“The best and safest thing is to keep a balance in your life,

acknowledge the great powers around us and in us. If you can do

that, and live that way, you are really a wise man.”

3.2 Profit or Loss Section or Statement

 section of the Statement of *Profit or Loss and **Other Comprehensive Income
 shows an amount which is a portion of the ***Total Comprehensive Income

* total of income less expenses, excluding the components of other comprehensive income

All items of income and expense recognised in a period must be included in profit
or loss unless a Standard or an Interpretation requires otherwise.

** comprising "items of income and expense (including reclassification adjustments) that

are not recognised in profit or loss as required or permitted by other PFRSs"

Some PFRSs require or permit that some components to be excluded from profit
or loss and instead to be included in other comprehensive income.

Examples of items recognised outside of profit or loss:

 Changes in revaluation surplus where the revaluation method is used under PAS 16
Property, Plant and Equipment and PAS 38 Intangible Assets

 Remeasurements of a net defined benefit liability or asset recognised in accordance

with PAS 19 Employee Benefits (2011)

 Exchange differences from translating functional currencies into presentation currency

in accordance with PAS 21 The Effects of Changes in Foreign Exchange Rates

 Gains and losses on remeasuring available-for-sale financial assets in accordance with

PAS 39 Financial Instruments: Recognition and Measurement

 The effective portion of gains and losses on hedging instruments in a cash flow hedge
under PAS 39 or PFRS 9 Financial Instruments

 Gains and losses on remeasuring an investment in equity instruments where the entity
has elected to present them in other comprehensive income in accordance with PFRS 9

 The effects of changes in the credit risk of a financial liability designated as at fair value
through profit and loss under PFRS 9

 In addition, PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

requires the correction of errors and the effect of changes in accounting policies to be
recognised outside profit or loss for the current period. [PAS 1.89]

1
 *** "the change in equity during a period resulting from transactions and other events,
other than those changes resulting from transactions with owners in their capacity as
owners (for example, share issuances and dividend distributions)"

A significant part of the current accounting theory focuses on the measurement

of profit. It has remained to be of great importance to the majority of financial
statement users because profit or loss is considered the most important
measure of an entity’s performance. The evolving needs of users for financial
information extend to the evaluation of overall financial performance of an
entity or the result of its operation. Therefore, the concept of COMPREHENSIVE
INCOME is adopted for financial reporting purposes.

3.2.1 Presentation “Excellence is not a skill. It is an attitude.”

An entity has a choice of presenting:

 a single statement of profit or loss and other comprehensive income, with profit or loss
and other comprehensive income presented in two sections, or

 two statements:
1. a separate statement of profit or loss
2. a statement of comprehensive income, immediately following the statement of
profit or loss and beginning with profit or loss [PAS 1.10A]

The statement(s) must present: [PAS 1.81A]

1. profit or loss
2. total other comprehensive income
3. comprehensive income for the period
4. an allocation of profit or loss and comprehensive income for the period between non-
controlling interests and owners of the parent

The following minimum line items must be presented in the profit or loss section (or
separate statement of profit or loss, if presented): [PAS 1.82-82A]

1. Revenue
2. gains and losses from the derecognition of financial assets measured at amortised cost
3. finance costs
4. share of the profit or loss of associates and joint ventures accounted for using the equity
method certain gains or losses associated with the reclassification of financial assets
5. tax expense
6. a single amount for the total of discontinued items

2
Approaches to Measurement of Profit
1. Capital Maintenance Approach
 measures profit or net income as the excess of ending capital over the beginning capital,
after excluding the effects of transactions with owners
 has 2 concepts:
a. Financial Capital Maintenance Concept
 A profit is earned only if the financial (or money) amount of the net assets at
the end of the period exceeds the financial (or money) amount of the net
assets at the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period.

 does not require any particular basis of measurement

 Net assets are simply measured as assets minus liabilities, using appropriate
measurement bases, in applicable PFRSs.

To illustrate, assume that a corporation has net assets of P600,000 and

P1,000,000 at the beginning and end of the year, respectively. Assume
further that there are no additional investments or dividend declaration
during the same period.

Based on the comparison of the ending and beginning net assets, the
corporation could pay out P400,000 to shareholders and still be as well off
at year end. P400,000 is the corporate profit for the year.

Assume, however, that dividends of P85,000 were declared and an additional

capital investment P110,000 was made by the shareholders during the year.
The profit of the corporation for the year is P375,000 (P1,000,000Capital,
end. - P600,000Capital, beg. + P85,000Dividend - P110,000Additional Investment).

Dividends declared are added back to, and additional investments are
deducted from the change in capital from beginning to end of the period so
as to eliminate the effect of these changes in capital.

Unfortunately, this profit information is not very useful to many interested

users. No breakdown is presented that identifies the causal relationships
and operating activities that account for the various items comprising this
aggregated profit amount. Because of the missing link between the
information provided and the users’ understanding, this concept is not
generally used for financial reporting purposes.

b. Physical Capital Maintenance Concept

 A profit is earned only if the physical productive capacity (or operating
capability) of the enterprise at the end of the period exceeds the physical
productive capacity at the beginning of the period after excluding any
distributions to, and contributions from, owners during the period.

 Requires the adoption of the current cost basis of measurement

3
2. Transaction Approach
 Profit is measured as the difference between the total income and total expenses for a given
reporting period, based on transactions of the enterprise. (Profit = Income – Expenses)

 applied using the accrual basis of accounting

 detailed classification of profit into revenues and gains and classification of expenses
into expenses and losses

 helps users better assess the future performance of the entity and its ability to generate
cash flows

 Expenses recognised in profit or loss should be analysed either:

 by nature (raw materials, staffing costs, depreciation, etc.) or

 *by function (cost of sales, selling, administrative, etc). [PAS 1.99]

*If an entity categorises by function, then additional information on the nature of
expenses – at a minimum depreciation, amortisation and employee benefits
expense – must be disclosed. [PAS 1.104]

a. Nature of Expense Method (with illustration)

 considers the characteristic of the expense, not its use

 shows expenses as Purchases, Salaries and Wages, Depreciation, Utilities and

other Operating Expenses

 does not show Cost of Goods Sold as a line item

 The increase or decrease in inventory from beginning to the end of the

period is shown as a deduction adjustment and addition adjustment to
net purchase, respectively.
STAYHOME Corp.
Income Statement
For the Year Ended December 31, 2019

Net sales revenue P xx

Other operating income xx
Net purchases (xx)
Change in merchandise inventory xx
Freight out (xx)
Staff (employee) benefits (xx)
Depreciation and amortization (xx)
Taxes and licenses (xx)
Bad debts expense (xx)
Other operating expenses (xx)
Income from operations P xx
Finance costs (xx)
Income from associates xx
Profit before income tax P xx
Income tax expense (xx)
Profit for the year P xx

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b. Function of Expense or Cost of Sales Method (with illustration)
 Expenses are classified according to their function in the enterprise operations:
 Cost of sales,
 Distribution or selling expenses – directly related to sales efforts
 Advertising and promotions
 Salesmen’s salaries and commissions
 Delivery expense
 Shipping supplies
 Depreciation of delivery equipment
 Store equipment
 General or administrative expenses – incurred in the administration and
general operations of the business
 Officers and office salaries
 Bad debts expense
 Office supplies used
 Expenses of accounting and credit and collection departments
 Certain taxes
 Depreciation of office equipment
 Other expenses – expenses and losses not appropriately classified as cost of
sales, selling expenses or general and administrative expenses

 Often provides more relevant information to users than the classification of

expenses by nature, but the allocation of costs to functions can be arbitrary and
involves considerable judgement. (par. 103, PAS 1)
STAYHOME Corp.
Income Statement
For the Year Ended December 31, 2019

Net sales revenue P xx

Cost of goods sold (xx)
Gross profit xx
Other operating income xx
Selling expenses (xx)
Administrative expenses (xx)
Other operating expenses (xx)
Income from operations P xx
Finance costs (xx)
Income from associates P xx
Profit before income tax P xx
Income tax expense (xx)
Profit for the year P xx

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 Cost of Goods Sold
Merchandising (uses Periodic Inventory Manufacturing (uses Perpetual Inventory
System) System)
Merchandise Inventory, beginning xx Direct materials used xx
Add net purchases xx Direct labor xx
Cost of goods available for sale xx Manufacturing overhead xx
Less merchandise inventory, ending xx Total manufacturing costs xx
Cost of Goods sold xx Work in process inventory, beginning xx
Work in process inventory, ending (xx)
Cost of goods manufactured xx
Finished goods inventory, beginning xx
Finished goods inventory, ending (xx)
Cost of goods sold xx

The above computations may be presented as separate schedules in the notes to the financial
statements.

Note:
Kindly check out your study planner. To indicate that you have finished grasping the key points at
this part of the module, tick on the checklist for Profit or Loss Statement.

Self-Check
Prepare Profit or Loss Statements for STAYHOME, Inc. for the year ended December 31, 2019
using both Nature and Function of Expense Methods with supporting notes. Assume a 30% tax
rate.
Sales P 7,800,000
Sales discounts 240,000
Sales returns 60,000
Purchases 5,200,000
Purchase discounts 140,000
Purchase returns 480,000
Freight in 50,000
Rent revenue 300,000
Dividend revenue 200,000
Interest expense 125,000
Income from Associates 225,000
Loss from Earthquake 85,000
Inventory, January 1 1,000,000
Inventory, December 31 1,400,000
Freight out 160,000
Salesmen’s commissions 640,000
Depreciation – store 140,000
Officers’ salaries 500,000
Depreciation – office 300,000
Income tax expense 640,000
Loss on equipment 55,000
Loss on sale of financial assets through profit or loss 75,000
Loss on expropriation of land 90,000

Refer to the Answer Key for the answer.

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 ANSWERS KEY

Unit 3: Philippine Accounting Standards 1

STAYHOME INC.

Nature of Expense Method

STAYHOME, Inc.
Statement of Profit or Losss
For the Year Ended December 31, 2019
Notes
Net sales revenue (11) P 7,500,000
Other operating income (12) 500,000
Net purchases (13) (4,630,000)
Increase in inventory (14) 400,000
Freight out (160,000)
Salesmen’s commissions (640,000)
Depreciation (15) (440,000)
Officers’ salaries (500,000)
Other operating expenses (16) (440,000)
Income from operations P 1,725,000
Finance costs (125,000)
Income from associates 225,000
Profit before income tax P1,825,000
Income tax expense (547,500)
Profit for the year P1,277,500

Note 11 – Net sale revenue

Sales P 7,800,000
Sales discounts (240,000)
Sales returns (60,000)
Net sales revenue P 7,500,000

Note 12 – Other operating invome

Rent revenue P 300,000

Dividend revenue 200,000
Total other operating income P500,000
Note 13 – Net purchases

Purchases
P 5,200,000
Freight in
50,000
Purchase discounts
(140,000)
Purchase returns
Net purchases (480,000)
P 4,630,000

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Note 14 – Increase in inventory
P 1,400,000
Inventory, December 31 1,000,000
Inventory, January 1 P 400,000
Increase in inventory

Note 15 – Depreciation expense

P 140,000
Depreciation – store 300,000
Depreciation – office P 440,000
Total depreciation expense

Note 16 – Other operating expenses

P 85,000
Casualty loss from earthquake
90,000
Loss on expropriation of land
55,000
Loss on sale of equipment
75,000
Loss on sale of financial assets through profit or loss
Total other operating expenses P 305,000

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Function of Expense Method
STAYHOME, Inc.
Statement of Profit or Loss
For the Year Ended December 31, 2019
Notes
Net sales revenue (11) P 7,500,000
Cost of goods sold (12) (4,230,000)
Gross profit 3,270,000
Other operating income (13) 500,000
Selling expenses (14) (940,000)
Administrative expenses (15) (800,000)
Other operating expenses (16) (305,000)
Income from operations P 1,725,000
Finance costs (P 125,000)
Income from associates 225,000
Profit before income tax P1,825,000
Income tax expense (P547,500)
Profit for the year
P 1, 277,500

Note 11 – Net sale revenue

Sales P 7,800,000
Sales discounts (240,000)
Sales returns (60,000)
Net sales revenue P 7,500,000

Note 12 – Cost of goods sold

Inventory, January 1 P 1,000,000

Purchases P 5,200,000
Freight in 50,000
Total P 5,250,000
Purchase discounts (140,000) 4,630,000
Purchase returns (480,000) 5,630,000
Cost of goods available for sale (1,400,000)
Inventory, December 31
P 4,230,000
Cost of goods sold

Note 13 – Other operating income

Rent revenue
Dividend revenue P 300,000
Total other operating income 200,000
P500,000
Note 14 – Selling expenses

Freight out
Salesmen’s commissions P 160,000
Depreciation – store 640,000
Total selling expenses 140,000
P 940,000

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Note 15 – Administrative expenses

Officers’ salaries P 500,000

Depreciation – office 300,000
Total administrative expenses P 800,000

Note 16 – Other operating expenses

Casualty loss from earthquake P 85,000

Loss on expropriation of land 90,000
Loss on sale of equipment 55,000
Loss on sale of financial assets through profit or loss 75,000
Total other operating expenses P 305,000

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