FUNDAMENTALS OF

ACCOUNTANCY,
BUSINESS, AND
MANAGEMENT
 CHAPTER 2
Statement of
Comprehensive Income
 Learning Objectives
• To understand the purpose of the Statement of
Comprehensive Income
• To identify the elements of the SCI
• To describe the nature of the accounts reported on
the SCI
• To prepare a single-step SCI for a service company
• To prepare a multi-step SCI for a merchandising
company
• To determine the normal balances of the elements
of the SCI
Results of the Company’s Operations

What is the STATEMENT OF

COMPREHENSIVE INCOME or SCI?

 It is a statement that reports the results of operations of the

business for one reporting period.

 It contains the following information:

 Revenue generated by operating the business
 Costs spent to generate the revenue
 Income, which is the excess of revenue over costs
Results of the Company’s Operations
The SCI is described as a “for the period” report.
This means that the amounts presented on the
report include only those that occurred within the
given period.

Statement of Comprehensive Income

 Components of the Statement of
Comprehensive Income
INCOME and EXPENSE are the
general terms used to describe the
elements of the SCI.

 Income refers to a transaction that  Expenses are transactions

increases assets and/or decreases
liabilities leading to increase in
equity resulting from the operations
of the business and not the owner’s
contribution.
that decrease assets and/or
increase liabilities leading to
decrease in equity resulting
from the operations of the
business and not because of
distributions to owners.
 Components of the Statement of
Comprehensive Income

What are the TWO KINDS OF INCOME?

 Revenues are income  Gains are income derived

generated from the from other activities of the
primary operations of the business.
business.
 Components of the Statement of
Comprehensive Income

What are the TWO KINDS OF EXPENSES?

 Expenses are related to  Losses are from other

the primary operations of activities of the business.
the business.
 Accrual Concept of Accounting

What is ACCRUAL?

 Accrual, which is one of the fundamental concepts of financial

accounting, is the concept that dictates when an item must be reported
on the SCI.

 It states that revenue must be reported on the accounting period that it

was earned. Similarly, expenses must be reported during the same
reporting period they were incurred.
 Accrual Concept of Accounting

When are revenues earned and

expenses incurred?

Revenue is recognized on the period of delivery. Expense, on the

other hand, is recorded in the same period of the revenue it was
able to generate. The allocation may be a direct one to one
correspondence or an indirect estimate based on rational
allocation. However, should there be no rational way to allocate,
the costs are expensed on the period they were incurred.
 Elements of the Statement of
Comprehensive Income
Revenue

a) Service Income
The Service Income account is generally used to
describe revenue derived from rendering of services.
A more specific account name may be used to identify
the services rendered such as Rental Income,
Professional Fee and Tuition Fee Revenue.
Misalignment of School Year and Calendar Year
Elements of the Statement of
Comprehensive Income
 Elements of the Statement of
Comprehensive Income
Revenue
b) Sales
 The Sales Revenue account is generally used to describe
revenue derived from selling of goods. A more specific account
name may be used to identify the goods sold such as Office
Supplies Sales, Book Sales, Food Sales, etc.
 Revenue from sales of goods is recognized when goods have
been delivered. However, customers are allowed to return goods
that do not meet their quality standards. Recall that we already
counted the goods delivered as Sales on the date of delivery.
When goods are returned, it is not deducted from Sales. Rather,
normal accounting practice is to report it under the account
name Sales Return and Allowances – a contra Sales account.
 Elements of the Statement of
Comprehensive Income
Expenses

a) Cost of Goods Sold (Cost of Sales)

 For trading operations, Cost of Sales collects the cost of
the merchandise sold including the purchase price of
inventory, brokerage, and shipment cost to bring the goods
to the premises of the company. This shipment cost is
called freight-in.
 Elements of the Statement of
Comprehensive Income
Expenses
a) Cost of Goods Sold (Cost of Sales)
 Cost of sales is part of inventory accounting. Accountants
have two ways of keeping records of inventory – perpetual
inventory system and periodic inventory system.
• Perpetual means that the • Periodic means the Inventory
Inventory and Cost of Goods Sold account is only “periodically”
accounts are “perpetually” updated, meaning the inventory
updated. The inventory account is account is updated only at end of
increased when goods for sale are the year or end of the month.
acquired and decreased when
goods are sold. The Cost of
Goods Sold account is updated
every time a sale is made.
 Elements of the Statement of
Comprehensive Income
Expenses
a) Cost of Goods Sold (Cost of Sales)
How is cost of goods sold determined in a
periodic inventory system?
Using the balances of the periodic inventory system accounts, Cost of
Sales is computed as follows:
Elements of the Statement of
Comprehensive Income
 Elements of the Statement of
Comprehensive Income
Expenses
b) Operating Expenses
Operating expenses refer to all other expenses related to
the operation of the business, other than cost of sales
including salaries of employees, supplies, utilities (electricity,
telephone and water bills), gasoline expense,
representation, bad debts expense, depreciation and
amortization.
• Bad debts expense, which is an estimated expense, is an
operating expense related to accounts receivable.
Elements of the Statement of
Comprehensive Income
 Elements of the Statement of
Comprehensive Income
Expenses
c) Other Expenses and Other Income
Losses and other expenses as well as gains and other
income are reported after the operating section of the SCI.
Line items included under this section are interest income
from investments of excess cash, interest expense from
borrowings and gain or loss from sale of PPE (proceeds from
sale less net book value of PPE on date of sale).
Formats in Presenting the Statement
of Comprehensive Income
1. Single-Step Statement of Comprehensive Income
 It groups all revenue items together and all expense items
together.
 It is called as such because net income is computed through
only one step, deducting total expenses from total revenues,
while subtotals are not computed and presented on the SCI.
 It is generally used by small businesses and service
businesses because of its simplicity.
 It is also closely linked to the nature of expense format by
listing down the expenses based on the source of expenses
such as salaries, purchases, supplies, utilities, fuel and
depreciation.

Single-Step Statement of Comprehensive Income

 Formats in Presenting the Statement
of Comprehensive Income
2. Multi-Step Statement of Comprehensive Income
 It is characterized by the presentation of several subtotals until
net income is determined.
 It is more popularly used in business.
 The subtotals are additional information that give the readers
more understanding of the operations of the business.
 The first subtotal is gross profit which is computed as Net Sales less Cost
of Goods Sold (Net Sales – Cost of Goods Sold).
 The next subtotal, Income from Operations, is computed by deducting
Operating Expenses from Gross Profit (Gross Profit-Operating
Expenses).
 Net Income is next determined by adding Other Income (i.e. interest
income) and deducting Other Expenses (i.e. interest expenses) from
Income from Operations.
 Formats in Presenting the Statement
of Comprehensive Income
2. Multi-Step Statement of Comprehensive Income
 It is also associated with as the function of expense format,
which classifies operating expenses into three categories
based on usage. The categories are: Cost of Sales, General
and Administrative Expenses and Selling Expenses.

• General and Administrative Expenses refer to those incurred in the

daily operations and management of the business.
• Selling Expenses are costs related to marketing, selling and
distributing the company’s merchandise.

Multi-Step Statement of Comprehensive Income

Formats in Presenting the Statement
of Comprehensive Income
How are operating expenses
classified into functions?
 Normal Balances
 An account is increased by an entry on the side of its normal
balance. Similarly, it is decreased by an entry on the opposite side of
its normal balance. The normal balance of equity accounts is credit.
 Income increases equity and expenses decreases equity. Combined
together, income increases equity and equity is increased by credit.
Therefore, the normal balance of all income accounts is credit.
 The same analysis is true for expenses. Expenses decrease equity
and equity is decreased by debit. Therefore, the normal balance of
all expense accounts is debit.
Normal Balances
Normal Balances