Department of Education
Republic of the Philippines
NATIONAL CAPITAL REGION
Fundamentals Of Accountancy,
Business And Management II
STATEMENT OF COMPREHENSIVE INCOME
First Quarter – Module 2
Writer: Sandra H. Gali
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
This is an 80-hour course offered in the ABM strand in the Senior High School. This course
deals with the preparation and analysis of financial statements of a service business and
merchandising business using horizontal and vertical analyses and financial ratios. Knowledge and
skills in the analysis of financial statements will aid future entrepreneurs in making sound economic
decisions.
CONTENT
This is a self-instructional module for Senior High School (SHS) learners in the Department of
Education - Division of City Schools Las Pinas – Las Pinas National Senior High Schools, Main Campus
under the Alternative Delivery Mode or ADM. There are exercises to be accomplished in this particular
module that is expected to be submitted to the faculty or teacher during the face-to-face encounter
in the field or in classroom sessions or other means of submission.
The exercises provided give emphasis in bridging the gap between theory and practice. SHS
learners are expected to analyze the concepts presented and apply these eventually in their work, for
those who are already have jobs. Before answering the exercises, the learners should have fully
understood the concepts presented. No one could stop the learners to read the modules as many
times as they desire.
Email:
sandra.gali@deped.gov.ph
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
HOW TO USE THIS MODULE
Before starting the module, I want you to set aside other tasks that will disturb you while
enjoying the lessons. Read the simple instructions below to successfully enjoy the objectives
of this kit. Have fun!
Follow carefully all the contents and instructions indicated in every page of this module.
Write on your notebook the concepts about the lessons. Writing enhances learning that is important
to develop and keep in mind.
Perform all the provided activities in the module. Let your facilitator/guardian assess your answers
using the answer key card. Analyze conceptually the posttest and apply what you have learned.
Enjoy studying! What is this module all about?
PARTS OF THE MODULE
Expectations
Pre-test
Looking Back to
your Lesson
Introduction
Brief Discussion
Activities
Remember
Check your
Understanding
Post-test
References
Answer keys
These are what you will be able to know after completing the lessons in the
module
This will measure your prior knowledge and the concepts to be mastered
throughout the lesson.
This section will measure what learning and skills did you understand from the
previous lesson.
This section will give you an overview of the lesson.
This section provides a brief discussion of the lesson. This aims to help you
discover and understand new concepts and skills.
This is a set of activities you will perform to process what you have learned from
the lesson
This section summarizes the concepts and applications of the lessons.
It will verify how you learned from the lesson.
This will measure how much you have learned from the entire module.
This is a list of all sources used in developing this module.
This contains answers to all activities in this module.
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
Name: ________________________
Section: _______________________
NAME: ___________________________________________
Score: ___________________
GRADE & SECTION __________________________
Teacher: ___________________
QUARTER 1 WEEK 2 AND 3
CONTENT: STATEMENT OF COMPREHENSIVE INCOME
This module is divided into two lessons, namely:
•
•
Lesson 1 – The Elements of Statement of Comprehensive Income
Lesson 2 – Preparation of Statement of Comprehensive Income
This module will help you to
• identify the elements of the Statement of Comprehensive Income and describe each of
these items for a service business and a merchandising business; ABM_FABM12-Ic-d-5
• prepare an Income Statement for a service business using the single-step approach;
ABM_FABM12-Ic-d-6
• prepare an Income Statement for a merchandising business using the multistep approach
ABM_FABM12-Ic-d-7
Let us start your journey in learning about the Statement of Comprehensive Income.
I am sure you are ready and excited to answer the Pretest. Smile and cheer up!
Directions: Read carefully and write the correct answer on the given
question/sentence. (letter only)
1. The income statement would help in which of the following?
A. assess capital structure
B. determine financial position
C. estimate future cash flows
D. estimate need for additional financing
2. Investors and creditors use the income statement for all of the following, except
A. to help assess the risk and uncertainty of achieving future cash flows.
B. to provide a basis for predicting future performance
C. to evaluate the future performance of an entity
D. to evaluate the past performance of an entity
3. It is an account use for the cost of supplies used up during the accounting period.
A. utility expense
B. rent expense
C. supplies expense
D. salary expense
4. Which of the following is NOT an operating expense?
A. cellphone load
B. interest expense
C. electricity
D. advertising
5. What is the result of adding the beginning inventory and the net purchases?
A. cost of goods sold
C. cost of goods manufactured
B. cost of goods available for sale
D. cost of goods in process
6. It is the total income less expenses, excluding other comprehensive income
A. comprehensive income
C. economic income
B. accounting income
D. profit or loss
7. The income statement reveals ___________________.
A. resources and equity at a point in time
C. net earnings at a point in time
B. resources and equity for a period of time
D. net earnings for a period of time
8. Which term cannot be used to describe a line item in the statement of comprehensive income?
A. Revenue
B. Gross income
C. Income before tax D. Extraordinary Income
9. Which of the following is NOT considered as service revenue?
A. professional fee
B. rental fee
C. tuition fee
D. sales
10. Which of the following expenses is an effect of systematic and rational allocation?
A. cost of sale
C. depreciation expense
B. commission expense
D. salaries expense
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
11. These are amounts of merchandise that were returned to suppliers and the amounts allowed as
deductions by suppliers for goods not returned.
A. purchase return & allowance
C. purchase discount
B. sales return & allowance
D. sales discount
12. A Company generated revenues amounting to ₱235,000. Expenses for the year totaled ₱186,000. How
much is the company’s net income for the year?.
A. ₱421,000
B. ₱235,000
C. ₱186,000
D. ₱49,000
13. Gross profit of the Company amounted to ₱105,000. Ending Inventory amounted to ₱50,000 while
Net Purchases totaled ₱85,000. Beginning inventory is equivalent to half of the ending inventory.
Compute for Company’s Net Sales.
A. ₱165,000
B. ₱155,000
C. ₱135,000
D. ₱85,000
14. It provides information on the financial performance of the business.
A. Statement of Financial Position
C. Statement of Changes in Equity
B. Income Statement
D. Cash Flow Statement
15. These are revenues whose recognition is put off into the future even though payment has been
received now.
A. deferred revenue
C. service revenue
B. accrued revenue
D. sales revenue
Great! You finished answering the questions. You may request your facilitator to check your work.
Congratulations and keep on learning!
Lesson
1
Competency code:
The Elements of Statement of
Comprehensive Income
ABM_FABM12-Ic-d-5
MELC: Identify the elements of the Statement of Comprehensive Income and describe each of these items
for a service business and a merchandising business
Objectives: At the end of this lesson, the learners will be able to……
1. Identify the elements of Statement of comprehensive Income;
2. Describe each account item for a service and merchandising business;
3. Solve problems related to Statement of Comprehensive Income; and
4. Differentiate selling expenses from general and administrative expenses.
LOOKING BACK TO YOUR LESSON:
Direction: Can you tell what source of income does the picture shows?
Figure 1
Figure 2
Figure 3
Write your answer here:
______________________________ ____________________________ ________________________________
______________________________ ____________________________ ________________________________
INTRODUCTION:
In the world of finance, the statement of comprehensive income holds significant importance as it
provides a snapshot of an organization’s financial performance over a specific period.
Historically, the financial statement that outlines a company’s revenues, expenses, and resulting net
income or net loss for a specific period is called Profit and Loss Statement or Income Statement. Over time,
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
accounting standards and practices have evolved to encompass a broader view of financial performance,
leading to the development of the modern “Statement of Comprehensive Income”. This updated statement
not only includes traditional income and expenses but also incorporates other comprehensive income items
that may arise from changes in the value of certain assets and liabilities.
DISCUSSION:
Sources of Income :
1. Sale of merchandise to customers
• The income from sales shall include all sales to customers during the period.
• Sales returns, allowances, and discounts shall be deducted from gross sales to arrive at net sales.
2. Rendering of services
• Income generated through the performance of various tasks, activities, or specialized services that are
often tailored to meet the specific needs of the recipient. This includes professional fees (doctors,
lawyers, accountants), contract work (software development, event planning), consulting services
(finance and technology), entertainment (musicians, actors), maintenance services, education (tuition
fees), delivery services, and personal services (grooming, salon).
3. Use of entity resources
• Income generated through the utilization of assets, facilities, or resources to provide products or
services to customers, or clients such as rental, leasing, royalties, subscription, usage fees, or parking
services.
4. Disposal of resources other than product
• Income generated by selling, transferring, or disposing of assets that owns and control by an
organization, these assets include various type of property, investments, or holdings that the entity no
longer intends to use or hold.
• Sale of investment, sale of property, plant and equipment, sale of intangible assets.
INCOME STATEMENT/PROFIT OR LOSS STATEMENT
➢ A financial statement that shows the financial performance of an entity for a given period of time.
➢ The financial performance is measured in terms of the level of income earned by the entity through
the effective and efficient utilization of resources.
➢ The information about financial performance is useful in predicting future performance and the ability
to generate future cash flows.
➢ Financial performance is the result of the operations of an entity.
COMPREHENSIVE INCOME
• It 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.
• It includes both the traditional components of net income (profit/loss) and other comprehensive
income, which consists of certain gains and losses that do not directly flow through the income
statement but are still important to consider. These are the unrealized gains and losses that resulted
from the
a. changes in the fair value of investments
b. changes in the exchange rate of foreign currencies
c. changes in the fair value of certain financial instruments
d. revaluation of certain assets to reflect the fair market value
e. change in pension plan obligations due to changes in actuarial assumptions
• The components of comprehensive income:
1. profit or loss – traditional income minus costs/expenses incurred by a business in generating
income.
2. other comprehensive income – unrealized gains and losses
The comprehensive income is reported in a financial statement called the Statement of Comprehensive
Income.
Main Elements of Income Statement
1. Revenue - these represent the inflow of assets from the primary operations of a business. They come
from the sale of goods, services, or other business activities. They contribute to a company’s gross
income.
2. Expenses – these are the costs incurred in generating revenue.
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
3. Gains/Losses – these represent the positive/negative financial events that are not part of a
company’s primary operations. They arise from activities outside the ordinary course of business and
often involve the sale or disposal of assets. Example: Capital gains (selling of shares or real property
higher than its original cost) or capital loss (if selling lower than its original cost), gain/loss on sale of
assets (selling of fixed assets such as equipment, machinery), gain/loss on forex transactions, or
gain/loss on restructuring debt.
4. Net income/loss – represents the result of all income minus all expenses.
Income
• refers to a transaction that increases assets and/or decreases liabilities leading to an increase in equity
resulting from the operation of the business and not from the owner’s contribution.
• Two kinds of income:
1. Revenues –income generated from the primary operations of the business.
Example: Sale of merchandise to a customer. (selling merchandise is the primary operation of the
business), or Providing services to clients (if service industry)
2. Gains – income derived from other activities of the business.
Example: Interest income from the time deposit. (investment in time deposit is not part of the
primary operations of the business)
• Income encompasses revenue and gain.
Expense
• refers to a transaction that decreases assets and/or increases liabilities leading to a decrease in equity
resulting from the operations of the business and not because of distribution to owners.
• refers to the cost of doing business.
• Two kinds of expenses:
1. Expense – related to the primary operations of the business
Example: rent, utility, salary, and the cost of merchandise sold. (part of the selling activity)
2. Losses – from other activities of the business
Example: interest expense from notes payable. (not part of selling activities)
To illustrate:
ABC Company sold a piece of machinery for ₱15,000, which it had purchased for ₱40,000 three years ago. The
estimated life of the machinery is 5 years with a salvage value of ₱2,000. During the same period, the company
paid for rent ₱7,500, salaries ₱15,000, and utilities ₱3,000. Total sales for the current year is ₱150,000, while
the cost of sale is ₱90,000. In addition, the company sold its investment in stock at ₱55,000 which is ₱15,000
higher than its carrying value. Assuming that no other transactions happened, determine the revenue, gain,
expenses, loss and net income of ABC Company.
SOLUTION:
Cost of machinery
40,000
Sales revenue
150,000
Accumulated depreciation ((40000-2000)/5)x3
22,800
Gain on sale of investment
15,000
Book value of machinery (asset given up)
17,200
Selling price of machinery (asset received)
15,000
Cost of sale
90,000
Loss from sale of machinery
2,200
Rent
7,500
Salaries
Utilities
Total expenses
15,000
3,000
115,500
Total income (150,000 + 15,000)
Total expense (115,500 + 2,200)
Net Income
165,000
117,700
47,300
When to recognize revenue?
When to record expenses?
RECALL: ACCRUAL ACCOUNTING PRINCIPLE
Revenue Recognition Principle:
• dictates the process and timing by which revenue is recorded and
recognized as an item in a company's financial statements.
• This principle states that a firm should record revenue when it is
realized or realizable and earned, regardless of when cash is received.
o Revenues are realized when products are exchanged for cash or
claims to cash.
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
o Revenues are realizable when related assets received are readily
convertible to cash or claims to cash.
o Revenues are earned when the products are delivered, or services are performed.
• Deferred Revenues or Unearned Revenue – are revenues whose recognition is put off into the future even
though payment has been received now.
• Example: Received down payment from customer for the ordered item to be delivered next week.
The time you received payment, no revenue yet but deferred revenue must be recorded.
Deferred revenues are liabilities. Record the revenues when the item is delivered to the
customer.
• Accrued Revenues – revenue that has been earned by providing a good or service, but for which no cash
has been received.
• Example: Delivered the ordered item to a customer but payment will be collected next week.
The time you delivered the item, revenue must be recorded even though there are no receipts
of cash yet. Accrued revenues are assets and these are equivalent to accounts receivables.
Matching Principle:
• This is an expense recognition principle
that dictates the process and timing of
which expense is recorded and recognized
as an item in a company’s financial
statements.
• It directs a company to report an expense on its income statement in the period in which the related
revenues are earned.
• It requires that the expenses incurred during a period be recorded in the same period in which the related
revenues are earned.
• This principle recognizes that businesses must incur expenses to earn revenues.
• It is important because the proper matching of expenses and revenues gives a more accurate appraisal of
the results of operations, helps to avoid distortion of the financial position of the business, and improves
the quality of the financial statements.
• Three methods of recording expenses:
1. association of cause and effect
▪ Cost of goods sold is directly associated with sales revenue.
▪ Sales commission is directly matched against sales revenue.
▪ Transportation expenses incurred to deliver goods to customers.
2. systematic and rational allocation
▪ The cost of equipment is systematically allocated as depreciation expense among the periods in
which the equipment provides the benefit (generates revenue).
▪ Amortization of intangible assets over the useful life of the asset.
▪ Allocation of prepaid costs such as insurance, rent, or subscription fee over the period covered.
3. immediate recognition
▪ it can be difficult to identify future benefits of some costs incurred, or for some costs, no rational
allocation scheme can be devised.
▪ period costs are usually recognized immediately, ex. Utilities, salaries, maintenance costs, or
marketing expenses. These costs are recognized in the same period they are incurred, irrespective
of specific revenue transactions.
Components of Statement of Comprehensive Income
• REVENUE – the total income generated from the sale of goods, provision of services, or other business
activities.
a. Service revenue – for service industries providing services for a fee.
b. Sales – for merchandising and manufacturing industries selling goods or merchandise.
o Sales return and allowances – sales return occurs when a customer returns an item to the
company due to a defect and sales allowance occurs when the company reduces the price paid
by a customer.
o Sales discount – a reduction in the price of a product that is offered by the seller, in exchange for
early payment by the buyer.
o Net sales – represents the revenue that the company has earned from its core business activities
after deducting any returns, allowances, and discounts.
Sales
xx
Less: Sales return and allowances
(xx)
Sales discount
(xx)
Net Sales
xx
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
To illustrate:
Happy Learning Pre-School collected tuition fees of ₱9,500,000 and ₱11,550,000 for the school year 20212022 and 2022-2023 respectively. The school closed in July and August. Determine the service revenue to be
reported on the statement of comprehensive income for the calendar year 2022.
SOLUTION:
School year 2021-2022 tuition earned (9,500,000 x 6/10)
5,700,000
School year 2022-2023 tuition earned (11,550,000 x4/10)
4,620,000
Tuition fee revenue to be reported for 2022
10,320,000
It is assumed that services are rendered evenly throughout the ten-month school year period. Only the
tuition fee earned for the year 2022 is accounted for. Therefore, get the pro-rata earned for SY2021-2022
and SY2022-2023.
To illustrate:
Bookay Publishing Inc. produces and sells books to different bookstores nationwide. Bookay sold 5,645 copies
of taxation books to National Bookstore at ₱525 each on account with terms 2/30, n/60, FOB Shipping point.
Freight charges are ₱5,000. Before the discount period ended, National Bookstore returned 35 copies of
books due to missing pages. The payment was made by National within the discount period. How much
revenue from National Bookstore is to be reported in the statement of comprehensive income?
SOLUTION:
Sales (5,645 X 525)
2,963,625
Less: Sales return and allowances (35 X 525)
(18,375)
Sales discount (2,963,625 – 18,375) x 0.02
(58,905)
Net Sales
2,885,985
• COST OF GOODS SOLD (COGS) or COST OF SALE – these are the direct costs associated with purchasing
(merchandising) or producing (manufacturing) the goods that are sold to customers during a specific period.
It is calculated by adding the beginning inventory and net purchases and deducting the ending inventory.
Beginning inventory
xx
Add: Net purchase
xx
Goods available for sale
xx
Less: Ending inventory
(xx)
Cost of goods sold or Cost of sale
xx
In Merchandising industry:
o Beginning inventory – the value of goods or merchandise at the beginning of the accounting
period. It represents the cost of unsold goods (ending inventory) from the previous period.
o Purchases – the cost of merchandise/goods purchased or acquired during the accounting period
for resale.
▪ Purchase return and allowances – purchase return occurs when defective or damaged goods
are returned to suppliers and purchase allowance occurs when the supplier reduces the price
paid to them.
▪ Purchase discount – a reduction in the purchase price offered by a supplier to the purchaser
as an incentive for early payment.
▪ Freight-in – transportation cost or shipping fee incurred to transport the goods purchased by
the buyer from the supplier’s location to the buyer’s location.
▪ Net Purchase – represents the actual cost of inventory that the business intends to sell to its
customers. It is the total cost of merchandise purchased for resale during a specific period
after considering the freight-in and deducting the purchase returns, allowances, and
discounts.
Purchases
xx
Add: Freight-in
xx
Less: Purchase return and allowances (xx)
Purchase discount
(xx)
Net Purchases
xx
o Cost of Goods Available for Sale (CGAS)– represents the total cost of inventory/goods that a
business has available to sell during a specific accounting period. It encompasses the beginning
inventory and net purchases.
Beginning inventory
xx
Add: Net Purchases
xx
Cost of Goods Available for Sale
xx
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
Ending Inventory – represents the value of merchandise that remains unsold at the end of an
accounting period. The amount of which is presented in the Statement of Financial Position.
To illustrate:
At the beginning of the year, the company had inventory amounting to ₱56,500. During the year, the company
purchased merchandise amounting to ₱5,215,000 and paid freight of ₱25,000. The company returned to
suppliers ₱112,000 defective and damaged goods. The supplier granted a total of ₱85,000 discount for the
early payment made. At the end of the year, the physical count of inventory is ₱165,000. How much is the cost
of goods sold?
SOLUTION:
Beginning inventory
56,500
Add: Net purchase:
Purchase
5,215,000
Freight in
25,000
Less: Purchase return
(112,000)
Purchase discount
(85,000) 5,043,000
Goods available for sale
5,099,500
Less: Ending inventory
165,000
Cost of goods sold or Cost of sale
4,934,500
Note: There are methods of costing inventories: LIFO, FIFO, Weighted Average, Specific Identification,
Standard Costing, Gross Profit Method, and Retail Method. The first three methods were already discussed
in Accounting 1.
Illustration:
XYZ Electronics Store sells various electronic products. The following is a record of purchases and sales of a
specific product, “Gadget X”, during the month of July:
Beg units
100
• July 1 – Beginning inventory – 100 units at ₱15,000 each
Units purchased
350
• July 10 – Purchase – 150 units at ₱16,500
Total units available for sale
450
• July 15 – Sale – 120 units at ₱22,500
Units sold
280
• July 20 – Purchase- 200 units at ₱16,900
Ending units (unsold)
170
• July 25 – Sale – 160 units at ₱24,000
Calculate the cost of goods sold and the value of ending inventory using
a. LIFO
b. FIFO
c. Weighted Average
SOLUTION:
Last-in, First-out (LIFO)
COGS
ENDING INVENTORY
200 x 16,900
3,380,000
100 x 15,000
1,500,000
80 x 16,500
1,320,000
70 x 16,500
1,155,000
COGS
4,700,000 End inventory
2,655,000
COGS
100 x 15,000
150 x 16,500
30 x 16,900
COGS
First-in, First-out (FIFO)
ENDING INVENTORY
1,500,000
170 x 16,900
2,873,000
2,475,000
507,000
4,482,000
Weighted Average
100
15,000
150
16,500
200
16,900
450
1,500,000
2,475,000
3,380,000
7,355,000
Weighted average unit cost (7,355,000/450)
COGS = 280 x 16,344.44
End Invty = 170 x 16,344.44
16,344.44
4,576,444.44
2,778,555.56
Beginning units
Purchase in units
Total
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
Specific Identification Method is used if each item in inventory is individually tracked, and the actual
cost of each item is used to determine the Cost of Goods Sold and Ending Inventory.
To illustrate:
Ongpin Jewels purchased the following during 2022:
PURCHASE DATE
SOLD DATE
ITEM
COST
Jan 8
Apr 1
Diamond ring
50,000
Mar 27
Mar 31
24K gold necklace
75,000
Jul 15
White gold ring
65,000
Aug 5
Diamond necklace
120,000
Sept 9
Nov 2
18K gold necklace
41,000
Oct 11
Pearl earrings
33,000
Dec 20
Dec 25
Topaz earrings
47,000
TOTAL PURCHASES
431,000
Determine the amount of cost of goods sold and ending inventory to be reported at the end of 2022.
SOLUTION:
PURCHASE DATE
SOLD DATE
ITEM
COST OF
ENDING
GOODS SOLD
INVENTORY
Jan 8
Apr 1
Diamond ring
50,000
Mar 27
Mar 31
24K gold necklace
75,000
Jul 15
White gold ring
65,000
Aug 5
Diamond necklace
120,000
Sept 9
Nov 2
18K gold necklace
41,000
Oct 11
Pearl earrings
33,000
Dec 20
Dec 25
Topaz earrings
47,000
TOTAL
213,000
218,000
•
•
•
Standard costing – assigning predetermined costs to each inventory item based on estimates. The
difference between standard cost and actual cost is accounted for as variance. This method is used in a
manufacturing business to manage costs, analyze variances, and make proper decisions. This method
will be further illustrated in financial management.
Gross profit Method – a technique used to estimate the value of cost of goods sold and ending
inventory based on the gross profit percentage. It is often employed when a physical count of inventory
is not feasible or when there is a need for a quick estimate due to theft, or loss from fire.
𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
COGS = Net sales x (1 – gross profit rate)
Gross profit rate based on sales =
𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
Gross profit based on cost = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
COGS = (1 + 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑟𝑎𝑡𝑒)
For Gross Profit Method, Net Sales is calculated by Gross Sales minus Sales Return. The sales discount
and allowances should not be deducted from gross sales or should be added back from reported net
sales, since there is no physical flow of goods back to the entity.
To illustrate:
The company reported the following information for the year:
Gross sales
3,250,000
Calculate the amount of cost of goods sold if the
Sales return
250,000
gross profit rate is 25%
Sales discounts
36,500
a. Based on sales
Sales allowance
72,500
b. Based on cost
SOLUTION:
Based on sales
Based on cost
3,000,000
COGS = 3,000,000 x (1 – 0.25) = 2,250,000
COGS = (1 + 0.25) = 2,400,000
•
Retail Method – use the ratio of cost to selling price, then apply the retail value of goods on hand to
determine the cost. This method is suitable for businesses that sell a wide range of products with varying
prices and turnover rates such as groceries, department stores, and pharmacies. It can help identify
discrepancies due to potential theft, damage, or other factors.
𝑇𝐺𝐴𝑆 𝑎𝑡 𝑐𝑜𝑠𝑡
Cost Ratio = 𝑇𝐺𝐴𝑆 𝑎𝑡 𝑟𝑒𝑡𝑎𝑖𝑙
TGAS at cost = total goods available for sale at cost (purchase price)
TGAS at retail = total goods available for sale at retail (selling price)
COGS = cost ratio x net sales
Ending inventory = cost ratio x Ending inventory at retail.
10
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
To illustrate:
Blueberry Company uses retail inventory method in estimating its ending inventory. For the year ended
2022, it reported the following amounts:
At Cost
At Retail
280,000
Cost Ratio = 410,000 = 68.29%
Beginning inventory
90,000
130,000
Purchases
190,000
280,000
TGAS
280,000
410,000
The company reported net sales of ₱330,000. How much is the cost of goods sold and ending inventory to
be reported in the statement of comprehensive income?
SOLUTION:
TGAS at Retail
410,000
COGS = 330,000 x 68.29% = 225,357
Net sales
330,000
End inventory = 80,000 x 68.29% = 54,633
Ending inventory at Retail
80,000
In Manufacturing Industry:
• Cost of Goods Manufactured – the total cost of producing the goods that were completed during the
accounting period. It includes direct materials, direct labor, factory overhead, and considering the
work-in-process inventory.
Raw Materials used
xx
Formula for Raw Materials used:
Direct labor
xx
Raw Materials beginning
xx
Factory overhead
xx
Add: Purchase of Raw Materials
xx
Total Manufacturing cost
xx
Total materials available for use
xx
Add: Work-in-process beginning
xx
Less: Raw Materials ending
(xx)
Less: Work-in-process ending
(xx)
Raw Materials used
xx
Cost of Goods Manufactured
xx
o Raw Materials – basic materials and components that are used in the production process to
create finished goods. These are the materials transformed through the manufacturing process
into the final products.
o Direct labor – the cost of the workforce directly involved in the production process.
o Factory overhead – all indirect costs incurred in the production process that cannot be directly
attributed to a specific product, such as factory supplies, utilities, rent of manufacturing plant,
maintenance, etc.
o Work-in-process inventory – the cost of materials that are in the process of being transformed
from raw materials into finished products that are not yet completed. It represents the partially
finished products that are at various stages of the production process within a manufacturing
facility.
• Beginning Finished goods – the value of finished goods inventory that a manufacturing company has
on hand at the beginning of the accounting period. It represents the goods produced that haven’t been
sold.
• Ending Finished goods – the value of unsold finished goods at the end of an accounting period.
To calculate the cost of goods sold in a Manufacturing Industry:
Beginning finished goods
xx
Add: Cost of goods manufactured
xx
Cost of goods available for sale
xx
Less: Ending Finished goods
(xx)
Cost of goods sold
xx
To illustrate:
Masay Manufacturing Company provided the following information for the year 2022:
Inventories:
January 1 December 31
Raw materials
116,500
186,000
Work-in process
75,000
195,000
Finished goods
260,000
355,500
During the year, raw materials purchased amounting to ₱2,650,000, direct labor costs incurred were ₱635,000
and the total factory overhead costs were ₱285,000. How much is the cost of goods manufactured and the cost
of goods sold for the year 2022?
11
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
SOLUTION:
Beginning Raw materials
Add: Purchases
Total materials available for use
Less: Ending Raw materials
Raw materials used
Direct labor
Factory overhead
Total manufacturing cost
Add: Work-in-process, beginning
Less: Work-in-process, ending
Cost of goods manufactured
Add: Beginning Finished goods
Total goods available for sale
Less: Ending Finished goods
Cost of goods sold
116,500
2,650,000
2,766,500
186,000
2,580,500
635,000
285,000
3,500,500
75,000
(195,000)
3,380,500
260,000
3,640,500
(355,500)
3,285,000
• GROSS PROFIT – the difference between the net sales and the cost of goods sold. It reflects the profitability
of the main operating activities before considering operating expenses.
Net sales
xx
Less: Cost of goods sold
xx
Gross profit
xx
• OPERATING EXPENSES – these are the costs incurred in the day-to-day or the normal operations of the
business.
o Selling expenses – expenses directly related to the main purpose of a merchandising business. It is
related to marketing, selling, and distributing the company’s merchandise. Examples: salaries of
cashiers and store managers, advertising expenses, rent of store, store supplies used, utilities in the
store, depreciation of store equipment, and other marketing costs.
o General & Administrative expenses - expenses are not directly related to the merchandising function
of the company but are necessary for the business to operate effectively. It is related to the
administration and management of the business. Examples: salaries of office clerks, accountants, and
board of directors, office supplies used, rent of office, utilities in the office, depreciation of office
equipment, and other administrative-related costs.
To illustrate:
The following expenses were incurred during the year:
Salaries of cashier and salesperson
112,500
Salaries of chief executive officer
45,700
Salaries of store manager
35,000
Salaries of accountant and clerk
55,600
Depreciation of office equipment
2,500
Depreciation of store furniture & fixture
2,950
Depreciation of delivery equipment
4,250
Utilities incurred in the store
11,250
Utilities incurred in the office
7,650
Rent of store space
15,000
Bad debt expense
11,500
Advertising expense
72,500
Interest expense
36,500
Office supplies used
15,800
a. How much selling expenses are to be reported in the statement of comprehensive income?
b. How much general and administrative expenses are to be reported in the statement of comprehensive
income?
c. How much is the total operating expenses?
SOLUTION:
SELLING EXPENSES
GENERAL & ADMINISTRATIVE EXPENSES
Salaries of cashier and salesperson
112,500 Salaries of chief executive officer
45,700
Salaries of store manager
35,000 Salaries of accountant and clerk
55,600
Depreciation of store furniture & fixture
2,950 Depreciation of office equipment
2,500
Depreciation of delivery equipment
4,250 Utilities incurred in the office
7,650
Utilities incurred in the store
11,250 Office supplies used
15,800
12
Rent of store space
Bad debt expense
Advertising expense
TOTAL SELLING EXPENSES
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
15,000 TOTAL GEN. & ADMIN EXPENSES
127,250
11,500
72,500
264,950
TOTAL SELLING EXPENSES
TOTAL GEN. & ADMIN EXPENSES
Total Operating expenses
264,950
127,250
392,200
• OPERATING INCOME/OPERATING PROFIT – this is the result after deducting operating expenses from gross
profit. It reflects the profitability of the company’s main operations.
Gross profit
xx
Less: Operating expense
xx
Income from operation
Operating income
xx
• OTHER INCOME/EXPENSE OR NON-OPERATING INCOME/EXPENSE- These are gains and losses that arise
from activities not directly related to the company’s main operation. Examples: interest income, interest
expense, gains or losses from the sale of assets or investments, gains or losses from foreign exchange
fluctuations.
• INCOME BEFORE TAX – this is the total earnings or profit before accounting for income tax expenses. It is
a key financial measure that provides insight into a company’s operational profitability and financial
performance before the impact of taxes is taken into account.
Operating income
xx
Add: Non-operating income
xx
Less: Non-operating expenses
(xx)
Income before tax
xx
• INCOME TAX EXPENSE – this represents the income taxes payable based on the company’s taxable
income. This will be further discussed and illustrated on the Taxation topic in the second quarter. If the
result of deducting the allowable deductions from revenue is a Net Loss, technically, ther is no income, so
there is no basis of income taxation.
• NET INCOME or NET LOSS – this is the final result after deducting income tax expense from income before
tax. It represents the company’s profit or loss for the reporting period.
Income before tax
xx
Less: Income tax expense
xx
Net income
xx
• OTHER COMPREHENSIVE INCOME (OCI) – this section includes gains and losses that are not included in
the calculation of net income but are still recognized in the financial statement.
a. Unrealized gain or loss on equity investment measured at fair value.
b. Unrealized gain or loss on debt investment measured at fair value.
c. Foreign currency translation adjustments.
d. Pension plan adjustments
e. Cash flow hedges
f. Revaluation surplus
To illustrate:
Gold Company provided the following information for 2022:
What is the amount of
Net income for the year
635,000
a. Other Comprehensive Income
Gain from expropriation of asset
65,000
b. Comprehensive income
Loss from sale of equipment
15,000
to
be reported in the statement of
Revaluation surplus for the land
comprehensive income?
(Fair value 3,200,000; cost 2,500,000)
700,000
Unrealized loss on derivative contract
115,000
Foreign currency translation gain
35,000
SOLUTION:
Net income for the year
635,000
Other Comprehensive Income (OCI)
Revaluation surplus for the land
700,000
Unrealized loss on derivative contract
115,000
Foreign currency translation gain
35,000
13
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
Total OCI
850,000
Comprehensive income
1,485,000
Note: the gain from expropriation of asset and loss from sale of equipment is already included in the net
income.
OTHER TERMS in preparing Income Statement:
• Salaries expense – represents the total compensation paid to employees including salaries, wages,
bonuses, and other benefits during the accounting period.
• Utilities expenses- these are costs related to utilities such as electricity, water, waste disposal, heating,
and sewage used in the operation of the business.
• Bad debts expense – these are potential losses arising from the uncollectibility of accounts receivable
due to customers’ inability or unwillingness to pay.
• Advertising expenses – these are costs incurred for advertising campaigns, promotions, marketing
materials, and other efforts to promote the company’s products or services and attract customers.
• Rent expense – the cost of renting or leasing property for the business’s operations which includes office
space, retail locations, warehouses, and other facilities
• Supplies expense - the cost of consumables used for business operations during a reporting period.
• Depreciation expense - portion of a fixed asset that has been considered consumed in the current
period.
• Amortization expense - cost allocated to intangible assets over their estimated useful lives.
• Freight out - the cost associated with the delivery of goods from a supplier to its customers. It includes
transportation, shipping, and handling costs.
The three industries: service, merchandising, and manufacturing have their own accounting in determining
their income. To differentiate, see the illustration below:
Service
Merchandising
Service revenue
xx
Less: Operating expenses
xx
Operating income
xx
Add/Less: Non-operating income/expense xx
Income before tax
xx
Less: Income Tax expense
xx
NET INCOME
xx
Manufacturing
Sales revenue
Less: Sales discount
Sales return & allowances
Net Sales
Less: Cost of goods sold
Gross Profit
Less: Operating expenses
xx
xx
xx
xx
xx
xx
xx
Operating income
xx
Add/Less: Non-operating income/expense xx
Income before tax
xx
Less: Income Tax expense
xx
NET INCOME
xx
Lesson
2
Competency codes:
Preparation of Statement of
Comprehensive Income
ABM_FABM12-Ic-d-6
ABM_FABM12-Ic-d-7
MELC: prepare an Income Statement for a service business using the single-step approach; and
prepare an Income Statement for a merchandising business using the multistep approach.
Objectives: At the end of this lesson, the learners will be able to……
1. Prepare a Statement of Comprehensive income using single-step and multi-step for service and
merchandising business;
2. Solve problems related to the preparation of statement of comprehensive income.
14
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
LOOKING BACK TO YOUR LESSON:
Direction: Match the word/s in column A with its definition in column B. Write the letter on
the blank before the number.
Column A
______1. Cost of labor
______2. Purchase discount
______3. Salaries expense
______4. Utilities expense
______5. Cost of sale
______6. Service revenue
______7. Supplies expense
______8. Sales Revenue
______9. Goods available for sales
______10. Income statement
Column B
A. It is the revenue that the company was able to generate from
selling goods.
B. It is an account used for the cost of supplies used up during the
period.
C. It is an account used for the amount earned from providing
services to clients.
D. This account represents the actual cost of merchandise that the
company was able to sell during the year.
E. It provides information on the financial performance of the
business.
F. It is an account used for electricity, heat, and water incurred
during the accounting period.
G. It represents the total beginning inventory and net purchases of
the company.
H. The expenses incurred for the work performed by employees
during the accounting period.
I. It is an account used to record early payments made by the
company to its suppliers.
J. It refers to the main cost associated with the service company
INTRODUCTION:
Why Income Statement is so important?
The income statement is usually presented first because it determines the profit to be presented in the
equity statement which in turn is presented in the statement of financial position.
The income statement helps determine a company’s financial health and the financial progress it made
during a particular period.
✓ a business owner will be able to make better financial decisions by having accurate figures. A business owner
is able to make swift decisions, which would otherwise require unreliable guesswork.
✓ act as solid proof for business success - allows a business owner to play the cards right around the
stakeholders, or with the buyers, if the owner has the intent of selling the business
✓ helps prepare a business to file taxes. Paying taxes is obligatory by law. Accurate and up-to-date income
statements (along with other financial statements) give a business owners all the necessary information
they need to calculate various taxes.
DISCUSSION:
There are two formats for preparing an Income Statement:
1. Single-step – related to the nature of expense format.
• Groups all revenue items together and all expense items together. It involves one calculation to
determine net income. This format is generally used by small businesses and service businesses.
• It lists down the expenses based on the source of expense such as cost of sale, salaries, supplies,
utilities, and depreciation.
2. Multi-step – associated with the function of expense.
• It classifies expenses into three categories based on usage: Cost of sales, Operating expenses (Selling
Expenses, and General & Administrative Expenses), Non-operating items. This format offers more
insights into the company’s operating performance, gross profit, and the effects of non-operating
items on the overall net income.
15
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
PRO-FORMA of an Income Statement using single-step and multi-step:
Single step
Multi-step
ABM Merchandising Company
ABM Merchandising Company
Income Statement
Income Statement
For the year ended Dec 31, 2022
For the year ended Dec 31, 202
Income:
Sales
₱xx
Sales
₱xx
Interest Income
xx
Less: Cost of goods sold
xx
Gain on sale of assets
xx
Gross Profit
xx
xx
Less: Operating expenses
Total Income
Expenses:
Rent expense
xx
Cost of goods sold
xx
Utility expense
xx
Rent expense
xx
Salaries and wages
xx
Utility expense
xx
Operating Income
Salaries and wages
xx
Non-operating Income/Expense:
Interest expense
xx
Income before tax
Income tax expense (see tax table)
Net Income
xx
xx
Interest Income
xx
Gain on sale of assets
xx
xx
Interest expense
(xx)
₱xx
Income before tax
xx
Unrealized gain/loss
₱xx
Revaluation of asset
xx
Comprehensive Income
xx
₱xx
Net Income
xx
xx
xx
Income tax expense (see tax table)
Other Comprehensive Income:
xx
Other Comprehensive Income:
xx
If there are other comprehensive income reported,
the title of the report will become a statement of
comprehensive income.
Unrealized gain/loss
₱xx
Revaluation of asset
xx
Comprehensive Income
xx
xx
In relation to the preparation of the Income Statement, a separate financial statement is also prepared to
show the cost of the goods being sold for the period. It is called the Cost of Goods Sold Statement.
PRO-FORMA of Cost of Goods Sold Statement:
Merchandising
Manufacturing
Name of the Company
Cost of Goods Sold Statement
For the period ended _____
Beginning inventory
Add: Net purchase:
Purchases
Freight In
Total
Less: Purchase discount
Purchase return & allowances
Goods available for sale
Less: Ending inventory
Cost of goods sold
Name of the Company
Cost of Goods Sold Statement
For the period ended _____
₱xx
₱xx
xx
xx
xx
xx
xx
xx
xx
₱xx
Direct material used
Direct labor used
Factory overhead
Total manufacturing cost
Add: Work in process, beginning
Total goods in process
Less: Work in process, ending
Cost of goods manufactured
Add: Finished goods, beginning
Cost of goods available for sale
Less: Finished goods, ending
Cost of goods sold
₱xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
₱xx
16
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
How to prepare a Statement of Comprehensive Income
1. Prepare the header:
• Name of the entity – identifies the reporting company
• Name of the report – identifies the financial statement
• Date for the period of time –
2. Choose the format of presentation
• Single-step
• Multi-step
3. Margin on the left side – the extreme margin is used to describe the major sections and the inner margin is
used to describe the accounts contained in the major section.
4. Money columns on the right side-the extreme margin are for the major amounts and the inner money column
is for the amounts of the described accounts.
5. Peso signs in the final money column (extreme right) are placed on the first and last amounts.
6. A single rule is placed under the last figure to be added or subtracted and a double line or rule is placed under
the final figure.
7. Income from the principal line of operation called operating income is always presented first followed by
other income. Expenses may be presented from the highest amount to the lowest amount (descending
order) in which case other expenses may be presented first in the expense section of the income
statement. Or these may be arranged alphabetically. Interest expense being a financial cost is always
presented last.
8. The amount of income tax expense is calculated based on the tax rate given or on the tax table (TRAIN Law)
9. A double rule is placed under the Net Income amount with a peso sign.
ASSESSMENT:
Before we move on to the next journey, answer the following:
Part I – Multiple Choice
Part II – Problem solving
Part III – Case analysis
Part I: Read carefully and choose the correct answer on the given question and write the letter on the box.
1. Which of the following is a temporary account?
a. prepaid expense
b. accrued expense
c. rent expense
d. capital
2. What is the result of net sales after deducting the cost of sales?
a. net profit
b. taxable profit
c. operating profit
d. gross profit
3. The amounts earned by a company in its main operating activities are ___________________.
a. revenue
b. gain
c. expense
d. loss
4. A company disposes of equipment that is no longer uses in its business. The amount received by the
company is more than the amount the asset is carried at in the accounting records. The company will
report a(n) ___________________.
a. revenue
b. gain
c. expense
d. loss
5. The income statement format that segregates the operating revenues and expenses from the nonoperating revenues and expenses is the _____________.
a. single-step
b. multi-step
c. report form
d. account form
6. The combination of Selling Expenses and Administrative Expenses is referred to as ___________.
a. general expense
b. operating expense c. total expense
d. other expense
7. Which of the following is NOT a type of revenue?
a. sales
b. service fee
c. commission
d. rent paid
8. An expense is _____________________________________.
a. money a business spends on the general operation of business
b. money the business owes to other organizations and people
17
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT II
c. money owed to the business
d. none of the above
9. Net Profit is ___________________________.
a. Assets less liabilities
b. Revenue less liabilities
c. Gross Profit less Expenses
d. Liabilities less Assets
10. If Sales = ₱100,000; Cost of Goods Sold = ₱25,000, the Gross Profit will be _________________.
a. ₱25,000
b. ₱75,000
c. ₱125,000
d. ₱150,000
Part II: Analyze and solve the following:
STAR Company provided the following information for the month of July, 2020.
Sales: ₱260,000
Cost of Goods Sold: ₱100,000
Salaries and Wages: ₱20,000
Rent Expense: ₱15,000
Advertising Expense: ₱35,000
Cost of repairs resulting from fire: ₱50,000
Required: Calculate the following:
1. Net Income
2. Operating Income
3. Gross Profit
Part III: Tuition
Las Piñas Private High School collected tuition fee of ₱12,500,000 and ₱14,750,000 for the school year
2019-2020 and 2020-2021, respectively. The school closed in April and May. There are 30 teachers employed,
10 senior teachers with a salary of ₱30,000 a month and 20 junior teachers at ₱20,000 a month. There are 4
administrators with average monthly salary of ₱35,000. Out of 30 teachers, only two senior teachers and one
junior teacher is paid during summer, April and May, the rest are no work, no pay. Annual depreciation for
furniture and fixtures amounted to ₱100,000; for building ₱150,000. Utilities expense for the year totals
₱1,800,000.
Determine the following:
1. The tuition fee revenue to be reported for the calendar year 2020.
2. Total expenses for the year
3. Net Income assuming tax rate of 30%.
Congratulations! Keep on learning.
References:
Florendo, Joselito, Fundamentals of Accountancy, Business and Management 1
Garcia, Vhinson Jay, Intermediate Accounting 1, 2023 Edition
Haddock, M., Price, J., & Farina, M. (2012). College Accounting: A Contemporary Approach, Second Edition.
New York: McGraw-Hill/Irwin.
Salazar, Dani Rose, Fundamentals of Accountancy, Business and Management 2
Valencia, E. G., &Roxas, G. F. (2010). Basic Accounting (3rd ed.). Mandaluyong City, Philippines: Valencia
Educational Supply
Valix et al, Financial Accounting 2017 Edition volume 1
Vera Cruz-Manuel, Zenaida, 21st Century Accounting Process, Basic Concepts and Procedures 2015 Edition
www.instopedia.com
www.accountingcoach.com
www.collinsdictionary.com
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