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STATEMENT OF COMPREHENSIVE INCOMEEssay Questions Define "comprehensive income". Comprehensive income 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.In other...

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STATEMENT OF COMPREHENSIVE INCOME

4.

Essay Questions 1. Define "comprehensive income".

PAS 1, paragraph 82A, provides that the other comprehensive income shall be classified by nature as follows:

Comprehensive income 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. In other words, comprehensive income includes the following: 1. Components of profit or loss 2. Components of other comprehensive income

2.

3.

a. OCI that will be reclassified subsequently to profit or loss when specific conditions are met. b. OCI that will not be reclassified subsequently to profit or loss.

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6.

What are the components of OCI that will not be reclassified to profit or loss subsequently? Line items for OCI that will not be reclassified subsequently to profit or loss include the following: a. Unrealized gain or loss on financial asset measured at fair value through OCI. Under PFRS 9, such unrealized gain or loss is reclassified to retained earnings upon disposal of the investment.

Define other comprehensive income. Other comprehensive income comprises items of income and expense including reclassification adjustments that are not recognized in profit or loss as required or permitted by Philippine Financial Reporting Standards. The components of "other comprehensive income" include the following: 1. Unrealized gain or loss on financial asset measured at fair value through othei comprehensive income 2. Gain or loss from translating the financial statements of a foreign operation 3. Revaluation surplus during the year 4. Unrealized gain or loss from derivative contracts designated as cash flow hedge 5. Remeasurements of defined benefit plan including actuarial gain or loss on defined benefit obligation Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognized in other comprehensive income in the current or previous periods.

What are the components of OCI that will be reclassified subsequently to profit or loss? Line items for OCI that will be reclassified subsequently to profit or loss include the following: a. Gain or loss from translating financial statements of a foreign operation. b. Unrealized gain or loss on derivative contracts designated as cash flow hedge.

Explain the term "profit or loss". Profit or loss is the total of income less expenses, excluding the components of other comprehensive income. In other words, this is the "bottom line" in the traditional income statement. An entity may use other term to describe this amount as long as the meaning is clear. For example, an entity may use "net income" or "net loss" to describe profit or loss.

Explain the presentation of other comprehensive income (OCI).

b. Change in revaluation surplus. The realization of the revaluation surplus is through retained earnings. c. Remeasurements of defined benefit plan including actuarial gain or loss on defined benefit obligation are not reclassified subsequently. Such remeasurements are permanently excluded from profit or loss.

7.

What are the options in presenting comprehensive income? The amended PAS 1, paragraph 10A, provides that an entity has two options in presenting comprehensive income, namely: 1. Two statements a. An income statement showing the components of profit or loss. Under the amended PAS 1, the income statement is called "statement of profit or loss".

b. A statement of comprehensive income beginning with profit or loss as shown in the income statement plus or minus the components of other comprehensive income. 2. Single statement of comprehensive income. This is the combined statement showing the components of profit or loss and components of other comprehensive income in a single statement. Under the amended PAS 1, the single statement of comprehensive income is called "statement of profit or loss and other comprehensive income". An entity shall recognize all items of income and expense in a period in profit or loss unless a PFRS requires or permits otherwise. When items of income or expense are material, an entity shall disclose their nature and amount separately. PAS 1, paragraph 87, specifically mandates that an entity shall not present any items of income or expense as extraordinary items in the statement of comprehensive income or separate income statement or in the notes. 8.

The cost of sales of a merchandising concern is computed as follows (all amounts are assumed): Beginning inventory Net purchases . Goods available for sale Ending inventory Cost of sales Gross purchases Freight in Total Purchase returns, allowances and discounts Net purchases

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500,000 2,000,000 2,500,000 ( 300,000) 2,200,000 1,900,000 150,000 2,050,000 ( 50,000) 2,000,000

Define an income statement. An income statement is a formal statement showing the financial performance of an entity for a given period of time. The financial performance of an entity is primarily measured in terms of the level of income earned by the entity through the effective and efficient utilization of its resources. This financial performance is also known as the results of operations of the entity. The income statement for a period presents the income, expenses, gains, losses and net income or loss recognized during the period and thereby presents an indication in conformity with PFRS of the results of the entity's profit-directed activities during the period.

9.

10. Illustrate the computation of cost of sales of a merchandising concern.

Explain the transaction approach to income measurement? The two approaches to income measurement are the transaction approach and capital maintenance approach. The "transaction approach" is the conventional or traditional preparation of income statement in conformity with PFRS. This approach of computing net income or loss requires the determination of how much income was earned during the year and how much expenses were incurred in earning the income. The difference between the income and the expenses is net income or net loss. The transaction approach is the direct result of the application of the principle of matching expenses with revenue. This procedure is also called the matching approach.

11. Illustrate the computation of cost of goods sold of a manufacturing concern. The cost of goods sold of a manufacturing concern is computed as follows (all amounts are assumed): Beginning raw materials Net purchases Raw materials available for use Ending raw materials Raw materials used Direct labor Factory overhead Total manufacturing cost Beginning goods in process Total cost of goods in process Ending goods in process Cost of goods manufactured Beginning finished goods Goods available for sale Ending finished goods Cost of goods sold

500,000 2,000,000 2,500,000 ( 300,000) 2,200,000 3,000,000 1,300,000 6,500,000 900,000 7,400,000 (1,000,000) 6,400,000 1,600,000 8,000,000 (1,500,000) 6,500,000

12. Define distribution costs. Distribution costs constitute costs which are directly related to selling, advertising and delivery of goods to customers. Distribution costs ordinarily include salesmen's salaries, sales commissions, traveling and marketing expenses, advertising and publicity expenses, freight out, depreciation of delivery equipment and store equipment, and other expenses related directly with the selling function.

13. Define administrative expenses. Administrative expenses constitute cost of administering the business. These ordinarily include all operating expenses not related to selling and cost of goods sold. Examples include doubtful accounts, office salaries and expenses of general executives and of the general accounting and credit department, office supplies used, certain taxes, contributions, professional fees, depreciation of office building and office equipment and amortization of intangibles.

a. Profit or loss attributable to noncontrolling interest and owners of the parent. b. Comprehensive income attributable to noncontrolling interest and owners of the parent. PAS 1, paragraph 85, provides that an entity shall present additional line items, headings and subtotals in the statement of comprehensive income or separate income statement when such presentation is relevant to an understanding of the entity's financial performance.

16. What are the two forms of presenting the income statement? Explain each briefly. 1. Functional presentation The functional presentation is the traditional and common form of income statement. It is also known as the cost of sales method. This form classifies expenses according to their function as part of cost of sales, distribution costs and administrative activities. An entity classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation, amortization expense and employee benefit expense.

14. Define other expenses. Other expenses are those expenses which are not directly related to the distribution and administrative function.

15. What are the line items in the statement of comprehensive income? The line items in the statement of comprehensive income are: a. Revenue b. Gain or loss from derecognition of financial asset measured at amortized cost as required by PFRS 9 c. Finance cost d. Share of income or loss of associate and joint venture accounted for using the equity method e. Income tax expense f. A single amount for discontinued operation g. Profit or loss for the period h. Total other comprehensive income i. Comprehensive income for the period The following items shall be disclosed in the statement of comprehensive income as allocation of profit or loss and other comprehensive income for the period:

2. Natural presentation This presentation is referred to as the nature of expense method. Under this form, expenses are aggregated according to their nature and not allocated among the various functions within the entity. The expenses which are of the same nature are grouped or aggregated as one item, for example, depreciation, purchases of raw materials, transport' costs, employee benefits and advertising costs.

17. Illustrate the functional presentation or cost of sales method of presenting income statement. "Functional" income statement (amounts are assumed) EXAMPLAR COMPANY Income Statement Year ended December 31,2013 Net sales Cost of sales Gross income Other income Investment income Total income Expenses:

9,000,000 (5,400,000) 3,600,000 900,000 500,000 5,000,000

Distribution costs Administrative expenses Other expenses Finance cost

1,350,000 1,000,000 320,000 200,000 2,870,000 2,130,000 580,000 1,550,000

Income before tax Income tax expense Net income

19. Which form of income statement is required by the standard? PAS 1 does not prescribe any format. Paragraph 105 simply states that "because each method of presentation has merit for different types of entities, management is required to select the presentation that is reliable and more relevant". 20. Illustrate a statement of comprehensive income.

18. Illustrate the natural presentation.

Using the net income in the preceding illustration, the statement may appear as follows:

"Natural" presentation (amounts are assumed)

EXAMPLAR COMPANY Statement of Comprehensive Income Year ended December 31,2013

EXAMPLAR COMPANY Income Statement Year ended December 31,2013 Net sales Other income Investment income Total income Expenses: Increase in inventory Net purchases Employee benefit cost Sales commission Advertising Supplies expense Delivery expense Depreciation Taxes and licenses Doubtful accounts Other expenses Finance cost Income before tax Income tax expense Net income

9,000,000 900,000 500,000 10,400,000 ( 500,000) 5,900,000 1,400,000 180,000 100,000 120,000 250,000 240,000 20,000 40,000 320,000 200,000 8,270,000 2,130,000 580,000 1,550,000

Net income 1,550,000 Other comprehensive income: Foreign currency translation gain 150,000 Unrealized loss on derivative contract designated as cash flow hedge (100,000) 50,000 Comprehensive income 1,600,000 Comprehensive income for a period includes the net income or loss for the period plus or minus the components of other comprehensive income. However, the comprehensive income of Pi,600,000 is not carried to retained earnings. Only the net income of PI,550,000 is included in the determination of retained earnings unappropriated. The net other comprehensive income of P50,000 is carried to "reserves" or shown separately in the statement of changes in equity.

21. Illustrate a "single" statement of comprehensive income. The single statement of comprehensive income following the "functional presentation" may appear as follows EXAMPLAR COMPANY Statement of Comprehensive Income Year ended December 31, 2013 Net sales Cost of sales

9,000.000 (5,400,000)

Gross income Other income Investment income Total income Expenses: Distribution costs Administrative expenses Other expenses Finance cost Income before tax Income tax expense Net income Other comprehensive income: Foreign currency translation gain ' Unrealized loss on derivative contract designated as cash flow hedge Comprehensive income

3,600,000 900,000 500,000 5,000,000 1,350,000 1,000,000 320,000 200,000

2,870,000 2,130,000 580,000 1,550,000

150,000 ( 100,000)

Retained earnings, January 1 Correction of error resulting from prior year underdepreciation Change in accounting policy from weighted average to FIFO inventory valuation resulting in increase Corrected beginning balance Net income for the period Dividends declared during the year Appropriated for contingencies Retained earnings, December 31

1,000,000 ( 100,000) 300,000 1,200,000 1,550,000 ( 400,000) ( 200,000) 2,150,000

24. What is a statement of changes in equity? 50,000 1,600,000

22. What is a statement of retained earnings? The statement of retained earnings shows the changes affecting directly the retained earnings of an entity and relates the income statement to the statement of financial position. The important data affecting the retained earnings that should be clearly disclosed in the statement of retained earnings are:

The statement of changes in equity is a basic statement that shows the movements in the elements or components of the shareholders' equity. Under PAS 1, the holders of instruments classified as equity are simply known as "owners". The statement of retained earnings is no longer a required basic statement but it is a part of the statement of changes in equity.

25. What are the components of the statement of changes in equity? a. Comprehensive income for the period.

a. b. c. d. e.

Profit or loss for the period Prior period errors Dividends declared and paid to shareholders Effect of change in accounting policy Appropriation of retained earnings

23. Illustrate a statement of retained earnings. Illustration (all amounts are assumed) EXAMPLAR COMPANY Statement of Retained Earnings Year ended December 31,2013

b. For each component of equity, the effects of changes in accounting policies and corrections of errors. c. For each component of equity, a reconciliation between the carrying amount at the beginning and end of the period, separately disclosing changes from: 1. Profit or loss 2. Each item of other comprehensive income 3. Transactions with owners in their capacity as owners showing separately contributions by and distributions to owners

26. Illustrate a statement of changes in equity.

Illustration - all amounts are assumed

distributions to owners.

EXAMPLAR COMPANY Statement of Changes in Equity Year ended December 31, 2013

Balances - January 1 Correction of error resulting from prior year underdepreciation Change in accounting policy from weighted average to FIFO - credit Issuance of 10,000 ordinary shares with P100 par at P150 per share Issuance of 5,000 preference shares with P50 par at P100 per share Comprehensive income: Net income Other comprehensive income Dividends declared during the year Current appropriation for contingencies Balances - December 31

Share capital 5,000,000

Reserves 2,000,000

Retained earnings 1,000,000

3.

What is the purpose of reporting comprehensive income? A. To replace net income with a better measure. B. To report a measure of overall entity performance. C. To report changes in equity due to transactions with owners. FA © 2014 D. To combine income from continuing operation with income from discontinued operation.

4.

When a complete set of financial statements is presented, comprehensive income and its components should A. Appear in the statement of retained earnings B. Be reported net of related income tax effect, in total and individually. C. Appear in a supplemental schedule in the notes to financial statements. D. Be displayed in a statement that has the same prominence as other financial statements. FA © 2014

5.

What is the two-statement approach of presenting comprehensive income? A. A comparative statement of comprehensive income B. A combined income statement and a statement of changes in equity C. A combined statement of comprehensive income and retained earnings FA © 2014 D. A separate income statement and a separate statement of comprehensive income

6.

Comprehensive income includes A. Profit or loss B. Other comprehensive income C. Both profit or loss and other comprehensive income D Neither profit or loss nor other comprehensive income

( 100,000) 300,000 1,000,000

500,000

250,000

250,000

1,550,000 50,000 ( 400,000) 200,000 ( 200,090) 6,250,000 3,000,000

2,150,000

Multiple Choice Theory Comprehensive income 1. It is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. A. Comprehensive income C. Profit or loss B. Other comprehensive income D. Share capital FA © 2014 2.

The term "comprehensive income" A. Is synonymous with the term "net income". B. Is the net change in owners' equity for the period. C. Must be reported on the face of the income statement. D. Includes all changes in equity during a period except those resulting from investments by and

FA © 2014

FA © 2014

7.

Total comprehensive income for the period is presented showing A. an analysis of expenses by nature. B. an analysis of expenses by function. C. profit or loss and the total of other comprehensive income. D. separately the total amount attributable to owners of the parent and the noncontrolling interest. FA 2014

8.

Comprehensive income includes all of the following, except A. Dividend revenue C. Loss on disposal of asset B. Investment by owners D. Unrealized holding gain

FA © 2014

9.

Comprehensive income includes all of the following, except A. Revenue and gain B. Expense and loss C. Preference share dividend D. Unrealized gain and loss on derivative contract

A. Assets and equity at a point in time. B. Assets and equity for a period of time. FA © 2014

10. Comprehensive income excludes changes in equity resulting from which of the following? A. Prior period error correction B. Dividends paid to shareholders C. Loss from discontinued operations D. Unrealized loss on financial assets held for trading TOA © 2013 11. An entity shall present all ...