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Department of Education
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SCHOOL DIVISION OFFICE
LAS PIŇAS CITY

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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2
First Quarter
Week 2-3

CONTENT: STATEMENT OF COMPREHENSIVE INCOME

This module is divided into two lessons, namely:

• Lesson 1 – The Elements of Statement of Comprehensive Income

• Lesson 2 – Preparation of Statement of Comprehensive Income

This module will help you to

• identify the elements of the Statement of Comprehensive Income and describe each of
these items for a service business and a merchandising business; ABM_FABM12-Ic-d-5
• prepare an Income Statement for a service business using the single-step approach;
ABM_FABM12-Ic-d-6
• prepare an Income Statement for a merchandising business using the multistep approach
ABM_FABM12-Ic-d-7

Let us start your journey in learning about the Statement of Comprehensive Income.
I am sure you are ready and excited to answer the Pretest. Smile and cheer up!

Directions: Read carefully and write the letter on the box the correct answer of the
given question/sentence.

1. The income statement would help in which of the following?

A. assess capital structure
B. determine financial position
C. estimate future cash flows
D. estimate need for additional financing

2. Investors and creditors use the income statement for all of the following, except
A. to help assess the risk and uncertainty of achieving future cash flows.
B. to provide a basis for predicting future performance
C. to evaluate the future performance of an entity
D. to evaluate the past performance of an entity
3. It is an account use for the cost of supplies used up during the accounting period.
A. utility expense B. rent expense C. supplies expense D. salary expense

4. Which of the following is NOT an operating expense?

A. cellphone load B. interest expense C. electricity D. advertising

5. What is the result of adding the beginning inventory and the net purchases?
A. cost of goods sold C. cost of goods manufactured
B. cost of goods available for sale D. cost of goods in process

6. It is the total income less expenses, excluding other comprehensive income

A. comprehensive income C. economic income
B. accounting income D. profit or loss

ABM 12 Prepared by: Sandra H. Gali – LPNHS-Main

 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II

7. The income statement reveals _.

A. resources and equity at a point in time C. net earnings at a point in time
B. resources and equity for a period of time D. net earnings for a period of time

8. Which term cannot be used to describe a line item in the statement of comprehensive income?
A. Revenue B. Gross income C. Income before tax D. Extraordinary Income

9. Which of the following is NOT considered as service revenue?

A. professional fee B. rental fee C. tuition fee D. sales

10. Which of the following expenses is an effect of systematic and rational allocation?
A. cost of sale C. depreciation expense
B. commission expense D. salaries expense

11. These are amounts of merchandise that were returned to suppliers and the amounts allowed as
deductions by suppliers for goods not returned.
A. purchase return & allowance C. purchase discount
B. sales return & allowance D. sales discount

12. A Company generated revenues amounting to ₱235,000. Expenses for the year totaled ₱186,000.
How much is the company’s net income for the year?.
A. ₱421,000 B. ₱235,000 C. ₱186,000 D. ₱49,000

13. Gross profit of the Company amounted to ₱105,000. Ending Inventory amounted to ₱50,000 while
Net Purchases totaled ₱85,000. Beginning inventory is equivalent to half of the ending inventory.
Compute for Company’s Net Sales.
A. ₱165,000 B. ₱155,000 C. ₱135,000 D. ₱85,000

14. It provides information on the financial performance of the business.

A. Statement of Financial Position C. Statement of Changes in Equity
B. Income Statement D. Cash Flow Statement

15. These are revenues whose recognition is put off into the future even though payment has been
received now.
A. deferred revenue C. service revenue
B. accrued revenue D. sales revenue

Great! You finished answering the questions. You may request your facilitator to check your work.
Congratulations and keep on learning!

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
The Elements of Statement of
1 Comprehensive Income
Competency code: ABM_FABM12-Ic-d-5

MELC: Identify the elements of the Statement of Comprehensive Income and describe each of these items
for a service business and a merchandising business

Objectives: At the end of this lesson, the learners will be able to……
1. Identify the elements of Statement of comprehensive Income;
2. Describe each account items for a service and merchandising business;
3. Solve problems related to Statement of Comprehensive Income; and
4. Differentiate selling expenses from general and administrative expenses.

LOOKING BACK TO YOUR LESSON:

Direction: Can you tell what source of income does the picture shows?

Figure 1 Figure 2 Figure 3

Write your answer here:

INTRODUCTION:
Sources of Income :
1. Sales of merchandise to customers
• Selling of products
2. Rendering of services
• Provide skills, talents
3. Use of entity resources
• Interest, rent, royalty Profit or loss
4. Disposal of resources other than product
• Sale of investment, sale of property, plant and equipment, sale of intangible assets

DISCUSSION:
INCOME STATEMENT/PROFIT OR LOSS
• A financial statement that shows the financial performance of an entity for a given period of time.
• The financial performance is measured in terms of the level of income earned by the entity through the
effective and efficient utilization of resources.
• The information about financial performance is useful in predicting future performance and ability to
generate future cash flows.
• Financial performance is the results of the operations of an entity.

Comprehensive Income
• includes net income and unrealized income, such as unrealized
gains or losses on hedge/derivative financial instruments and
foreign currency transaction gains or losses.
• It is the change in equity during a period resulting from transactions and other events, other than
changes resulting from transactions with owners in their capacity as owners.

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II

Components of comprehensive income

1. profit or loss
2. other comprehensive income

Profit or Loss = total income less expenses excluding the

component of other comprehensive income. This is the
traditional income statement. It includes revenues, costs,
and expenses incurred during a specified period.
Other comprehensive income – includes revenues,
expenses, gains, and losses that have yet to be realized.

The topic on statement of other comprehensive income is

beyond the scope of high school accounting and will be discussed more in advanced accounting subjects. We
will be concentrating on the Income Statement or also known as Statement of Comprehensive Income on this
module.

Elements of Income Statement

1. Income
2. Expense

Income
• refers to a transaction that increases assets and/or decreases liabilities leading to increase in equity
resulting from the operation of the business and not from owner’s contribution.
• Two kinds of income:
1. Revenues –income generated from the primary operations of the business.
Example: Sale of merchandise to customer. (selling merchandise is the primary operation of
business)
2. Gains – income derived from other activities of the business.
Example: Interest income from the time deposit. (investment in time deposit is not part of the
primary operations of the business)
• Income encompasses revenue and gain.

Expense
• refers to transactions that decreases assets and/or increases liabilities leading to decrease in equity
resulting from the operations of the business and not because of distribution to owners.
• refers to the cost of doing business.
• Two kinds of expense:
1. Expense – related to the primary operations of the business
Example: the cost of merchandise sold. (part of the selling activity)
2. Losses – from other activities of the business
Example: interest expense from notes payable. (not part of selling activities)

When to recognize revenue?

When to record expenses?

RECALL: ACCRUAL ACCOUNTING PRINCIPLE

Revenue Recognition Principle:
• dictates the process and timing by which revenue is recorded a nd
recognized as an item in a company's financial statements.
• This principle states that a firm should record revenue when it is
realized or realizable and earned, regardless of when cash is
received.
oRevenues are realized when products are exchanged for cash or
claims to cash.
oRevenues are realizable when related assets received are read ily
convertible to cash or claims to cash.
oRevenues are earned when the products are delivered, or services are performed.
• Deferred Revenues – are revenues whose recognition is put off into the future even though payment has
been received now.
• Example: Received down payment from customer for the ordered item to be deliver next week.
The time you received payment, no revenue yet but deferred revenue must be recorded.
Deferred revenues are liability. Record the revenues when the item is delivered to the
customer.
• Accrued Revenues – revenue that has been earned by providing a good or service, but for which no cash
has been received.
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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
• Example: Delivered the ordered item to customer but payment will be collected next week.
The time you delivered the item, revenue must be recorded even though there are no receipt
of cash yet. Accrued revenues are assets and these are equivalent to accounts receivables.

Matching Principle:
• directs a company to report an expense on
its income statement in the period in
which the related revenues are earned.
• requires that the expenses incurred duri ng a period be recorded in the same period in which the rela ted
revenues are earned.
• This principle recognizes that businesses must incur expenses to earn revenues.
• The matching principle is important because the proper matching of expenses and revenues gives a more
accurate appraisal of the results of operations, helps to avoid distortion of the financial position of the
business, and improves the quality of the financial statements.
• Three methods of recording expenses:
1. association of cause and effect
▪ Cost of goods sold is directly associated with sales revenue
▪ Sales commission is directly matched against sales revenue
▪ Transportation expense incurred to deliver goods to customer
2. systematic and rational allocation
▪ the cost of equipment is systematically allocated as depreciation expense among the periods in
which the equipment provides the benefit (generates revenue)
▪ amortize intangibles
▪ allocate prepaid costs such as insurance and rent.
3.immediate recognition
▪ it can be difficult to identify future benefits of some costs incurred, or for some costs no rational
allocation scheme can be devised
▪ period costs are usually recognized immediately, ex. Utilities, salaries, maintenance cost, selling
and administrative cost

Elements of Statement of Comprehensive Income

• Service Revenue – revenue derived from rendering services. Examples: professional fees, rental income,
tuition fees, royalty, dividend income.
• Sales Revenue – revenue derived from selling merchandise. Examples: sale of merchandise.
• Sales return and allowances - sales return occurs when a customer returns an item to the company and
sales allowance occurs when the company reduces the price paid by a customer because the customer
received defective merchandise.
• Sales discount - a reduction in the price of a product or service that is offered by the seller, in exchange for
early payment by the buyer. A sales discount may be offered when the seller is short of cash, or if it wants
to reduce the recorded amount of its receivables outstanding for other reasons.
• Net Sales - are operating revenues earned by a company for selling its products after deducting returns,
allowances and discounts. (Sales – Sales Return and Allowances – Sales Discount)
• Beginning Inventory - the amount of inventory at the beginning of the accounting period. This is also the
amount of ending inventory from the previous period.
• Purchases – the amount of goods/merchandise bought during the current accounting period.
• Purchase returns and allowances - the amounts of merchandise that were returned to suppliers and the
amounts allowed as deductions by suppliers for goods not returned.
• Purchase discount - an offer from the supplier to the purchaser, to reduce the payment amount if the
payment is made within a certain period of time.
• Freight In - transportation costs of merchandise purchased by the company.
• Net Purchase = Purchases plus Freight In minus Purchase returns and allowances minus purchase
discount.
• Cost of Goods Available for Sale - is the maximum amount of goods, or inventory, that a company can
possibly sell during an accounting period. (Beginning inventory + Net Purchases)
• Ending inventory – amount if inventory presented in the Statement of Financial Position. Total cost of
inventory unsold at the end of the accounting cycle.
• Cost of Goods Sold - is the carrying value of goods sold during a particular period. (Cost of Goods available
for Sale - Ending inventory)
• Gross profit - the profit a company makes after deducting the costs associated with making and selling its
products. (Net Sales – Cost of Goods Sold)
• Operating Expense - is an expense a business incurs through its normal business operations.
oSelling expenses – expenses directly related to the main purpose of a merchandising business. It is
related to marketing, selling and distributing the company’s merchandise. Example: salaries of cashiers
and store managers, advertising expense, depreciation of store equipment.
oGeneral & Administrative expenses - expenses are not directly related to the merchandising function
of the company but are necessary for the business to operate effectively. It is related to the
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 administration and management of the business. Example: salaries of office clerks and accountants,
office supplies used, rent of office.
• Operating Profit – earnings before interest and taxes (EBIT). Gross profit minus operating expenses.
• Other Income or Non-operating income- income that does not come from a company's main business,
such as interest. Examples of other income include income from interest, rent, and gains resulting
from the sale of fixed assets.
• Other Expense or Non-operating expense- expenses that do not relate to a company's main business. As
well as operating costs, the company needs to consider other expenses including interest expense and
losses from disposing of fixed assets. Examples of other expenses include interest expense and losses
from disposing of fixed assets.
• Income before tax – earnings after deducting all expenses except tax. The basis for tax. Taxable
Income. (Operating profit + Non-operating Income – Non-operating Expense)
• Income tax expense - a type of expense which is to be paid by every person or organization on
the income earned by them in each financial year as per the norms prescribed in the income tax laws.
Calculated by multiplying the appropriate tax rate of an individual or business by the income received or
generated before taxes.
• Net Income is the earnings of the company after deducting all expenses from the revenue. It
indicates how well a company is managing its profit.

FORMULAE:
NET SALES = Sales – (Sales Return & Allowances + Sales Discount)
NET PURCHASE = Purchase + Freight In – (Purchase Return + Purchase Discount)
COST OF GOODS AVAILABLE FOR SALE = Beginning inventory + Net Purchase
COST OF GOODS SOLD = Cost of Goods Available for Sale – Ending Inventory
GROSS PROFIT = Net Sales – Cost of Goods Sold
OPERATING EXPENSES = Selling + Administrative Expense
OPERATING INCOME = Gross Profit – Operating expense
INCOME BEFORE TAX = Operating income + Non-operating Income – Non-operating Expense
INCOME TAX EXPENSE = Income before tax X tax rate
NET INCOME = Income before tax – Income Tax Expense

❖ The Statement of Comprehensive Income reports the result of operations of the business for one
period. It is described as a “for the period” report.
❖ Income increases assets and/or decreases liabilities leading to increase in equity resulting from
the
operation of the business and not from the owner’s contribution
❖ Expense decreases assets and/or increases liabilities leading to decrease in equity resulting from
the
operation of the business and not because of distribution to owners.
❖ There are two kinds of income: revenue and gain
❖ There are two kinds of expenses: expenses and losses
❖ Revenue is earned upon delivery of goods and services
❖ There are three approaches to recognize expense:
1. Cause and effect
2. Systematic and rational allocation
3. Immediate recognition
❖ There are two kinds of Revenue:
1. Service Revenue – used by service operations
2. Sales Revenue – used by merchandising operations
❖ Components of Net Sales: Sales, Sales Returns & Allowances, Sales Discounts
❖ Components of Net Purchases: Purchases, Freight In, Purchase Return & Allowance, Purchase Discount
❖ Components of Cost of Sales: Beginning inventory, Net Purchase, Ending Inventory
❖ Components of Operating expenses: Selling expense, General & Administrative expense.
❖ Net Income is the bottom line profit of the company from the operation of business. it indicates the
financial performance of the company.
❖ Other terms:
▪ Salaries expense – account used to record the amounts earned by employees during the accounting
period.
▪ Utilities expense-the cost incurred by using utilities such as electricity, water, waste disposal, heating,
and sewage.
▪ Bad debts expense –is recognized when a receivable is no longer collectible because a customer is
unable to fulfill their obligation to pay an outstanding debt due to bankruptcy or other financial
problems. Method of computation: Percent of sales and Percent of accounts receivable.
▪ Advertising expense - the amount a company incurs to promote its products, brands, and image via
television, radio, magazines, Internet, etc.
▪ Rent expense – refers to the total cost of using rental property for each reporting period. It is
typically
among the largest expenses that companies report 5
 ▪ Supplies expense - refers to the cost of consumables used during a reporting period.
▪ Depreciation expense - portion of a fixed asset that has been considered consumed in the current
period.
▪ Amortization expense - cost allocated to intangible assets over their useful lives.
▪ Freight out - the transportation cost associated with the delivery of goods from a supplier to its
customers.

Preparation of Statement of
2 Comprehensive Income
Competency codes: ABM_FABM12-Ic-d-6
ABM_FABM12-Ic-d-7

MELC: prepare an Income Statement for a service business using the single-step approach; and
prepare an Income Statement for a merchandising business using the multistep approach.

Objectives: At the end of this lesson, the learners will be able to……
1. Prepare a Statement of Comprehensive income using single-step and multi-step for service and
merchandising business;
2. Solve problems related to the components of statement of comprehensive income.

LOOKING BACK TO YOUR LESSON:

Direction: Match the words in column A with its definition in column B. Write the letter on the
blank before the number.
Column A Column B
1. Cost of labor A. It is the revenue that the company was able to generate from
2. Purchase discount selling goods.
3. Salaries expense B. It is an account used for the cost of supplies used up during the
4. Utilities expense period.
5. Cost of sale C. It is an account used for the amount earned from providing
6. Service revenue services to clients.
7. Supplies expense D. This account represents the actual cost of merchandise that the
8. Sales Revenue company was able to sell during the year.
9. Goods available for sales E. It provides information on the financial performance of the
10. Income statement business.
F. It is an account used for electricity, heat and water incurred
during the accounting period.
G. It represents the total beginning inventory and net purchases of
the company.
H. The expenses incurred for the work performed by employees
during the accounting period.
I. It is an account used to record early payments made by the
company to its suppliers.
J. It refers to the main cost associated with the service company

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
INTRODUCTION:

Why Income Statement is so important?

The income statement is usually presented first because it determines the profit to be presented in the
equity statement which in turn is presented in the statement of financial position.
The income statement helps determine a company’s financial health and the financial progress it made
during a particular period.
✓ a business owner will be able to make better financial decisions by having accurate figures. A business
owner is able to make swift decisions, which would otherwise require unreliable guesswork.
✓ act as solid proof for business success - allows a business owner to play the cards right around the
stakeholders, or with the buyers if the owner has the intent of selling the business
✓ helps prepare a business to file taxes. Paying taxes is obligatory by law. Accurate and up-to-date income
statements (along with other financial statements) give a business owner all the necessary information
they need to calculate various taxes.

DISCUSSION:
There are two formats in preparing Income Statement:
1. Single-step – related to the nature of expense format.
• Groups all revenue items together and all expense item together. This format is generally used by
small businesses and service businesses.
• It lists down the expenses based on the source of expense such as cost of sale, salaries, supplies,
utilities and depreciation.
2. Multi-step – associated with the function of expense.
• It classifies operating expense into three categories based on usage: Cost of sales, General &
Administrative Expenses, and Selling Expenses

Presentation of Income Statement

1. Prepare the header:
• Name of the entity – identifies the reporting company
• Name of the report – identifies the financial statement
• Date for the period of time –
2. Choose the format of presentation
• Single-step
• Multi-step
3. Margin on the left side – the extreme margin is used to describe the major sections and the inner margin is
used to describe the accounts contained in the major section.
4. Money columns on the right side-the extreme margin is for the major amounts and the inner money
column is for the amounts of the described accounts.
5. Peso sign in the final money column (extreme right) are placed on the first and last amounts.
6. A single rule is placed under the last figure to be added or subtracted and a double line or rule is placed
under the final figure.
7. Income from the principal line of operation called operating income is always presented first followed by
other income. Expenses may be presented from the highest amount to the lowest amount (descending
order) in which case other expense may be presented first in the expense section of the income statement.
Or these may be arranged alphabetically. Interest expense being a financial cost is always presented
last.
8. The amount of income tax expense is calculated based on the tax rate given.
9. A double rule is placed under the Net Income amount with peso sign.

TEMPORARY ACCOUNTS – Also known as nominal accounts are the accounts found under the Income
Statement. 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.

Sample presentation of Income Statement using single-step and multi-step is shown below:

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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
Single-step Multi-step
ABM Merchandising Company ABM Merchandising Company
Income Statement Income Statement
For the year ended Dec 31, 2020 For the year ended Dec 31, 2020
Revenues:
Sales ₱1,500,000 Sales ₱1,500,000
Interest Income 10,000 Less: Cost of goods sold 985,000
Gain on sale of assets 43,000 Gross Profit 515,000
Total Revenues ₱1,553,000 Less: Operating expenses
Expenses: Rent expense ₱150,000
Cost of goods sold ₱985,000 Utility expense 98,000
Rent expense 150,000 Salaries and wages 210,000 458,000
Utility expense 98,000 Operating Income 57,000
Salaries and wages 210,000 1,443,000 Non-operating Income:
Income before tax 110,000 Interest Income 10,000
Income tax expense (30%) 33,000 Gain on sale of assets 43,000 53,000
Net Income ₱77,000 Income before tax 110,000
Income tax expense (30%) 33,000
Net Income ₱77,000

Activity 1: Preparation of Income Statement

On June 1, 2020, Coco Matsing opened a store that sells school supplies. Coco wanted to know the
results of operating the Store. Coco knew that you were studying accounting, so he asked for your help. The
following were taken from the accounting records of Coco’s Store.

Balance Additional information:

Sales ₱114,567 a. physical inventory conducted at the end of the month
Sales return 1,544 revealed an ending inventory of ₱15,345.
Sales discount 1,675 b. depreciation is for shelves and cabinets used as
Purchases 61,558 display racks and storage in the store.
Purchase return 504 c. Coco has a small office inside the store and allocates
Purchase discount 1,076 15% of rent and utilities to general and
Freight In 765 administrative expenses.
d. 25% of Lorraine’s salaries are allocated to General &
Utilities expense 4,000
Administrative expense. Aside from tending the
Salaries expense 14,000
store, she was also tasked to file the receipt and
Rent expense 10,000
maintain some records.
Depreciation expense 500

Prepare Income Statement in a one whole sheet of paper. One for single-step, another for multi-step.

Activity 2: Problem solving

1. At the end of the first month of operations for SAP Service Company, the business had the following
accounts: Cash, ₱43,000; Prepaid Rent, ₱1,500; Supplies, ₱900; Equipment, ₱15,000, Accounts Payable
₱12,000 and Notes Payable ₱10,000 . By the end of the month, SAP's had earned total Revenue of
₱55,000, incurred ₱7,000 Utilities Expenses and ₱5,500 Salaries Expenses. Depreciation of the equipment
is allocated at ₱500 per month. Monthly rental is ₱500 and supplies used was ₱300. Calculate the net
income to be reported by the company for this first month.

2. During August, a fitness center had the following transactions involving revenue and expenses.
Provided fitness services for ₱12,750 in cash and ₱1,900 on credit
Paid rent ₱1,500
Paid salaries to employees ₱4,500
Paid internet and phone services ₱500
Paid sanitizing materials ₱250
Did the fitness center earn a net income or incur a net loss for the period? What was the amount?

3. Pan Demic, owner of Pandemic Convenience Store, asked for your help to determine the cost of sales of
his store. This is the first year of operation for Pandemic Store. He provided the following:
Purchases based on suppliers’ receipts ₱55,344
Freight charges based on receipts of taxi fares
when he shopped at Divisoria 430
Defective items returned to supplier 760
Ending inventory based on physical count 2,320
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 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II

How much is the cost of sale?

REMEMBER
❖ The income statement helps a business owner to make better decisions; it acts as solid proof of success;
and it helps prepare a business file taxes.
❖ There are two acceptable formats in preparing income statement: single-step and multi-step.
❖ Single-step – groups all revenue together and group all expenses together. Net income is simply computed
as total revenues minus total expenses. Expenses are listed based on the source of the expense such as
salaries, purchases, supplies, utilities, fuel and depreciation.
❖ Multi-step – revenue and expenses are classified and presented based on the function of expense.
Operating expenses are categorized into cost of sales, general and administrative expense and selling
expenses. Sections to be presented as follows: gross profit, operating section and non-operating section.