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Lesson 2: Statement of Comprehensive Income

Statement of Comprehensive Income is a statement that reports the results of operations of the
business for once accounting period. This statement contains the following information:

a. Revenue generated by operating the business;

b. Cost spent to generate the revenue; and
c. Income, which is the excess of revenue over costs.

For our purposes, the SCI is the same as the Income Statement. The different between the SCI and the
income statements is beyond the scope of high school accounting and will be discussed more in
advanced accounting subjects.

The SCI is described as a “for a period” report. This means that the amount 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 31, 20X1”. This means that the reported revenue of P1.29 Milon was
generated from January 1, 20X1 to December 31, 20X1. Revenues generated in 20X0 or 20X2 were not
counted in this particular report.

ABC Company
Statement of Comprehensive Income
For the year ended December 31, 2019

Revenues 1,290,000
Expense 890,000
Net Income 400,000

Financial statements are set of interconnected reports. SCI is prepared first. The bottom line the SCI is
net income (Figure 1)'. 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 (P). 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 equity.

Below are the key features of a statement of comprehensive income.

1. The Title
The Statement of Comprehensive Income is a financial report, As a financial report, it must be properly
identified and dated. The appropriate title of the statement will enable the users to differentiate the
statement of comprehensive income from the other financial reports issued by the entity.

An appropriate title or heading includes the name of the entity, the title of the report (i.e., statement of
comprehensive income) and the period it covers.

2. Revenues

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Revenues are defined by The Conceptual Frameworks for Financial Reporting as (International
Accounting Standards Board 2010):
“Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of
different names including sales, fees, interests, dividends, royalties and rent."

Revenues are the first line item in the statement of comprehensive income. Revenues earned by the
business vary according to the nature of the entity. A small retail store will have sales as its main
revenue. A small law firm, on the other hand, will have professional fees as its main revenue. Also,
revenues may come from interests and dividends are earned on financial instruments such as time
deposits and equity shares, respectively. Furthermore, certain entities may charge royalties from
individuals who would like to use their established brand and technology. Finally, owners of fixed
properties (e-g., land and building) may charge third parties with rent.
Smaller and less complex entities will have one or two sources of revenue. Larger and more complex
entities, on the other hand, will have multiple sources of revenues. Finally, remember that revenues are
recorded when earned rather when the related cash is received.

3. Expenses
Expenses are defined by The Conceptual Frameworks for Financial Reporting (International Accounting
Standards Board 2010):
“Arising in the course of the ordinary activities of the entity include, for example, cost of sales, wages and
depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash
equivalents, inventory, property, plant and equipment."

Revenues earned by businesses are matched with expenses. For service entities, expenses are usually
categorized as cost of services or operating expenses. In the case of a law firm, costs of services include
the salaries paid to lawyers who render services to legal clients in behalf of the law firm. Operating
expenses, on the other hand, include rent for office space, salaries for office staff, permits paid to local
government units, depreciation of office equipment and other similar expenses. As one can notice, costs
of services are more related to revenues.

Classifying expenses for merchandising concern is more complex than that in a service concern. For a
merchandising concern, the expenses are classified as either cost of sales, selling expenses or
administrative (operating) expenses. The cost of sales is the amount paid or payable by the business
entity to its suppliers for the merchandise sold to the business entity's customers. Cost of sales will take
a general formula as seen below:

Beginning Inventory xx
Add: Net Purchases xx
Total Goods available for sales xx
Less: Ending Inventory xx
Cost of Sales xx

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Beginning inventory is the stock of goods carried over from prior reporting period. For example, for
December 31, 2017, the beginning inventory is the ending inventory from December 31, 2016.
Remember that as real accounts, ending inventory balances are carried over to the subsequent year.
Net purchase for the year is the total amount paid or payable to suppliers for the period. Net purchases
follow a formula as shown below:
Gross Purchases xx
Less: Purchase discount xx
Less: Purchase returns and allowances xx
Add: Freight in xx
Net Purchases xx

Gross purchases are the general ledger balance of the purchases account for the period. Purchase
discounts are usually granted by suppliers to buyers to encourage prompt payment of latter's account.
Also, some suppliers may grant purchase returns and allowances for merchandise purchased which
does not meet the original specification of the buyer.
Finally, freight in are necessary expenses incurred in the purchase of merchandise. Freight in are
expenses incurred in order to transport the merchandise to the place of buyer. Recall from your
previous bookkeeping course that adjustments are made for ending inventory. Typically, entities
conduct a year-end inventory count to ascertain the balance of the ending inventory. The balance of the
inventory is deducted to the total goods available for sale to arrive at the cost of sales.

After costs of sales, another cost classification for merchandising concerns is selling expenses. Selling
expenses are incurred in accordance with the disposition of the merchandise to the customers.
Examples of selling expenses are commissions paid to salesmen, salaries of sales staff and delivery
expenses.

Aside from the cost of sales and selling expenses, businesses also incur operating expenses. Operating
expenses are also called general and administrative expenses. Expenses under this type are those which
are not covered in the previous expense types.
Examples are:
 general depreciation expenses,
 general rent expenses
 office salaries and
 taxes and licenses.
These classifications discussed above are based on the function of the expenses. These classifications
may answer the question "How are they related to the normal operations of the business". In other
words, these classifications are made by relating the said expenses to the major source of revenue (e.g,
the "function" of the cost of sale is to match such costs directly to the related sales).

Expenses can also be classified by nature. When an expense is classified by nature, the classification
answers the question "What are these expenses?" Common examples of expense by nature are salaries

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and depreciation. An expense classified by nature may still be classified by function. For example, the
salaries expense can still be broken down to selling expenses (salaries of sales personnel) and
administrative expenses (salaries of office personnel).

4. Gains and Losses

Gains are defined by The Conceptual Frameworks for Financial Reporting (International Accounting
Standards Board 2010):
“represent other items that meet the definition of income and may, or may not, arise in the course of the
ordinary activities of an entity."
To reiterate, gains are incidental to the operations of a business. For example, if a law firm sells its office
printer for P5,000 when the carrying amount of the printer is P4,000, a gain amounting to P1,000 must
be recorded. It must be noted that the said amount cannot be classified as revenue since the revenue of
a law firm pertains to professional fees earned for the period. One does not expect a law firm to
continuously sell its non-current assets. The resulting income from this transaction is therefore classified
as a gain rather than revenue.
Losses, on the other hand, are defined as follows (International Accounting Standards Board 2010):
"represent other items that meet the definition of expenses and may, or may not, arise in the course of
the ordinary activities of the entity”.
One can say that a loss is to an expense as a gain is to as revenue. Generally, a loss is not expected to be
incurred periodically by business organizations. For example, if a law firm sells for P1,000 an office
printer with a book value of P3,500, a loss of P2,500. The said amount cannot be categorized as an
expense (specific) since such is not expected to occur routinely and normally.

5. Other Items
Other items included in the computation of the total comprehensive are income taxes and items of
other comprehensive income. Income tax is the sum of money payable to the government. Items of
other comprehensive income are increases or decreases in economic benefit to a period. However,
accounting standards prohibits business organizations in including these items in the computation of
profit or loss. These items however, are included in computing the total comprehensive income.

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Preparing a Statement of Comprehensive Income for A Merchandising Concern

Refer to the partial trial balance of Best Shirts below:

BEST SHIRTS
Partial Trial Balance
December 31, 2015
Account Debit Credit
Inventory, 1/1/2015 2,000,000
Sales 15,000,000
Sales Return and Allowances 10,000
Sales discount 120,000
Purchases 8,000,000
Freight-in 200,000
Freight-out 500,000
Purchases Discounts 100,000
Purchases Return and Allowances 10,000
Salaries Expense 1,000,000
Rent Expense 500,000
Utilities 240,000
Permit and Licenses 10,000
Repairs and Maintenance 100,000
Depreciation 120,000

Best Shirts Co. buys t-shirts from various suppliers and re-sells them at a margin. You are tasked to make
a statement of comprehensive income. Ignore the effect of income taxes. Inventory based on a year-end
count on December 31, 2015, amounts to P1,750,000.
It is determined that salaries, rent, utilities and depreciation expenses pertain to selling (20%) and
administrative functions (80%). The entity elects to use the function of expense format.
1. Determine the Revenues
Since the entity is a merchandising concern, its revenue will come from sales. The revenue to be
presented in the statement of comprehensive income must be net of any deductions. In the case of Best
Shirts, sales must be presented net of the discounts, returns and allowances. Refer to the partially
completed statements below:

Best Shirts
Supporting Schedules
For the Year Ended December 31, 2015

Note 1 - Net Sales

Sales 15,000,000
Less: Sales Discount (120,000)
Sales Returns and Allowance (10,000)
Prepared by: Ma. Isabel Abellon, CPA
Net Sales 14,870,000
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Contra Revenue Account:

Sales returns – occur when customers return their products for reasons such as but not limited
to defects or change of preference.
Sales discount – Also known as cash discount. This is different from trade discounts which are
given when customers buy in bulk. Sales discount is awarded to customers who pay earlier or
before the deadline.

2. Determine the Net Purchases, Cost of Sales and Gross Profit Based on the given data from the partial
trial balance, net purchases must first be determined. Below is a schedule of net purchases following the
discussed cost formula in the previous section:

Note 2 - Net Purchases

Purchases 8,000,000
Add: Freight-in 200,000
Less: Purchase discount (100,000)
Purchase Returns and allowances (10,000)
Net Purchases 8,090,000

Note that there is a difference between freight-in and freight-out. Freight-in denotes charges pertaining
to the receipt or purchase ot goods (hence the preposition "in"). Freight-in is accounted for as an
addition to purchases. Freight-out, on the other hand, pertains to the delivery of costs of goods sold.
Freight-out is treated as a selling expense.
Contra-purchase account
Purchase discount – Account used to record early payments by the company to the suppliers of
merchandise.
This is how buyers see a sales discount given to them by a supplier.
Purchase returns – Account used to record merchandise returned by the company to their
suppliers. This is how buyers see a sales return recorded by their supplier

Now that net purchase has been determined, the cost of sales can now be computed. Applying the cost
formula in the previous section, the cost of sales is shown below:
Note 3 - Cost of Sales
Inventory, 1/1/2015 2,000,000
Add: Net Purchases (Note 1) 8,090,000
Total Goods Available for Sales 10,090,000
Less: Inventory, 12/31/2015 1,750,000
Cost of Sales 8,340,000

After determining the cost of sales, the said amount should now be placed in the partial statement of
comprehensive income, as shown on the below:

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Best Shirts
Statement of Comprehensive Income
For the Year Ended December 31, 2015

Net Sales (Note 1) 14,870,000

Cost of sales (Note 3) 8,340,000
Gross Profit 6,530,000

Gross profit is computed as the difference between the net sales and cost of sales. In case the cost of
sales are larger than net sales, such amount is called gross loss.

3. Determine the Selling Expenses

As discussed above, salaries, rent, utilities and depreciation expenses pertain to both selling and
administrative expenses. One should now appropriately allocate them based on the given percentage of
80% (administrative) and 20% (selling). Refer to the allocation schedule at the next page:
Allocation of Expense
Nature Total Selling (20%) Administrative (80%)
Salaries Expense 1,000,000 200,000 800,000
Rent Expense 500,000 100,000 400,000
Utilities 240,000 48,000 192,000
Depreciation 120,000 24,000 96,000

After such allocation, selling expense can now be determined. Refer to the schedule below:
Note 4 - Selling Expense
Freight out 500,000
Salaries Expense 200,000
Rent Expense 100,000
Utilities 48,000
Depreciation 24,000
Selling Expense 872,000

4. Determine the Administrative Expense

Finally, administrative expense can now be determined below:

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Note 5 - Administrative Expense

Salaries Expense 800,000
Rent Expense 400,000
Utilities 192,000
Repairs and Maintenance 100,000
Depreciation 96,000
Permit and Licenses 10,000
Administrative Expense 1,598,000

5. Determine the Net Income

Since the case above does not include gains, losses and other comprehensive income, net income is
equal to total comprehensive income.
Best Shirts
Statement of Comprehensive Income
For the Year Ended December 31, 2015

Net Sales (Note 1) 14,870,000

Cost of Sales (Note 3) 8,340,000
Gross Profit 6,530,000
Selling Expense (Note 4) 872,000
Presentation of Administrative Expense (Note 5) 1,598,000 Statement
of Comprehensive Net Income/Total Comprehensive Income 4,060,000 Income
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.

Single-Step Statement of Comprehensive Income

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
revenues. 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 source of expenses such as salaries, purchases, supplies, utilities, fuel and depreciation.

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Best Shirts
Statement of Comprehensive Income
For the Year Ended December 31, 2015

Net Sales 14,870,000

Increase in inventory (250,000)
Total Revenues and income 14,620,000
Less: Expenses:
Net purchases 8,090,000
Freight out 500,000
Depreciation 120,000
Utilities 240,000
Salaries 1,000,000
Rent Expense 500,000
Permit and Licenses 10,000
Repairs and Maintenance 100,000
Total Expenses 10,560,000
Net Income 4,060,000
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 expense.
However, due to the existence of ending inventory, we know that not all current year purchases were
sold. Therefore, we need an inventory adjustment to convert net purchases to cost of goods sold.
Let us analyze the adjustment needed for this conversion: 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 portion of the current year purchases. This caused the Net Income to be
understated. To correct this, the increase in inventory should be added back to arrive at the corrected
Net Income. How about if there was a decrease in Inventory Ending inventory is less than beginning
inventory if all the current year purchases were sola as well as some of the beginning inventory. This
time, there was an under deduction of expenses because only the current year purchases were
subtracted from the Net Income. This caused an overstatement in the Net income and therefore, the
sold portion of the beginning inventory should be deducted.

Multi-step Statement of Comprehensive Income

The multi-step SCI is characterized by presentation of several subtotals until net income is determined.
The multi-step SCI is more popularly used in business.
The multi-step approach is also associated with the function of expense format. The function of
expense 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

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refer to those incurred in the daily operations and management of the business. On the other hand,
Selling Expenses are costs related to marketing, selling and distributing the company's merchandise.

Best Shirts
Statement of Comprehensive Income
For the Year Ended December 31, 2015

Sales 15,000,000
Less: Sales Discount (120,000)
Sales Returns and Allowance (10,000)
Net Sales 14,870,000

Inventory, 1/1/2015 2,000,000

Add: Net Purchases (Note 1) 8,090,000
Total Goods Available for Sales 10,090,000
Less: Inventory, 12/31/2015 1,750,000
Cost of Sales 8,340,000
Gross Profit 6,530,000

Operating Expense:
General and administrative Expense
Salaries Expense 800,000
Rent Expense 400,000
Utilities 192,000
Repairs and Maintenance 100,000
Depreciation 96,000
Permit and Licenses 10,000 1,598,000
Selling Expense
Freight out 500,000
Salaries Expense 200,000
Rent Expense 100,000
Utilities 48,000
Depreciation 24,000 872,000
Net Income/Total Comprehensive Income 4,060,000

Prepared by: Ma. Isabel Abellon, CPA