
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

Illustrative Problem:
Juana Dela Cruz is the owner of Friendly Convenience Store. The store was
established on January 1, 2020. Juana deposited 100,000 to a bank account in the
name of Friendly Convenience Store. She made three more deposits of P25,000
each during the year from her personal account. The store generated net income of
P356,700 in 2020. Juana regularly withdraws P10,000 per month from the store’s bank
account for her personal expenses.
1. Determine the 2020 year-end balance of the Juana Dela Cruz, Drawings account.
2. Prepare a Statement of Changes in Equity for the year ended December 31, 2020.

Answer:
1. The 2020 year-end balance of the Juana Dela Cruz, Drawings account is P120,000.
This is computed as P10,000 x 12 months.
2. Statement of Changes in Equity
Friendly Convenience Store
Statement of Changes in Equity
For the Year Ended December 31, 2020

Juana Dela Cruz, Capital, January 1, 2020 P - 0 -

Add:
Owner’s contribution (P100,000+P75,000) 175,000
Net income 356,700
Less:
Drawings (P10,000 x 12) (120,000)
Juana Dela Cruz, Capital, December 31, 2020 P 411,700

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.

Illustrative Problem:
The DEF Partnership was established in 2020. The partners, Diana, Emina and
Fanny have January 1, 2020 outstanding capital balances of P25,600, P43,800 and
P37,655, respectively. Diana contributed P15,000 during 2020. Emina and Fanny also
contributed P10,000 each in 2020. The 2020 year end balances of each partner’s
Drawings account are as follows: Diana, P12,000, Emina P15,000 and Fanny P14,000.
The partnership reported 2020 net income of P75,650. According to the
partnership agreement, the partner’s profit sharing ratio is 30%, 40% and 30% for
Diana, Emina and Fanny.
Required: Prepare the 2020 SoCE of DEF Partnership.
Answer:
DEF Partnership
Statement of Changes in Equity
For the Year Ended December 31, 2020
Diana, Emina, Fanny, Total
Capital Capital Capital
Balance, January 1, 2020 P25,600 P43,800 P37,655 P107,055
Add:
Partner’s contributions 15,000 10,000 10,000 35,000
Net income* 22,695 30,260 22,695 75,650
Less:
Drawings (12,000) (15,000) (14,000) (41,000)
Balance, December 31, 2020 P51,295 P69,060 P56,350 P176,705
● Distribution of Net Income
Diana – P 75,650 x 30% = P22,695
Emina – P 75,650 x 40% = P30,260
Fanny - P 75,650 x 30% = P22,695

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.
Illustrative Problem:
GHI Incorporated was established in 2020. The corporation issued 10,000, P10
par value shares of stock at an issue price of P20 per share. On July 15, 2021, the
corporation issued 1,000 new shares at an issue price of P25 per share.
The corporation reported net income of P56,785 and P65,870 in 2020 and 2021,
respectively. Dividends of P2.15 per share were declared and distributed to
shareholders on February 1, 2021. There were no dividends distributed on the first year
of operations of the corporation.
Required: Prepare the 2021 Statement of Changes in Equity of GHI Incorporated.
Answer:
GHI Incorporated
Statement of Changes in Equity
For the Year Ended December 31, 2021
Capital Additional Retained Total
Stock Paid-in Capital Earnings
Balance, January 1, 2021 P100,000 P100,000 P56,785 P256,785
Add:
Issuance of shares 10,000 15,000 25,000
Net income 65,870 65,870
Less:
Dividends (21,500) (21,500)
Balance, December 31, 2021 P110,000 P115,000 P101,155 P326,155

Computations:
1. Capital stock January 1, 2021
Number of stocks issued as of January 1, 2021 10,000
Par value P 10
Capital stock, January 1, 2021 P100,000
2. Additional paid-in capital, January 1, 2021
Number of stocks issued as of January 1, 2021 10,000
Issue price in excess of par value (P20 - P10) P 10
Additional paid in capital, January 1, 2021 P100,000
3. Capital stock, issuance
Number of stocks issued on July 1, 2021 1,000
Par value P 10
Capital stock, issuance P 10,000
4. Additional paid in capital, issuance
Number of stocks issued on July 1, 2021 1,000
Issue price in excess of par value (P25 – P10) P 15
Additional paid in capital, issuance P15,000
5. Dividends
Number of stock issued as of February 2, 2021 10,000
Dividend per share P 2.15
Dividends for 2021 P21,500
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 (+)

Direct versus Indirect Presentation

According to IAS 7 (IASB 2001), entities are given an option whether to present
the statement of cash flow using the direct or indirect method.
The direct method presents each major classification of gross receipts and
gross payments for operating activities. IAS 7 (IASB 2001) encourages the use of
the direct method. Below is an example of a direct method Statement of Cash Flows:

Margaret Jane Trading

Statement of Cash Flows
For the Period Ended December 31, 2019

Cash Flow From Operating Activities

Cash receipts from rendering services P100,000
Cash payment to suppliers of goods and services (50,000)
Net cash flow from operating activities 50,000
Cash Flow From Investing Activities
Purchase of property, plant and equipment (100,000)
Cash Flow From Financing Activities
Proceeds from cash investment of owners 230,000
Proceeds from bank loans 50,000
Payment to owners (10,000)
Net cash flows from financing activities 270,000
Net Increase in Cash 220,000
Cash at the Beginning of the Period 250,000
Cash at the End of the Period 470,000

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. After which, the movements in current assets and liabilities are adjusted
to the resulting figure.
Below is an example of a statement of cash flows presented using the indirect
method:
Margaret Jane Trading
Statement of Cash Flows
For the Period Ended December 31, 2019

Cash Flow From Operating Activities

Income before income tax P 100,000
Adjustments for:
Depreciation 10,000
Amortization 20,000
Operating income before working capital changes 130,000
Increase in accounts receivable (10,000)
Decrease in inventories 15,000
Increase in accounts payable 10,000
Decrease in notes payable (12,000)
Net cash flow from operating activities 133,000
Cash Flow From Investing Activities
Purchase of property, plant and equipment (100,000)
Cash Flow From Financing Activities
Proceeds from cash investment of owners 1,000,000
Proceeds from bank loans 200,000
Payment to owners (200,000)
Net cash flow from financing activities 1,000,000
Net Increase in Cash 1,033,000
Cash at the Beginning of the Period 150,000
Cash at the End of the Period 1,183,000

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
.