Fundamentals of Accountancy, Business and Management 2

2. STATEMENT OF
COMPREHENSIVE
INCOME

3. Learning Objectives
By the end of the chapter, the students should be able to:
1. understand the purpose of the Statement of Comprehensive
Income;
2. identify the elements of the Statement of Comprehensive
Income;
3. Describe the nature of the accounts reported on the
Statement of Comprehensive income;
4. prepare single-step Statement of Comprehensive Income for
service company;
5. prepare a multi-step Statement of Comprehensive Income
a merchandising company; and
6. determine the normal balances of the elements of the
Statement of Comprehensive Income.

4. Results of the Company’s Operations
The SCI is a statement that reports the results
of operations of the business for one
accounting period. This statement contains
the following information:
a. Revenue generated by operating the
business;
b. Costs spent to generate the revenue; and
c. Income, which is the excess of revenue
costs.

5. The SCI is describe as a “for the period” report.
This means that the amounts presented on the
report include only those that occurred within
the given period. For example, the SCI in
Figure 1 is described as “for the year ended
December 13, Y. “This means that the reported
revenue of P 1.29 million was generated from
January 1, Y to December 31, Y. Revenues
generated in 20X0 or 20x2 were not counted
in this particular report.

6. ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20X1
Revenues P 1,290,000
Less: Expenses 890,000
Net Income P 400,000
Figure 1. Statement of Comprehensive Income

7. Financial statements is a set of interconnected
reports. SCI is prepared first. The bottom line of
the SCI is net income. Net Income is transferred
out to the Statement of Changes in Equity to be
included in the determination of the Owner’s
Capital balance as of the end of the year. The
capital balance is transferred to the Statement of
Financial Position(SFP). If double entry
accounting is implemented correctly, the SFP will
balance. This means that the SFP will show total
assets equal to the sum of liabilities and owner’s

8. Components of the Statement of
Comprehensive Income
The SCI is an action-packed financial
statement. In contrast, the SFP is a still
photograph. The SCI is a statement that
explains some of the changes that occur
between two SFPs taken one year apart.

9. What are the actions reported on the
SCI?
Income and Expenses are the general terms used
to describe the elements of the SCI. Income refers
a transaction that increases assets and/or decreases
liabilities leading to increase in equity resulting from
the operations of the business and not from the
owner’s contribution. Expenses are transactions 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

10. Friendly Convenience Store: Income
1. Recall Maria Reyes, the regular customer of Juana
Dela Cruz. Maria purchased 3 small cans of sardines
that juana sells for P 25 each. Maria asked Juana to
include it in her account. Juana purchased the
sardines from her wholesale supplier at P 15 per can.
2. Recall Pedro Benitez who rented a small space on
store’s countertop for his coffee vending machine.
October 1, 20X1, he paid six months advance rental
P 500 per month.
3. Juana Dela Cruz, owner of the store, deposited P
1,000 to the store’s savings account from her
account.
Which of the above transactions will be reported as Income?

11. 1. Analysis of the transaction with Maria Reyes:
Conclusions: This transaction met the definition of
income. Asset increased by P 30. This increase
resulted from the operations of the store and not
contribution from the owner. Hence, this
transaction should be counted as income.
Decreased in Inventory 3 x 5 P (45.00)
Increase in Accounts
Receivable
3 x 5 75.00
Net effect on total assets P 30. 00

12. 2. As December 31, 20X1, the unearned rent will
have a balance of P 1,500 (P 500x3). Its original
balance is P 3,000 (P 500x6) representing the 6
months advance rent paid by Pedro Benitez.
Liability decreased by P 1,500 which is the rent
from October to December. This met the
definition of Income. A decrease in liability from
the operations of the business.
3. The asset, specifically cash, will increase by
P1,000. However, this is a contribution from the
owner and therefore not reportable in income.

13. ACTIVITY - INCOME
1. Pedro Maglatang, the regular customer of Pepito
Manoloto. Pedro purchased 5 box of detergent
powder with 12 pcs per each box that Pepito sells for
P 12.50 each detergent. Pedro asked Pepito to
it in his account. Pepito purchased the detergent
his wholesale supplier at P 11.00 per detergent.
2. Hanz Montemayor who rented a small space on the
store’s countertop for his soimai stall. On June 1,
2017, he paid six months advance rental of P 350.00
per month.
3. Maritez Hernandez, owner of the shop, deposited P
5,000 to the store’s savings account from her

15. There are two kinds of income – revenue and
gains. Revenues are income generated from
the primary operations of the business. Gains,
on the other hands are income derived from
other activities of the business. Sale
merchandise to Juana’s customers is an
example of revenue. It is because the primary
operation of the store is to sell its inventories.
Interest income from the time deposit is
considered gains and other income and not
revenue.

16. It is because investment in time
deposit is not part of the primary
operations of the store. Classification
of income as to revenue and gains is
dependent on the nature of the
business. For Juana’s store, interest
income is not revenue. However, for a
bank whose primary operation is to
give out loans, interest income is

18. There are two kinds of expenses – expenses
and losses. Expenses are related to the primary
operations of the business. Losses are from
other activities of the business. The cost of the
merchandise sold by Juana’s is part of the
store’s selling activities. Therefore, it is
classified as an expense. Interest expense from
notes payable is not part of the selling
activities of the store. It is classified as losses
and other expenses.

19. Elements of the Statement of
Comprehensive Income
REVENUE
Service Income
The Service Income account is generally used to
describe revenue derived from rendering of
A more specific account name may be used identify
the service rendered such as Rental Income,
Professional Fee and Tuition Fee Revenue.

20. Revenue from services is recognized when they
have already been rendered. However, contract
of services may take a long time to complete.
For example, when you enrolled in high school
sometimes in May or June, you initially signed a
service contract for one school-year (June to
March). The revenue generated from this
enrolment contract may be reported as Tuition
Fee Revenue. If the school follows the calendar
year of reporting, then we will have a problem
because of the misaligned time period.

21. SCHOOL YEAR
June 2016 – March
2017
April – May 2017 June 2017 – March 2018
2016 January 2017 –
December 2017
2018
Figure 2. Misalignment of School Year and Calendar Year
Example: Tuition Fee Revenue
Twinkle-twinkle Pre-School collected tuition
fee of P 1,250,000.00 and P 1,455,000.00 for the
school year 2016-2017 and 2017-2018,
respectively. The school closed in April and May.
Determine the tuition fee revenue to be reported
on SCI for the calendar year 2017

22. ANSWER
School Year 2016-2017 P 1,250,000.00
Number of months from January – March 3
Number of months in one school year 10
Tuition fee revenue for calendar year 2017 P 375,000.00
School Year 2017-2018 P 1,455,000.00
Number of months from June – December
2017
7
Number of months in one school year 10
Tuition fee revenue for calendar year 2017 P 1,018,500.00
Total tuition fee revenue for the CY 2017 P 1,393,500.00

23. 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. When goods are returned, it is
deducted from Sales. Rather, normal accounting
practice is to report it under the account name
Return and Allowances – a Contra Sales Account.

24. Accounts Payable, we mentioned that suppliers give
discounts to their customers to encourage early
payments. We delivered the goods to the buyer and
appropriately recorded Sales Revenue based on full
selling price. We gave the buyer the credit terms of
2/10, n/30. The customer took advantage of the
discount and paid within the ten day discount
period. Accounting practice does not deduct the
paid within the ten day discount period. Accounting
practice does not deduct the discount from Sales
Revenue. Rather, we use another Contra-Sales
account called Sales Discount.

25. Only Net Sales is reported on the face of the SCI.
Net Sales refer to Gross Sales less Sales Return and
Allowances and Sales Discount. (Net Sales = Gross
Sales – Sales Return and Allowances – Sales
Discount)Friendly Convenience Store: Sales Revenue
Juana Dela Cruz, owner of Friendly Convenience Store, sold 3 boxes
of ballpoint pens to Mrs. Susan Gonzales on account at a price of P
150.00 per box of P 15.00 per pen. Juana gave Mrs. Gonzales two
weeks to pay the account. Moreover, Juana told Mrs. Gonzales that
she will deduct 2% discount if she pays within a week.
Mrs. Gonzales returned one week later. She returned five pens
and took advantages of the discount.
Determine the amount of Sales, Sales Return, Sales Discount and
Net Sales from the Transaction with Mrs. Gonzales.

26. ANSWER
Sales 150 x 3 P 450.00
Sales return 15 x 3 (75.00)
Amount to be paid by Mrs. Gonzales before
discount
375.00
Sales discount (375 x 2%) 2% (7.50)
Amount paid by Mrs. Gonzales P 367.50
Alternatively:
Sales P 450.00
Less: Sales returns and
allowances
(75.00)
Less: Sales discount (7.50)
Net sales P 367.50

27. Q
U
I
Z
SALES REVENUE
Motorcycle Enterprise Inc. owned by Mr. Pedro Benitez
sold 2 unit of Motorcycle to Mr. Edwin Gonzales on
account at a price of P 65,450.00 per unit. Mr. P.
Benitez gave Mr. E.Gonzales three weeks to pay the
account. Moreover, Mr. P. Benitez told Mr. E. Gonzales
that he will deduct 2% discount if he pays within a
week.
Mr. Gonzales returned one week later. He returned
one unit and took advantages of the discount.
Determine the amount of Sales, Sales Return, Sales
Discount and Net Sales from the Transaction with Mr.

28. EXPENSES
Cost of Goods Sold (Cost of Sales)
This is an account used by companies that
sells goods instead of services. For trading
operations, Cost of Sales collects the cost of
the merchandise sold. This includes the
purchase price of inventory, brokerage and
shipment cost to bring the goods the
premises of the company. This shipment cost
is called Freight-in.

29. Cost of sales is part of inventory accounting.
Accountants have two ways of keeping records
of inventory – perpetual and periodic inventory
system. Perpetual means that the Inventory and
Cost of Goods Sold accounts are “perpetually”
updated. The inventory account is increased
when goods for sale are acquired and
decreased when goods are sold. The Cos of
Goods Sold account is updated every time a
sale is made.

30. The other method is called periodic inventory
system. The Inventory account is only
“periodically” updated. “Periodically” means
that the inventory account is updated only at
end of the year or end of the month.
What happens when merchandise
are acquired or sold?

31. Cost of merchandise acquired is collected using the
Purchases account. We also introduce two contra-
Purchase accounts: Purchase Returns and
Allowances and Purchase Discount. Returns of
defective goods are reported under Purchase
Returns and Allowances. Discounts taken are
reported under Purchase Discount. “Net purchases”
is equivalent to Purchases plus Freight-In less
Purchase Returns and Purchase Discount (Net
Purchases = Purchases + Freight-In – Purchase
Returns – Purchase Discount). Observe that this is
similar to the accounting practice for sales.

32. 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:
Beginning inventory
Add: Net purchases (Purchases + Freight-In –
Purchase Returns – Purchase Discount)
Cost of Goods available for sale
Less: Ending Inventory
Cost of goods sold

33. Beginning and ending inventory are
determined based on the physical count of
the merchandise owned by the company.
The ending inventory of the prior-period is
also the beginning inventory of the current
period. The “periodic” adjustment updates
the inventory account to bring it to the
balance based on year-end physical count.

34. Based on the inventory count taken at the last day of the
year, the ending inventory is valued at P 2,320. How much is
Friendly Convenience Store: Cost of Goods Sold
Juana Dela Cruz, owner of Friendly Convenience Store,
asked for your help to determine the cost of sales of her
store. This is the first year of operations for Juana’s store.
She provided the following data to you.
Purchases (based on suppliers’ receipts) P 55,344
Freight-In (based on receipts of taxi fares she
incurred when the shops for merchandise at
Divisoria)
430
Purchase Returns 760

35. ANSWER
Beginning inventory (remember this is the store’s
year of operations
P 0
Purchase (based on suppliers’ receipts) P 55,344
Add: Freight-In 430
Less: Purchase returns (760)
Net purchases 55,014
Cost of goods available for sale 55,014
Less: Ending inventory (based on
count)
(2,320)
Cost of goods sold P 52,694

36. EXPENSES
Operating Expenses
It refers to all other expenses related to
the operation of the business, other than
cost of sales. These include salaries of
employees, supplies, utilities (electricity,
telephone and water bills), gasoline
expense, representation, bad debts
expense, depreciation and amortization.

37. Bad debt expense is an operating expense
related to accounts receivable. It is an
estimated expense. Recall from Chapter 1,
Accounts Receivable is the right to collect
payment from customers. However, some
accounts become uncollectible. The accounting
rule is:
1. To periodically analyze the collectability of
Account Receivable and;
2. To immediately charge to expense the
amount deemed uncollectible.

38. We will refer to this account as bad debts
expense. We will try our best to estimate
bad debts expense using percentage of
sales. This method requires the
determination of the historical relationship
between bad debts and sales (or credit
sales). We now apply this historical
relationship to current year sales in order to
determine bad debts expense.

39. Friendly Convenience Store: Bad debts expense
Current year sales of the store amounted to P
128,865. Of this, only P 70,000 is cash sales. Based
on the company’s experience, bad debts is 3% of
total sales or 6.5% of credit sales. Determine bad
debts expense given the following:
1.Juana Dela Cruz, the manager-owner decided
use percentage of total sales method.
2.Juana Dela Cruz, the manager-owner decided
use percentage of credit sales method.

40. ANSWER
3% of Total
sales
6.5% of credit
sales
Total sales P 128,865
Total credit sales P 58,865
Historical experience 3% 6.5%
Bad debts expense 3,866 3,826
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 borrowing and gain or loss
from sale of equipment (proceeds from sale less net book value of

42. There are two formats for the SCI, namely,
the Single-step and the Multi-step. The
Single-step is closely related to the nature
of expense format. On the other hand, the
Multi-step approach is also associated with
the function of expense.

43. The single-step SCI groups all revenue items
together and all expense items together. It is called a
single-step SCI because net income is computed using
only one step, deducting total expenses from total
revenue. Subtotal are not computed and presented on
the SCI. This format is generally used by small
businesses and service businesses because of its
simplicity.
The single-step SCI is also closely linked to the
nature of expense format. It lists down the expenses
based on the sources of expenses such as salaries,

44. Let us focus on
the adjustment
for increase in
inventory.
Why is this important? Look at the list
of expenses. Included in this list is Net
Purchases which means it was fully
deducted as an expenses.
However, due to the
existence of ending
inventory, we know that
not all current year
purchases were sold.

45. Therefore, we need an inventory
adjustment to convert net purchases to
cost of goods sold.
When ending inventory is greater than
beginning inventory, not all of the current
year purchases were sold. This only means
that the excess of ending inventory over
beginning inventory is from the unsold
current year purchases. We know that we
have an over-deduction of expenses
because all Net Purchases were deducted
without taking into consideration the unsold
current year purchases.
Let us analyse
the adjustment
needed for this
conversion:

46. 6/13/2017
Fundamentals of Accountancy, Business, and Management
2 Edmer M.
Constantino
46