ABM FABM2 Module 2 Lesson 1 SCI Elements AND THE SCI Single STEP Approach PDF

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Fundamentals ofAccountancy,Business andManagement 2Quarter 1 – Module 2: Lesson 1Statement of ComprehensiveIncomeSenior High SchoolWriter: VIENNAH MARIE M. BUSTOS Teacher II- SAN VICENTE SAN FRANCISCO HIGH SCHOOLEditors: JANE P. VALENCIA, ED. D., EPS Mathematics CHAIRMAN BETHEL GRACE M. GUIAO- Teach...

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Senior High School

Fundamentals of Accountancy, Business and Management 2 Quarter 1 – Module 2: Lesson 1 Statement of Comprehensive Income

Writer: VIENNAH MARIE M. BUSTOS Teacher II- SAN VICENTE SAN FRANCISCO HIGH SCHOOL Editors: JANE P. VALENCIA, ED. D., EPS Mathematics CHAIRMAN BETHEL GRACE M. GUIAO- Teacher-III NESSA B. DIMALANTA Teacher-II

What I Need to Know This module was designed and written with you in mind. It is here to help you master the Statement of Comprehensive Income (SCI). The scope of this module permits it to be used in many different learning situations. The language used recognizes the diverse vocabulary level of students. The lessons are arranged to follow the standard sequence of the course. But the order in which you read them can be changed to correspond with the textbook you are now using. The module is divided into two lessons, namely: Lesson 1 – Identify and describe the elements of SCI for a Service Business and merchandising business and preparation using single step approach for service business After going through this module, you are expected to: a. Identify and describe the elements of SCI for a Service Business and merchandising b. Prepare an SCI for a service business using single step approach

What I Know Pretest. Choose the letter of the best answer. Write the chosen letter on a separate sheet of paper. 1. Which of the following is an element of a statement of comprehensive income? a. Cash b. Interest Expense c. Interest Payable d. Prepaid Rent 2. Which of the following is the correct gross profit formula? a. Sales – Gross Profit = Cost of Sales b. Sales + Cost of Sales = Gross Profit c. Sales + Gross Profit = Cost of Sales d. None of the above 3. Which of the following is an element of a statement of comprehensive income? a. Bonds payable b. Capital c. Notes payable d. Service Fee 4. Which of the following is classified as selling expense? a. Depreciation of office equipment b. Depreciation of the administrative building c. Salaries of the sales executives d. Salary of the president 5. This is a financial statement that informs the reader about the “performance” and activities of the company for a certain period. 3

a. b. c. d.

Statement Statement Statement Statement

of of of of

Cash Flow Changes in Equity Comprehensive Income Financial Position

6. Which of the following is only ancillary to the entity’s operation? a. Gain on sale of land b. Professional fees charged by an auditing firm c. Sales revenues earned by a convenience store d. Sales revenues earned by a drug store 7. This is typically the date of the statement of comprehensive income? a. “As of December 31, 2019,” b. “For the period ended December 31, 2019” c. Either a or b d. None of the above 8. Which of the following is an element of a statement of comprehensive income? a. Accounts Payable b. Capital c. Notes Receivable d. None of the above

Identify and describe the elements of SCI for a Service Lesson 1 and Merchandising business and preparation using single step approach for service business The statement of comprehensive income or income statement reports an entiy’s revenues, expenses, gains, losses, and the resulting net income(or net loss) for the period of time specified in its heading.

What’s In

“My Personal SCI” I want you to get a piece of paper and write how much is your monthly allowance (computed by daily allowance x number of days in a month). Next, write the amount you spend on food, transportation, phone load, etc. (make it monthly to match your allowance). After that deduct the amount you spend from the amount from your allowance. Think of your allowance as your income or your revenue, the amount you spend as expense and the difference that you got is the net income. 4

Notes to the Teacher There might be some cases that the result of the learner’s computation is zero or even negative. Ask the learner to review the computation and if it is negative, ask where the learner gets the difference (lending from classmates, friends) and include them as part of the revenue. If the learner does not have a regular allowance, the teacher can ask him/her to give an estimate.

What’s New

This lesson aims to teach you the elements and details of the Statement of the Comprehensive Income which reports the revenue, expenses and income/loss on an entity at a given period. It also aims to teach you the different items for a service business and merchandising business. At the end of this lesson you are expected to identify the elements of the Statement of Comprehensive Income and describe each of these items for a service business and merchandising business.

What is It STATEMENT OF COMPREHENSIVE INCOME (INCOME STATEMENT) The Statement of Comprehensive Income informs the reader about the “performance” and activities of the company for a certain period (e.g., for the period ended December 31, 2019). It contains the revenues and expenses incurred by an entity for a specific period. It is also compared to a running video because it presents an entity’s activities form the start to the end of a period. Another meaning is 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) Other books define the income statement as the profit and loss statement that presents an entity’s result of operations for a period of time. TEMPORARY ACCOUNTS 5

Temporary accounts are 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.

ELEMENTS OF THE SCI Elements and Key Features of a Statement of Comprehensive Income 1. The Title The Statement of Comprehensive Income is a financial report therefore it must be properly identified and dated. The title or the heading includes the name of the entity, the title of the report (i.e., Statement of Comprehensive Income and the period it covers. 2. Revenues “Revenues arise in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividend, royalties, rent”. (The Conceptual Framework for Financial Reporting by the International Accounting Board 2010) Revenues are the first line item in the Statement of Comprehensive Income. They vary depending to the nature of the entity. A small retail store has sales as its main revenue. Revenues may also come from interest from time deposits and dividends earned from shares of stocks. Royalties from individuals who would like to use their established brand and technology. Owners of fixed properties (e.g. land and building) may charge third parties with rent. Entities engage in service business use service income as revenue account. Smaller and less complex entities may have one or two sources of revenues while larger and more complex entities have multiple sources of revenues, recorded when earned. 3. Expenses “Expenses arise in the course of the ordinary activities of the entity include, for example, cost of sales, wages, and depreciation. They usually take the form of an outflow or depletion of asset such as cash and cash equivalent, inventory, property, plant, and equipment.” (The Conceptual Framework for Financial Reporting by the International Accounting Board 2010) Revenue earned by business are matched with expenses. For service entities, expenses are categorized as cost of service or operating expense. In a law firm, cost of service includes the salaries paid to lawyers who render services to legal clients in behalf of the law firm. Operating expenses include rent for office space, salaries for office staff, permits to local government chapters, depreciation of office equipment, and other similar expenses. For a merchandising concern, the expenses are classified as cost of sales, selling expenses and administrative (operating) expenses.

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The cost of sales is the direct cost of the products sold or the amount paid or payable by the business entity to its suppliers for the merchandise sold to the business then to then sold to the entity’s customers. 4. Gain and losses “Gains represent other items that meet the definition of income and may not, arise in the course of the ordinary activities of an entity.” (The Conceptual Framework for Financial Reporting by the International Accounting Board 2010) Gains are incidental to the operation of the business. “Losses represent other items that meet the definition of expenses and may or may not arise in the course of the ordinary activities of the entity.” 5. Other Items Other items included in the computation of the total comprehensive income are income taxes and items of other comprehensive income. Income tax is the sum of money payable to the government. Items of other comprehensive income are increases or decreases in economic benefit for a period. THE TWO TYPES OF STATEMENT OF COMPREHENSIVE INCOME: 1. The Single-step Format of the SCI It is 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). This format of SCI is more commonly used by service companies. 2. Multi-step format of the SCI It is called multi-step because there are several steps needed in order to arrive at the company’s net income. (Haddock, Price, & Farina, 2012) This format is more commonly used by merchandising companies. DIFFERENCE BETWEEN THE SCI OF A SERVICE BUSINESS AND THE SCI OF A MERCHANDISING BUSINESS: The main difference 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). PREPARATION OF THE STATEMENT OF COMPREHENSIVE INCOME USING THE SIGNLE-STEP APPROACH THE DIFFERENT PARTS OF THE STATEMENT OF COMPREHENSIVE INCOME FOR A SERVICE BUSINESS USING THE SINGLE-STEP APPROACH: 7

Bustos Accounting Office Statement of Comprehensive Income For the year ended December 31, 2019 Service Revenue

REVENUE/S

Php

HEADING 140,000

Expenses: Salaries Expense

60,000

Rent Expense

25,000

Depreciation Expense

EXPENSES

Utilities Expense

15,000 10,000

Miscellaneous Expense

2,000

Total Expenses

112,000

Net Income

NET INCOME/LOSS

28,000

I. Heading

Name of the Company a. Name of the Statement b. Date of preparation (emphasis on the wording – “for the”) II. Sample of a Statement of Comprehensive Income (please refer above)

a. First part is revenues This is the total amount of revenue that the company was able to generate from providing services to customers b. Second part is expenses (can be broken down into General and Administrative and Selling Expenses) Please see the discussion in multi-step for general and administrative and selling expenses. c. Revenues less Expenses. Net income for a positive result and net loss for a negative result In the service industry, the account professional fee is the appropriate revenue classification. In presenting the operating expenses, it is customary for service organization industries operated as sole proprietorships to omit the cost of service. A supporting note is referred to in the statement of comprehensive income. This supporting schedule shows the detailed composition of the operating expenses as arranged according to recorded amount, from highest to lowest. Other or miscellaneous expenses are presented last, no matter how much is the balance. Operating income is determined by deducting the operating expenses from professional fees. After which, gains from ancillary transactions are presented. Such gains cannot be presented as revenues as the gain is not normally incurred during operations. After the gain, income taxes are presented. Income taxes are deducted from income. After that the other comprehensive income is added to arrive at the total comprehensive income.

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What’s More

Activity 1 Identify each element or account if it can be found on a service or merchandising business. Complete the table by putting a (√) check mark or (x) cross mark in the corresponding columns. Write your answers on a separate sheet of paper. Account Titles

Service Business

Merchandising Business

Sales Consulting Revenue Purchases Cost of Sales Inventory-Beginning Referral Revenue Freight-In Purchase Returns and Allowances Advertising Revenue Service Revenue

Assessment 1 – Kenneth Advertising Agency The following are the accounts of Kenneth Advertising Agency for the year ended December 31, 2019 Professional Fees Salaries Expense Supplies Expense Depreciation Expense Utilities Expense Insurance Expense Rent Expense Gain on Sale of Equipment

1,300,000 130,000 192,500 155,000 105,000 55,000 230,000 100,000

You are employed by the entity as its bookkeeper in its first year of operation. You will prepare the necessary financial statement for the current year ended. Required: 1. Determine the net income 2. Prepare a Statement of Comprehensive Income Write your answers on a separate sheet of paper.

Activity 2

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TRUE OR FALSE: Write the word “True” if the statement is correct and “False” if it is incorrect. Write your answers on a separate sheet of paper. _______________ 1. The Statement of Comprehensive Income is also called the Income Statement and profit and loss statement. _______________ 2. Nominal accounts are also called temporary accounts because their balances are being transferred to the capital account at the end of the accounting period. _______________ 3. For a service entity, the expenses are classified as cost of sales, selling expenses and administrative (operating) expenses. _______________ 4. A merchandising business provides services in order to generate revenue _______________ 5. In a single-step comprehensive income statement, all revenues are listed down in one section while all expenses are listed in another.

Assessment 2 Vivien Dental Clinic The following are the accounts of Vivien Dental Clinic for the year ended December 31, 2019 Professional Fees Salaries Expense Rent Expense Office Supplies Utilities Expense Depreciation Expense Miscellaneous Expense Gain on Sale of Equipment Provision for Income Tax Other Comprehensive Income

Required:

900,000 205,000 180,000 105,000 95,000 25,000 20,000 200,000 80,000 20,000

1. Prepare a supporting note for the operating expenses 2. Determine the net income 3. Prepare a Statement of Comprehensive Income

Write your answers on a separate sheet of paper.

Activity 3 – Joshua Legal Office The following are the accounts of Joshua Legal Office for December 31, 2019 Professional Fees Salarie s Expense Supplie s Expense Depreciation Expe nse Utilities Expense Insurance Expense Rent Expense

Required:

1,100,000 120,000 160,000 130,000 90,000 40,000 190,000

1. Determine the net income 2. Prepare a Statement of Comprehensive Income

Write your answers on a separate sheet of paper.

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Assessment 3 – Lordinel Architectural Services The following are the accounts of Lordinel Architectural Services for December 31, 2019 Professional Fees Salaries Expense Supplies Expense Depreciation Expense Utilities Expense Insurance Expense Rent Expense

Required:

362,500 36,250 51,875 42,500 29,000 15,500 61,250

1. Determine the net income 2. Prepare a Statement of Comprehensive Income

Write your answers on a separate sheet of paper.

What I Have Learned The key features of Statement of Comprehensive Income are; (a) title, (b) revenues, (c) expenses, (d) _______ (1) ________, and (e) other items. ______ (2) _________ arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividend, royalties, and rent. _______ (3) ________ arise in the course of the ordinary activities of the entity. Expenses include cost of sales, wages, and depreciation. They usually take the form of an _______ (4) ________ or depletion of asset such as cash and equivalent, inventory, property, plant, and equipment. _______ (5) ________ represent other items that meet the definition of income and may not arise in the course of the ordinary activities of an entity. ______ (6) _________ represent other items that meet the definition of expenses and may or may not arise in the course of the ordinary activities of the entity. Lastly, ______ (7) _________ included in the computation of the total comprehensive income are income taxes and items of other comprehensive income. The ______ (8) _________ uses only one subtraction function to calculate net income: net income = (revenue + gains) – (expenses + losses). The ______ (9) _________ of the statement of comprehensive or income statement includes the name of the company which appears first, followed by the _____ (10) __________ “Statement of Comprehensive Income.” The third line tells the reader the time interval period of time, you must inform the reader of the precise period of time being covered.

What I Can Do The following are the nominal accounts of Alex Medical Services for the year ended December 31, 2019.

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