FUNDAMENTALS ON ACCOUNTING, BUSINESS AND MANAGEMENT 2

Statement of Comprehensive Income is a statement that provides

information as to the financial performance of the company by computing the net
income or net loss of the entity. SCI has two major elements namely: Income and
Expenses. Let us describe these elements and the examples under each to
understand better.

1. 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. Income has a credit normal balance because
it increases Equity. There are two (2) kinds of Income, the Revenue and Gains.

a. Revenue – income coming from the primary operations of the business

Different account names under revenue are:
o Service Income – account generally used to describe revenue derived
from rendering of services and are recognized when services have
already been rendered.
Examples:
Rental Income from space rental, vehicle and equipment rental
Professional Fees received by Doctors, Lawyers, Dentists, CPA,
Engineers
Tuition Fees received by schools and universities
o Sales – account generally used to describe revenue derived from selling
of goods and are recognized when goods have been delivered.
Examples:
Sales from office supplies, books, food, medicines, accessories
and clothing
Contra Sales accounts are reductions to sales. This includes:
- Sales Discounts are granted to customers who pay earlier or before
the deadline.
- Sales Returns and Allowances occur when customers return their
products for reasons such as but not limited to defects or change of
preference.

b. Gains are income coming from the non-primary activities of the

business. These are non-cash income that occur when the proceeds from
the sale of asset exceeds the net book value of the asset.
Example:
- Gains from sale of Delivery Van of a grocery store (The primary
activity of the grocery involves selling of grocery items,
therefore selling its delivery van is non-primary activity).

2. Expenses – are transactions that decrease assets and/ or increase liabilities

leading to the decrease in equity resulting from the operations of the business and
not because of distribution to owners. It has a debit normal balance because it
decreases Equity. Account under expenses are:
 FUNDAMENTALS ON ACCOUNTING, BUSINESS AND MANAGEMENT 2

a. Cost of Goods Sold is an account used by merchandising and

manufacturing business that refers to the cost of merchandise sold. It
includes the purchase price and the shipment cost (freight in) to bring
goods to the premises of the business for merchandising business and the
cost of producing goods for sale for a manufacturing business.

b. Operating Expenses refers to all other expenses related to the operations

of the business other than the cost of sales.
Examples:
– salaries of employees
– supplies used
– utilities (such as electricity, gasoline, telephone, water)
– depreciation expense, amortization expense, and bad debts expense*
*estimated operating expense when accounts receivable become
uncollectible.
Operating expenses can be:
o General and Administrative are expenses that are not directly
related to the merchandising function of the company but are
necessary for the business to operate effectively. Examples of these
are salaries of office employees, office supplies, and office utilities
expenses.
o Selling Expenses are expenses that are directly related to the main
purpose of a merchandising business which is the sale and delivery
of merchandise.

c. Other Expenses and Losses are expenses which are not related to the
major operations of the business. They are presented after the operating
section of the SCI.
Examples:
– Interest expense
– Loss on sale of Equipment (these are non-cash expenses that occurs
when the proceeds from the sale of asset is less than the net book
value of the asset).

Income and Expenses are considered as temporary or nominal

accounts. The balances of these accounts are transferred to the capital account,
thus their balances become zero at the end of the accounting period.
 FUNDAMENTALS ON ACCOUNTING, BUSINESS AND MANAGEMENT 2

A Single-step approach simply groups all revenue items together and all expenses
together. Net income is computed using a “single-step” which is deducting the
total expenses from the total revenues/ income. Subtotals are not computed in
this format. The format for the single-step SCI is as follows:

Total Revenue/ Income xxx

Less: Total Expenses xxx
Net Income/(loss) xxx

This approach is more often used in service business. They have simpler
transactions compared to merchandising business because service business does
not have inventories.

COVIDFREE SALON & SPA STATEMENT OF COMPREHENSIVE INCOME FOR

THE YEAR ENDED DECEMBER 31, 2019

Service Revenue ₱1,250,000

Interest Income 22,000
Gain on Sale of Land TOTAL 110,000
REVENUE/
Total Revenues and Income
INCOME ₱1,382,000
Less: Expenses
Salaries Expense 640,000
Utilities Expense 96,000
Supplies Expense 72,000
Rent Expense TOTAL 90,000
EXPENSES
Depreciation Expense 60,000
Insurance Expense 12,000
Interest Expense 18,000
Loss on Sale of Equipment 3,000
Total Expenses 991,000
Net Income ₱ 391,000

Figure 5. Single-Step – Statement of Comprehensive Income

Note that there are only two groups of items: 1) the total amount of revenue
earned by the business; and 2) the total expenses. The result after deducting the
total expenses from the total revenue is Net Income when it is positive and Net
Loss when it is negative.
 FUNDAMENTALS ON ACCOUNTING, BUSINESS AND MANAGEMENT 2

A multi-step SCI is prepared with several steps in computing for the

company’s net income/loss. It is more commonly used by merchandising
businesses. A multi-step SCI classifies and presents revenue and expenses in
different sections. These section include:

1. Gross Profit section –The first step in multi-step SCI is the computation of
the gross profit. The components of the gross profit section are the following:

a. Sales is the total amount of revenue that the company is able to

generate from selling products.

Contra sales account is on the opposite side of the sales account which are
reductions to sales. Contra sales accounts include:

i. Sales returns – account debited in order to record returns of

customers or allowances for such returns. It occurs when
customers return goods purchased for reasons such as but
not limited to defects or change of preference.
ii. Sales discount – discounts given to customers for paying early or
before the deadline

Net Sales = Sales – Sales returns – Sales discount

b. Cost of Goods Sold – account that represents the actual cost of

merchandise sold during the year

i. Beginning inventory – amount of inventory at the beginning of the

accounting period and is also the amount of ending inventory from
the previous period
ii. Purchases – amount of goods bought during the current year

Contra Purchase account – an account on the opposite side of the

purchases
(a) Purchase discount – account used to record early payments made
by the company to the suppliers of merchandise
(b) Purchase returns – account used to record the cost of returned
merchandise by the company to their suppliers iii. Freight In – refers
to the cost of transporting merchandise purchased form the seller
to the premises of the company

Net Purchases = Purchases – Purchase discount – Purchase Returns

Cost of Goods Available for Sale = Beginning inventory + Net Purchases

iv. Ending inventory – amount or total cost of unsold inventory at

the end of the accounting period. It is also the amount
presented in the Statement of Financial Position.
 FUNDAMENTALS ON ACCOUNTING, BUSINESS AND MANAGEMENT 2

Cost of Goods Sold = Cost of Goods Available for sale – Ending

Inventory

c. Gross Profit – The amount can be computed by deducting the Cost of

Goods Sold from the Net Sales.

2. Operating Income Section – The next step in a multistep SCI is the

computation of the operating income. The components of this section are:

a. General and Administrative Expenses – expenses which are not

directly related to the merchandising function of the company but
are necessary to the operations of the business

b. Selling Expenses – expenses which are directly related to the

main purpose of a merchandising business which are the sale and
delivery of merchandise

c. Operating Income/(Loss) = From the Gross Profit, we deduct the

general and administrative expenses and the selling expenses to
arrive at the operating income/ (loss).

3. Net Income Section - This is the final section in a multi-step SCI, which are
reported after the operating section of the SCI. It includes:

a. Other Income/ Gains

b. Other Expenses/ Losses

c. Net Income/ (Net Loss) = This line item is the “bottom line” of the SCI.
Operating Income/(Loss) + Other Income/ Gains – Other Expenses/
Losses

Note that, the amount of net income/ (loss) obtained from the SCI is
forwarded to the Statement of Changes in Equity (will be discussed in the next
lesson) and will either increase or decrease the equity account.
 FUNDAMENTALS ON ACCOUNTING, BUSINESS AND MANAGEMENT 2

The following illustrative problem shows the preparation of the SCI using a
multistep approach.

On December 31, 2019, COVIDFREE Merchandising had provided the following

information.
Sales ₱ 1,340,000
Sales Returns and Allowances 35,000
Sales Discount 55,000 Purchases 925,000
Purchase Returns and Allowances 25,000
Purchase Discount 45,000 Freight In
65,000
Rent Expense 96,000 Salaries Expense
252,000
Utilities Expense 60,000 Depreciation Expense
50,000
Gain on sale of Old Equipment 8,000
Interest Expense from borrowings 12,000
Income Tax 35,000

Additional information:
1. Ending Inventory
December 2018 180,000
December 2019 250,000
2. 30% of the rent expense is attributed to selling
3. Salaries expense for office employees is 40% of the total
salaries paid
4. Office shares payment for utilities at 50%
5. Depreciation attributed to selling is 80%
FUNDAMENTALS ON ACCOUNTING, BUSINESS AND MANAGEMENT 2

COVIDFREE MERCHANDISING
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2019

₱1,450,000 Gross profit

Net Sales¹ 850,000
Less: Cost of Goods Sold² section
Gross Profit 600,000
Operating Expenses
General and Administrative Expenses³ (208,000)
Selling Expenses Operating (250,000)
Income section
Operating Income 142,000
Gain on Sale of Old Equipment 8,000
Interest Expense on Loans (12,000)
Net Income/
Income before tax Loss section 138,000
Income Tax 35,000
Net Income/(Loss) ₱ 103,000

Figure 6. Multi-step – Statement of Comprehensive Income

FUNDAMENTALS ON ACCOUNTING, BUSINESS AND MANAGEMENT 2