CHAPTER 6

STATEMENT OF COMPREHENSIVE INCOME

AN INTRODUCTION

TECHNICAL KNOWLEDGE 

 To understand the objective and usefulness of an income statement. 

 To understand the concept of comprehensive income, profit or loss and other comprehensive
income. 
 To identify the components of other comprehensive income. 
 To understand the subsequent ‘reclassification of the components of other comprehensive income. 
 To know the minimum line items in the statement of comprehensive income.
 To know the natural and functional presentation of the income statement.
 To be able to prepare and present a separate income statement and a single statement of
comprehensive income.

DEFINITION

 An income statement a formal statement showing the financial performance of an entity for a given
period of time. 
 The financial performance of an entity is primarily measured’ in terms of the level of income earned
by the entity through the effective and efficient utilization of its resources. 
 The financial performance is also known as the results of Operations of the entity. 
 The income statement for a period presents the income, Expenses, gains, losses and net income or
loss recognized during the period.
 Information about financial performance is useful in Predicting future performance and ability to
generate future cash flows. 

COMPREHENSIVE INCOME

 Comprehensive income 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.

Accordingly, comprehensive income includes:

a. Components of profit or loss 
b. Components of other comprehensive income 

PROFIT OR LOSS

 The term "profit or loss" is the total of income less expenses, excluding the components of other
comprehensive income. 
 In other words, this is the "bottom line" in the traditional income statement. An entity may use "net
income" or "net loss" to describe profit or loss. 

OTHER COMPREHENSIVE INCOME (OCI)

 Other comprehensive income comprises items of income and expenses including reclassification
adjustments that are not recognized in profit or loss as required or permitted by Philippine Financial
Reporting Standards.

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The components of “other comprehensive income” include the following: 
1. Unrealized gain or loss on equity investment measured at fair value through other comprehensive
income  
2. Unrealized gain or loss on debt investment measured at fair value through other comprehensive
income. 
3. Gain or loss from translation of the financial statements of a foreign operation 
4. Revaluation surplus during the year. 
5. Unrealized gain or loss from derivative contracts designated as cash flow hedge 
6. "Remeasurements" of defined benefit plan, including actuarial gain or loss 
7. Change in fair value attributable to credit risk of a financial liability designated at fair value through
profit or loss. 

PRENSENTATION OF OTHER COMPREHENSIVE INCOME

 PAS 1, paragraph 82A, provides that the statement of comprehensive income shall present line items
for amounts of other comprehensive income during the period classified by nature. 

The line items for amounts of OCI shall be grouped as follows: 

a. OCI that will be reclassified subsequently to profit or loss when specific conditions are met. 
b. OCI that will not be reclassified subsequently to profit or loss.

Components of OCI that will be reclassified subsequently, to profit or loss include: 

a. Unrealized gain or loas on debt investment measured at fair value through other comprehensive
income.
b. Gain or loss from translating financial statements of a foreign operation. 
c. Unrealized gain or loss on derivative contracts designate as cash flow hedge.

Components of OCI that will not be reclassified Subsequently to profit or loss include:
a. Unrealized gain or loss on equity investment measured at fair value through other comprehensive
income. 
The Application Guidance of PFRS 9, paragraph B5.7.1, provides that such unrealized gain or loss is
reclassified to retained earnings upon disposal of the investment. 

b. Revaluation surplus during the year 

The realization of the revaluation surplus is through retained earnings. 

c. Remeasurements of defined benefit plan, including actuarial gain or loss. 

The remeasurements are not reclassified subsequently but are permanently excluded from profit or
loss. 
However, the remeasurements may be transferred within equity or retained earnings. 

d. Change in fair value attributable to credit risk of a financial liability designated at fair value through
profit or loss. 
Such gain or loss from change in fair value attributable to credit risk of a financial liability may be
transferred within equity or retained earnings.

PRESENTATION OF COMPREHENSIVE INCOME

An entity has two options of presenting comprehensive income namely:

1. Two statements:
a. An income statement showing the components of profit or loss.

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b. A statement of comprehensive income beginning with profit or loss as shown in the income statement
plus or minus the components of other comprehensive income. 

2. Single statement of comprehensive income:

− This is the combined statement showing the components of profit or loss and components of other
comprehensive income in a single statement. 

SOURCES OF INCOME

a. Sales 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. 

b. Rendering of services
Income from rendering of services, among others, includes professional fees, media advertising
commissions, insurance agency commissions, admission fees for artistic performance and tuition
fees. 

c. Use of entity resources 

This income category includes interest, rent, royalty and dividend income.

d. Disposal of resources other than products Examples include gain on sale of investments, gain on sale
of property, plant and equipment and gain on sale of intangible assets. 

COMPONENTS OF EXPENSE

a. Cost of goods sold or cost of sales

b. Distribution costs or selling expense
c. Administrative expense
d. Other expenses
e. Income tax expense

Beginning inventory 500,000

Net purchases 2,000,000

Goods available for sale 2,500,000

Ending inventory (300,000)

Cost of good sales 2,200,000

COST OF GOODS OF MERCHANDISING CONCERN

Gross Purchases 1,900,000

Freight in 150,000

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 Total 2,050,000

Purchase returns, allowances and discounts (50,000)

Net Purchases 2,000,000

COST OF GOODS SOLD OF MANUFACTURING CONCERN

Beginning raw materials 500,000

Net Purchases 2,000,000

Raw materials available for use 2,500,000

Ending raw materials ( 300,000 )

Raw material used 2,200,000

Direct labor 3,000,000
Factory overhead 1,300,000

Total manufacturing cost 6,500,000

Beginning goods in process 900,000

Total cost of goods in process 7,400,000

Ending goods in process (1,000,000)

Cost of goods manufactured 6,400,000

Beginning finished goods 1,600,000

Goods available for sale 8,000,000

Ending finished goods (1,500,000)

Cost of goods sold 6,500,000

CLASSIFICATION OF EXPENSES

 Distribution costs constitute costs which are directly related jo selling, advertising and delivery of
goods to customers. 

Distribution costs ordinarily include: 

a. Salesmen’s salaries
b. Salesmen's commissions. 
c. Traveling and marketing expenses 
d. Advertising and publicity 
e. Freight out
f. Depreciation of delivery equipment and store equipment 

 Administrative expenses constitute cost of administering the business.

 Administrative expenses ordinarily include all operating expenses not related to selling and cost of
goods sold. 
examples include: 
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 a. Doubtful accounts
b. Office salaries 
c. Expenses of general executives
d. Expenses of general accounting and credit department 
e. Office supplies used 
f. Certain taxes 
g. Contribution 
h. Professional fees 
i. Depreciation of office building and office equipment  
j. Amortization of intangible assets 

 Other expenses are those expenses which are not directly related to the selling and administrative
function. 
Examples include:
a. Loss on sale of trading investments 
b. Loss on disposal of property, plant and equipment
c. Loss on sale of noncurrent investment 
d. Casualty loss — flood, earthquake, fire  

NO MORE EXTRAORDINARY ITEMS

 PAS 1, paragraph 87, specifically mandates that an entity shall not present any items of income and
expense a extraordinary items, either on the face of the income, Statement or statement of
comprehensive income or in the notes.

LINE ITEMS
PAS 1, paragraph 82, provides that as a minimum, the income Statement and statement of comprehensive
income shall include the following line items:
a. Revenue
b. Gain and loss from the derecognition of financial asset measured at amortized cost as required by
PFRS 9.
c. Finance cost 
d. Share in income or loss of associate and joint venture accounted for using the equity method. 
e. Income tax expense. 
f. A single amount comprising discontinued operations
g. Profit or loss for the period 
h. Total other comprehensive income
i. Comprehensive income for the period being the total of profit or loss and other comprehensive
income. 

The following items shall be disclosed on the face of the income statement and statement of comprehensive
income: 
a. Profit or loss for the period attributable to noncontrolling interest and owners of the parent
b. Total comprehensive income for the period attributable to noncontrolling interest and owners of the
parent. 

FORMS OF INCOME STATEMENT

 PAS 1, paragraph 99, provides that an entity shall present an analysis of expenses recognized in
profit or loss using a classification based on either the function of expenses or their t nature within
the entity, whichever provides information that is reliable and more relevant.
 Accordingly, the income statement may be presented in two ways, namely functional and natural. 

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 FUNCTIONAL PRESENTATION

 This form classifies expenses according to their function as part of cost of goods sold, distribution
costs, administrative expenses and other expenses. 
 The functional presentation is also known as the cost of goods sold method.
 An entity classifying expenses by function shall disclose additional information on the nature of
expenses, including depreciation, amortization and employee benefit costs.

NATURAL PRESENTATION

 The natural presentation is referred to as the nature of expense method.

 Under this form, expenses are aggregated according to their nature and not allocated among the
various functions within the entity. In other words, the expenses are no longer classified as cost of
goods sold, distribution costs, administrative expenses and other expenses.
 The expenses which are of the same nature are grouped or aggregated and presented as one item. 
 For example, depreciation, purchases of raw materials, transport costs, employee benefit costs and
advertising costs are presented separately.

FUNCTIONAL INCOME STATEMENTS

EXAMPLAR COMPANY
Income Statement
Year ended December 31, 2017

Note

Net Sales (1) 9,000,000

Cost of goods sold (2) (5,400,000)

Gross Income 3,600,000

Other Income (3) 900,000
Investment income (4) 500,000

Total income 5,000,000

Expenses:
Distribution costs (5) 1,350,000
Administrative expenses (6) 1,000,000
Other expenses (7) 320,000
Finance cost (8) 200,000
2,870,000
Income before tax 2,130,000
Income tax expense 580,000

Net Income 1,550,000

NOTE 3 – OTHER INCOME

Interest revenue 180,000

Dividend revenue 120,000
Rent revenue 100,000
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Gain from exportation 500,000

TOTAL 900,000

NOTE 4 – INVESTMENT INCOME

Share in net income of associate (25%) 500,000

NOTE 5 – DISTRIBUTION COSTS

Sales salaries 600,000

SSS and Philhealth – sales 20,000
Sales commission 180,000
Advertising 100,000
Store supplies expense 50,000
Delivery expense 250,000
Depreciation – store equipment 150,000

Total Distribution costs 1,350,000

NOTE 6 – ADMINISTRATIVE EXPENSES

Office salaries 650,000

SSS and Philhealth – office 30,000
Bonuses 100,000
Office supplies expense 70,000
Taxes and license 20,000
Doubtful accounts 40,000
Depreciation – office equipment 90,000

Total Administrative expense 1,000,000

NOTE 7 – OTHER EXPENSES

Loss on sale of investments 90,000

Loss on sale of property 120,000
Casualty loss form earthquake 170,000

Total 320,000

NOTE 8 – FINANCE COST

Interest expense on bank loan 50,000

Interest expense on bonds payable 150,000

Total finance cost 200,000

“NATURAL” INCOME STATEMENT

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 EXAMPLAR COMPANY
INCOME STATEMENT
YEAR ENDED DECEMBER 31,2017

NOTES
Net Sales (1) 9,000,000
Other income (2) 900,000
Investment income (3) 500,000

Total incomes 10,400,000

Expenses:
Increase in inventory (4) (500,000)
Net Purchases (5) 5,900,000
Employee benefit costs (6) 1,400,000
Sales commission 180,000
Advertising 100,000
Supplies expense (7) 120,000
Delivery expense 250,000
Depreciation (8) 240,000
Taxes and license 20,000
Doubtful accounts 40,000
Other expenses (9) 320,000
Finance cost (10) 200,000

8,270,000
Income before tax 2,130,000
Income tax expense 580,000

Net income 1,550,000

NOTE 1 – NET SALES

Gross sales 9,300,000

Sales return and allowance (100,000)
Sales discount (200,000)

Net sales 9,000,000

NOTE 2 – OTHER INCOME

Interest revenue 180,000

Dividend revenue 120,000
Rent revenue 100,000
Grain from expropriation 500,000

Total 900,000

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 NOTE 3 – INVESTMENT INCOME

Share in net income of associate (25%) 500,000

NOTE 4 – INCREASE IN INVENTORY

Inventory – December 31 2,000,000

Inventory – January 1 1,500,000

Increase in inventory 500,000

NOTE 5 – NET PURCAHASES

Purchases 6,000,000
Freight in 300,000
Purchase return and allowance (150,000)
Purchase discount (250,000)

Net purchases 5,900,000

NOTE 6 – EMPLOYEE BENEFIT COSTS

Sales salaries 600,000

SSS and Philhealth – sales 20,000
Office salaries 650,000
SSS and Philhealth – office 30,000
Bonuses 100,000

Total employee costs 1,400,000

NOTE 7 – SUPPLIES EXPENSE

Store supplies 50,000

Office supplies 70,000

Total supplies expense 120,000

NOTE 8 - DEPRECIATION

Depreciation – store 150,000

Depreciation – office 90,000

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Total depreciation 240,000

NOTE 9 – OTHER EXPENSES

Loss on sale of investments 30,000

Loss on disposal on property 120,000
Casualty loss from earthquake 170,000

Total 320,000

NOTE 10 – FINANCE COST

Interest expense of bank loan 50,000

Interest expense on bonds payable 150,000

Total finance cost 200,000

WHICH FORM OF INCOME STATEMENT?

 PAS 1 does not prescribe any format.

 paragraph 105 simply states that because each method of Presentation has mertt for different types of
entities, management is required to select the presentation that is reliable and more relevant. 

STATEMENT OF COMPREHENSIVE INCOME

 As stated earlier, in addition to the income statement, a statement of comprehensive income is also
prepared in order to show the total comprehensive income.
 The statement of comprehensive income starts with the profit or loss as shown in the income
statement plus or minus the components of other comprehensive. 
 The purpose of this statement is to provide a more comprehensive information on financial
performance measured more broadly than the income as traditionally computed. 

ILLUSTRATION

Using the data in the preceding illustration the statement pf comprehensive income may appear as follows:

EXAMPLAR COMPANY ‘
Statement of Comprehensive Income
Year Ended December 31, 2017

Net income 1,550,000 

      other comprehensive income to be reclassified to profit or loss: 
Foreign currency translation gain   150,00
Unrealized loss on derivative contract designated aa cash flow hedge (100,000) Comprehensive
income                             50,000 
       
                                                              1,600,000

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  Comprehensive income for a period includes the net income or loss for the period plus or minus the
components of other comprehensive income:
 However, the comprehensive income of P1,600,000 is not carried to retained earnings. Only the net
income of P1,550,000 is included in the determination of retained earnings unappropriated. 
 The net other comprehensive income of P50,000 is carried to "reserves" or shown separately in the
statement of changes in equity. 

SINGLE STATEMENT OF COMPREHENSIVE INCOME

 Another option in presenting the components of profit or loss and components of other
comprehensive income is to prepare a single statement of comprehensive income. 
 Again, this single statement is the combined income statement and statement of comprehensive
income.
Using the preceding data, the single statement of’ comprehensive income following the "functional
presentation" may appear as follows: 

EXAMPLAR COMPANY
Statement of Comprehensive income
Year Ended December 31,2017

Net sales 9,000,000

Cost of goods sold (5,400,000)

Gross income 3,600,000

Other income 900,000
Investment income 500,000

Total income 5,000,000

Expenses:
Distribution costs 1,350,000
Administrative expenses 1,000,000
Other expenses 320,000
Finance cost 200,000
2,870,000
Income before tax 2,130,000
Income tax expense 580,000

Net income 1,550,000

Other comprehensive income to be reclassified to profit or loss:

Foreign currency translation gain 150,000
Unrealized loss on derivative contract
Designated as cash flow hedge (100,000)
50,000
Comprehensive income 1,600,000

STATEMENT OF RETAINED EARNINGS

 The statement of retained earnings shows the changes affecting directly the retained earnings of an
entity and relates the income statement to the statement of financial position.

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The important data affecting the retained earnings that should be clearly disclosed in the statement of
retained earnings are:
a. Profit or loss for the period 
b. Prior period errors 
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings 

ILLUSTRATION – ALL AMOUNT ARE ASSUMED

EXAMPLAR COMPANY
STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 2017

Retained earnings, January 1 1,000,00

Correction of error resulting
from prior year under depreciation (100,000)
Change in accounting policy from weighted
average to FIFO inventory valuation
resulting in an increase (300,000)

Corrected beginning balance 1,200,000

Net income for the period 1,550,000
Dividends declared during the year (400,000)
Appropriated for contingencies (200,000)

Retained earnings, December 31 2,150,000

STATEMENT OF CHANGE IN EQUITY

 The statement of changes in equity is a basic statement that shows the movements in the elements or
components of the shareholders’ equity. 
 The statement of retained earnings is no longer a required basic statement but it is a part of the
statement of changes in equity. 
An entity shall present a statement of changes in equity showing the following: 
1. Comprehensive income for the period 
2. For each component of equity, the effects of changes in accounting policies and corrections of
errors. 
3. For each component of equity, a reconciliation between the carrying amount at the beginning and
end of the period, a separately disclosing change from.
a. Profit or loss , 
b. Each item of other comprehensive income 
c. Transactions with owners in their capacity as owners showing separately contributions by and
distributions + owners. 

ILLUSTRATION – ALL AMOUNTS ARE ASSUMED

EXAMPLAR COMPANY
Statement of Change in Equity
Year Ended December 31, 2017

Share capital Reverse Retained Earnings

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Balances – January 1 5,000,000 2,000,000 1,000,000
Correction of error resulting
from prior year under depreciation (100,000)
Change in accounting policy from
weighted average to FIFO – credit 300,000
Issuance of 10,000 ordinary shares
with 10,000 par at P150 per share 1,000,000 500,000
Issuance of 5,000 preference shares
with P50 par at P100 per share 250,000 250,000
Comprehensive income:
Net income 1,550,000
Other comprehensive income 50,000
Dividends paid during the year (400,000)
Current appropriation for
contingencies 200,000 (200,000)

6,250,000 3,000,000 2,150,000

STATEMENT OF CASH FLOWS

 The statement of cash flows basic component of the financial statements which summarizes the
operating, investing and financing activities of an entity. 
 In simple language, the statement of cash flows provides information about the cash receipts and
cash payments of an entity during a period. 
 The preparation of the statement of cash flows and a more detailed discussion of the statement of
financial position, income statement, statement of comprehensive income and statement of changes
in equity are taken up exhaustively in Financial Accounting, Volume Three.

QUESTIONS

1. Define an income statement. 

2. Explain the usefulness of an income statement.

3. Define comprehensive income. 

4. Distinguish components of profit or loss and components of other comprehensive income.

5. Identify components of other comprehensive income.

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6. Explain the presentation of other comprehensive income. 

7. What are the components of other comprehensive income that are subsequently reclassified to profit or
loss? 

8. What are the components of other comprehensive income that are not subsequently reclassified to profit
or loss? 

9. Explain the reclassification of the components of other comprehensive income that are not reclassified to
profit or loss. 

10. Explain the two options of presenting comprehensive income. 

11. Identify the common sources of income.

12. Identify the components of expenses.

13. What is the formula in computing cost of goods sold of a merchandising concern? 

14. What is the formula in computing the cost of goods sold of a manufacturing entity?

 
15. Define distribution costs. 

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