Module 6.2: Statement of Comprehensive Income

LICEO DE LA SALLE SENIOR HIGH SCHOOL
SECOND SEMESTER | QUARTER 3

AY 2020 – 2021 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 2
NAME AND SECTION:
TEACHER:
MODULE 6.2: STATEMENT OF COMPREHENSIVE INCOME
Service businesses perform services for profit, thus, a basic income statement is needed. The
preparation of such was covered last semester. On the other hand, merchandising businesses earn
profit through the buying and selling goods. These entities use the same basic accounting methods as
service entities, but the buying and selling process of merchandise require additional accounts and
concepts, thus, having a more complex income statement. Here is a comparison between both
businesses:
Service Merchandising
Income Statement Income Statement
Revenues from Services Net Sales

Less: Expenses Less: Cost of Goods Sold
Profit Gross Profit
Less: Expenses
Profit
Single Step Approach Multi Step Approach
Note that in the Single Step approach, all expenses are lumped together and are deducted from the
Service Revenue. On the other hand, in the Multi Step Approach, the Cost of Goods Sold is deducted
from the Net Sales to yield the Gross Profit. From here, the other expenses are being subtracted from
the Gross Profit to get the Net Profit.
Statement of Comprehensive Income
The statement of comprehensive income or income statement presents the performance of the
enterprise and summarizes the revenues earned and expenses incurred for a certain period of time.
There are two methods used – Nature of Expense and Function of Expense. The difference between
the two lies in the items above operating profit. The standard does not prescribe any format. The
choice between the two methods depends on historical and industry factors and the nature of the
entity.
Nature of Expense Method
Expenses are combined in the income statement according to their nature and are not reallocated
among various functions within the entity. This method is simple to apply in many small scale
enterprises because no allocation of operating expenses between functional classifications is
necessary.
Others call this as the “single step” approach. Such method was tackled during the previous semester
during our discussion on the Financial Statements of a service type of business. The Statement of
Comprehensive Income of a Service Business using the nature of expense method is shown on the
next page.
1
NAME AND SECTION:
TEACHER:
Del Mundo Landscape Specialists

Income Statement
For the Month Ended Nov. 30, 2019
Revenues
Lawn Cutting Revenues Php 42,250
Expenses
Salaries Expense Php 5,600
Supplies Expense 500
Rent Expense 7,000
Insurance Expense 2,000
Gas Expense 1,500
Advertising Expense 1,750
Depreciation Expense - Vehicles 4,500
Depreciation Expense - Equipment 1,000
Interest Expense 1,400
Total 25,250
Profit Php 17,000
Function of Expense Method
This method, also referred to as the “cost of sales” method, classifies expenses according to their
function as part of cost of sales, distribution / selling, administrative and other operating activities.
The presentation offers information that is more relevant to users than the nature of expense but the
allocation of costs involves proper judgement. Some call this method as “multi-step” approach.
In a merchandising business, net sales arise from the sale of merchandise while the cost of goods sold
represents the cost of inventory sold to customers. The difference between net sales and cost of sales
is called the gross profit.
Operating expenses, which includes distribution (or selling) and administrative expenses, are
deducted from the gross profit to arrive at the operating profit or otherwise called as the earnings
before interest and taxes (EBIT). Interest expense and taxes are deducted from the operating profit to
derive the Net Profit.
Operating Expenses are primary recurring costs associated with the central operations, other than the
cost of goods sold, which are incurred to generate sales. These are further classified into:
§ Distribution or Selling Expenses

o Expenses related directly to the business’ efforts to generate sales.
o Examples: Sales Salaries, commissions, advertising, promotions, transportation out,
depreciation of store and delivery equipment, and store supplies.
§ Administrative Expenses
o Expenses related to the general administration of the entity’s operations.
o Examples: Office salaries, office supplies expense, depreciation of office furniture and
fixtures, licenses and fees, and uncollectible accounts expense.
2
NAME AND SECTION:
TEACHER:
The Statement of Comprehensive Income of a Merchandising Business using the function of expense
method is shown below:
Casino Traders
For the Year Ended Dec. 31, 2019
Net Sales (from Module 3)

Gross Sales Php 2,463,500
Less: Sales Returns and Allowances Php 27,500
Sales Discounts 42,750 70,250
Net Sales Php 2,393,250
Cost of Goods Sold (from Module 4)

Merchandise Inventory, beginning Php 750,000
Purchases Php 1,450,000
Less: Purchase Returns and Allowances Php 75,000
Purchase Discounts 45,650 120,650
Net Purchases 1,329,350
Add: Transportation In 87,210
Net Cost of Purchase 1,416,560
Goods Available for Sale 2,166,560
Less: Merchandise Inventory, end 918,000
Cost of Goods Sold (or Cost of Sales) Php 1,248,560
Gross Profit Php 1,144,690
Operating Expenses
Selling Expenses
Sales Salaries 225,000
Transportation Out 57,400
Store Supplies Expense 15,400
Insurance Expense – Selling 5,600
Total Selling Expenses 303,400
Administrative Expenses
Office Salaries Expense 171,000
Utilities Expense 48,000
Depreciation Expense – Building 26,000
Depreciation Expense - Equipment 22,000
Office Supplies Expense 12,040
Insurance Expense – General 3,600
Total Administrative Expense 282,640
Total Operating Expense 586,040
Operating Profit 558,650
Less: Interest Expense 38,000
Profit before Taxes 520,650
Less: Taxes 156,195
Net Profit Php 364,455
*If taxes or the tax rate is not given, then, the net profit will be value after the Interest Expense is
subtracted.
3
NAME AND SECTION:
TEACHER:
The preparation of the Statement of Changes in Equity and Statement of Financial Position was
already discussed last quarter. Kindly refer to last quarter’s module on the mechanics on how to
prepare the said Financial Statements.
We will be having an in depth discussion of the Statement of Financial Position during the Fourth
Quarter.
Illustrative Example (Preparation of the Financial Statements)
Presented below are the different accounts and its corresponding balances of Stellar Merchandising as of
June 30, 2020.
Cash on Hand Php 1,100,100 Depreciation Expense - Factory Equipment Php 200,000
Cash in Bank 2,000,000 Depreciation Expense - Office Equipment 300,000
Accounts Receivable 700,000 Sales Returns and Allowances 120,000
Allowance for Bad Debts 95,000 Sales Discount 80,000
Supplies 580,000 Purchase Returns and Allowances 140,000
Prepaid Insurance 450,000 Purchase Discounts 100,000
Accounts Payable 1,000,000 Utilities Expense 297,000
Sales 10,000,000 E. Brillante, Drawing 1,000,000
Purchases 6,000,000 Notes Payable (Current) 500,000
Freight In 200,000 Mortgage Payable 2,500,000
Rent Expense 600,000 Loans Payable (Long Term) 1,500,000
Salaries Expense – Sales Personnel 300,000 Factory Equipment 5,000,000
Salaries Expense – Head Office Accumulated Depreciation-Factory
Personnel 300,000 Equipment 1,500,000
Freight Out 200,000 Office Equipment 1,500,000
Accumulated Depreciation- Office
Interest Expense 150,000 Equipment 250,000
Insurance Expense - General 100,000 Sales Office Building 5,500,000
Depreciation Expense – Sales Office Accumulated Depreciation – Sales Office
Building 500,000 Building 3,500,000
Additional Information:
1. As of March 31, 2020, the merchandise inventory amounted to Php 2,000,000 and E.
Brilliante, Capital was Php 6,000,000.
2. As of June 30, 2020, physical count revealed that the total unsold merchandise had a value of
Php 1,800,000.
3. Within the second quarter, the owner made an additional investment of Php 500,000.
4. Tax rate to be applied is 30%.
Required:
1. Prepare the Income Statement, Statement of Changes in Equity, and Balance Sheet for the
Second Quarter of 2020.
4
NAME AND SECTION:
TEACHER:
Solution:
Step 1: Prepare the Income Statement. This is being prepared first since we will be needing the Net
Income in order to compute for the Ending Capital in the Statement of Changes in Owner’s Equity.
Stellar Merchandising
For the Quarter Ended June 30, 2020
Net Sales
Sales Php 10,000,000
Less: Sales Returns and Allowances Php 120,000
Sales Discounts 80,000 200,000
Net Sales Php 9,800,000
Cost of Goods Sold

Merchandise Inventory, beginning Php 2,000,000
Purchases Php 6,000,000
Less: Purchase Returns and Allowances Php 140,000
Purchase Discounts 100,000 240,000
Net Purchases 5,760,000
Add: Freight In 200,000
Net Cost of Purchase 5,960,000
Goods Available for Sale 7,960,000
Less: Merchandise Inventory, end 1,800,000
Cost of Goods Sold (or Cost of Sales) 6,160,000
Gross Profit Php 3,640,000
Operating Expenses
Selling Expenses
Salaries Expense – Sales Personnel 300,000
Freight Out 200,000
Depreciation Expense – Sales Office Building 500,000
Total Selling Expenses 1,000,000
Administrative Expenses
Rent Expense 600,000
Salaries Expense – Head Office Personnel 300,000
Insurance Expense - General 100,000
Depreciation Expense - Factory Equipment 200,000
Depreciation Expense - Office Equipment 300,000
Utilities Expense 297,000
Total Administrative Expense 1,797,000
Total Operating Expense 2,797,000
Operating Profit 843,000
Less: Interest Expense 150,000
Profit before Taxes 693,000
Less: Taxes (30%) 207,900
Net Profit Php 485,100
5
NAME AND SECTION:
TEACHER:
Step 2: Prepare the Statement of Changes in Owner’s Equity. Since we have computed for the Net
Income earlier, its value will be included in this statement. If the business had a net profit, it should
be added to the capital. On the other hand, if the business yielded a net loss, it should be deducted
from the capital.
Statement of Changes in Owner’s Equity
E. Brillante, Capital March 31, 2020 Php 6,000,000
Add: Additional Investments Php 500,000

Net Profit 485,100 985,100
Total 6,985,100
Less: E. Brillante, Drawing 1,000,000
E. Brillante, Capital June 30, 2020 Php 5,985,100
Step 3: Prepare the Balance Sheet. The Ending Capital from the Statement of Changes in Equity will
be reflected in the business’ Balance Sheet as part of the Owner’s Equity. The complete balance sheet
is shown on the next page.
6
NAME AND SECTION:
TEACHER:
Statement of Financial Position
Assets
Current Assets
Cash on Hand Php 1,100,100
Cash in Bank 2,000,000
Accounts Receivable 700,000
Less: Allowance for Bad Debts 95,000 605,000
Supplies 580,000
Prepaid Insurance 450,000
Total Current Assets Php 4,735,100
Non-Current Assets
Factory Equipment 5,000,000
Less: Accumulated Depreciation-Factory Equipment 1,500,000 3,500,000
Office Equipment 1,500,000
Less: Accumulated Depreciation- Office Equipment 250,000 1,250,000
Sales Office Building 5,500,000
Less: Accumulated Depreciation – Sales Office
3,500,000 2,000,000
Building
Total Non-Current Assets 6,750,000
Total Assets Php 11,485,100
Liabilities
Current Liabilities
Accounts Payable 1,000,000
Notes Payable (Current) 500,000
Total Current Liabilities 1,500,000
Non-Current Liabilities
Mortgage Payable 2,500,000
Loans Payable (Long Term) 1,500,000
Total Non-Current Liabilities 4,000,000
Owner’s Equity
E. Brillante, Capital June 30, 2020 5,985,100
Total Liabilities and Owner’s Equity Php 11,485,100
References:
Ballada, W. (2020). Fundamentals of Accountancy, Business and Management 1 (2020 ed.).

DomDane and Made Easy Books.
Ong, F. (2016). Fundamentals of Accountancy, Business and Management 1 for Senior High
School (2016 ed.). Quezon City: C&E Publishing.

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LICEO DE LA SALLE SENIOR HIGH SCHOOL

SECOND SEMESTER | QUARTER 3

NAME AND SECTION: