Statement of Comprehensive Income and its elements PDF

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THE FINANCIAL STATEMENT: STATEMENT OF COMPREHENSIVE INCOME Learning Outcomes After reading this chapter, the learners should be able to 1. Explain the nature of statement of comprehensive income 2. Explain the elements of the statement of comprehensive income 3. Differentiate Revenue and Gains as well as Expense and Loss 4. Differentiate nature of expense method and function of expense method

Two of the factors affecting equity are Income and Expense. The excess of income over expense is called net income while the excess of expense over income is called net loss. In this chapter, we will discuss the financial statement that shows the performance of the company. It is called statement of comprehensive income. THE STATEMENT OF COMPREHENSIVE INCOME This financial statement provides information about how the entity performed during a period of time, by showing the income earned and expenses incurred. The statement of comprehensive income shows the result of business operation for a given period. It shows the profitability of the company. Profitability is the ability of the company to generate profits from its operation. Profit means the excess of income over the expense of the company. Other term for profit or net profit is net income. The key elements of statement of comprehensive income based on the given definition are: Income and Expense. These are the main accounts for the statement of comprehensive income. THE INCOME Income is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Income can be classified as Revenue and Gains. Revenue is income arises in the ordinary course of business, sale of goods or rendition of service. For service provider business, there are different account names for revenue. Some of the examples are provided below: Service Provider Account name for Revenue Education Tuition Fees

Law Firms Construction firms Hospital

Legal Fees Construction Revenue Medical Fees

Service provider business can used different account names based on the nature of its business. For Merchandising and manufacturing business the account name for revenue is Sales or Sales Revenue. Gains represent income that do not arise in the ordinary course of business. This income arises from transaction other than the sales of goods or service. Examples of the transaction and account name of gains are presented below: Transaction Account name for Gains Sale of property, plant and equipment Gain on sale of equipment Sale of investment Gain on sale of investment THE EXPENSE Expense is decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Expenses arises from the ordinary course of business, sale of goods or rendition of service, is called an expense or operating expense while those arises from transactions other than the ordinary course of business, sale of property, plant and equipment or sale of investment, is called a loss. Loss can also occurred from theft, embezzlement, lawsuits, natural disaster or accident. Examples of expenses are as follows: Advertising Expense Maintenance Expense Insurance Expense Permit and licenses Expense Salaries Expense Supplies Expense Utilities Expense Loss due to fire Rent Expense Loss from theft Interest Expense Loss from sale of equipment PRESENTATION OF STATEMENT OF COMPREHENSIVE INCOME The statement of comprehensive income is presented in two sections: 1. The profit or loss section (Income statement) 2. Other comprehensive income (OCI) section The statement of comprehensive income may be prepared using two forms: 1. One statement form – It includes the profit or loss section and other comprehensive income section 2. Two-Statement form – One statement for profit or loss and another statement for other the comprehensive income which includes the result for the first statement and the other comprehensive income.

For this course, we will only discuss the profit or loss section or the income statement. The full discussion of statement of comprehensive income will be covered by higher accounting course. THE INCOME STATEMENT The income statement shows the income and expense of the company based on business operation for a given period of time. The income is presented first followed by the expense. The expense in the income statement may be presented using two methods: 1. The nature of expense method 2. Function of expense method

An entity engaged in any type of business operation can use the nature of expense method while the function of expense method may be used by merchandising and manufacturing business. Under the function of expense method, expense are classified according to purpose of the expense in the operation of business. The function are as follows: a. Cost of goods sold (Merchandising and Manufacturing Business) b. Selling expense c. General and administrative expense d. Other operating expense Under the nature of expense method, there is no need to classify the expenses by function. Expenses are presented based on their account names in the general ledger. The interest expense or finance cost, and income tax expense are required to be presented as a line item in the income statement.

Example of Income Statement (Nature of Expense method) ABC Service Provider Company Income Statement December 31, 2020 Service Revenue 1,100,000 Gain on sale of equipment 100,000 Total Income 1,200,000 Less: Operating Expenses Advertising Expense 50,000 Insurance Expense 80,000 Rent Expense 300,000 Salaries Expense 400,000 Utilities Expense 200,000 Loss due to theft 20,000 950,000 Operating Income 250,000 Less: Interest Expense 10,000 Net Income before tax 240,000 Less: Income tax expense 40,000 Net Income after tax 200,000 Based on the following illustration, Income is presented first followed by expense. Total income minus operating expense is called operating income. Interest expense is presented separately because this is a non-operating expense. It means this is an expense that has nothing to do with the operation activity of the business. The Income tax expense is also presented separately. The net income after tax is P200,000. This is the result of business operation of the entity. This amount will be forwarded to statement of changes in equity. (Statement of changes in equity)

Appendix: Income Statement (Function of Expense method) ABC Merchandising Company Income Statement December 31, 2020 Sales Revenue Less: Cost of goods sold Gross Profit Gain on sale of equipment Total Income Less: Operating Expense Selling Expense 400,000 General Administrative Expense 200,000 Operating Income Less: Interest Expense Net Income before tax Less: Income tax expense Net Income after tax

2,000,000 1,200,000 800,000 100,000 900,000

600,000 300,000 10,000 290,000 90,000 200,000

The Income statement presented may be used by merchandising or manufacturing business....