Chapter2: Statement of Comprehensive Income

Learning Objective: By the end of the chapter, the student should be able to:

1. Understand the purpose of the Statement of Comprehensive Income (SCI)

2. Identify the elements of the Statement of Comprehensive Income (SCI).
3. Describe the nature of the accounts reported on the Statement of Comprehensive Income
(SCI).
4. Prepare a single-step Statement of Comprehensive Income for a service company;
5. Prepare a multi-step Statement of Comprehensive Income for a merchandising company; and
6. Determine the normal balances of the elements of the Statement of Comprehensive Income
(SCI).

Results of the Company’s Operations

We continue our study of financial statements with the Statement of Comprehensive Income
(SCI). 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 operation the business;

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

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

The SCI is described 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 31, 20x1”. This means that the reported revenue of P
1.29million was generated from January 1, 20x1 to December 31, 20x1. Revenues generated in 20x0
or 20K2 were not counted in this particular report.

ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20x1

Revenue P 1,290,000
Less: Expenses 890,000
Net Income 400,000
Figure 1: Statement of Comprehensive Income

Recall from chapter 1, financial statement is a set of interconnected reports. SCI is prepared
first. The bottom line of 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 (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 equity.

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 SFP’s taken one year
apart.

What are the actions reported on the SCI? Income and Expense are the general term used to
describe the elements of the SCI. Income refers to a transaction that increase 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, on the other hand as 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 owners.

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 wholesales supplier at P 15 per can.
2. Recall Pedro Benitez who rented a small space on the stores countertop for his coffee
vending machine. On October 1, 20x1, he paid six months advance rental of P 500 per
month.
3. Juana dela Cruz, owner of the store, deposited P 1,000 to the stores savings account
from her personal account.

Which of the above transaction will be reported as income?

There are two kinds of income – revenue and gains. Revenues are income generated from the
primary operations of the business. Gains, on the other hand are income derived from other activities
of the business. Sale of 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. 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 considered revenue.

Like income, 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. Recall that
the primary operation of Juana’s store is selling activities. The cost of the merchandise sold by Juana’s
store 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.

Notice that the primary operation of the business is the main criterion for the classification.
This classification method is to help the readers of the financial statements to understand the
operations of the reporting company. Those items that are from the primary operations of the
business are expected to continue regularly. On the other hand, those from other activities of the
business may be one of time or limited occurrence.
Accrual Concept of Accounting
Let us review the accrual concept introduced in ABM 1. The preparation of the SCI creates
complications in accounting because of its cut-off date. It is because the revenue generation process
has many components. In its simplest forms, these components may all occur simultaneously. At the
other end of the spectrum, these components may occur far apart from each other.

Imagine yourself inside a fast food restaurant. You ordered for a hamburger meal with regular
French fries and regular soft drinks. The crew punches your order on his computer (point of sale)
terminal. The computer then relays the message to the kitchen where you meal is put together. In a
few minutes, the crew give you the hamburger meal on a tray. He asked you for your payment. You
gave him P 100. He accepts your payment and gives your change. You lift up your tray and join your
friends at your table. From order, delivery, and payment, all the components of your transaction
occurred in a span of five to ten minutes. In a simple transaction such as the one you just had, it is
easy to count sales for a calendar-year period. These are all the meals sold from the opening of the
restaurant on January 1 until the last meal sold on closing time at December 31.

Unfortunately for accountants, not all transactions are as simple as the one you just had.
Consider the same fast food restaurant. This establishment also offers birthday packages. This time,
you want to celebrate you next birthday at this fast food restaurant. Let us agree that your birthday is
on January 2, 20x2. Your parents went to the fast food restaurant on November 29, 20x1 to make the
reservation and pay the downpayment for our birthday party. The party, held on January 2, 20x2, was
a complete success. Spaghetti, fried chicken, soft drinks and sundae were served. The famous
mascots of the fast food restaurant entertained your guests. At the end of the party, you parents paid
the remaining balance using their credit card. The credit card company paid the fast food restaurant
on January 3, 20x2. We see three important dates in your birthday party package. Namely, November
28, 20x1 January 2, 20x2 and January 3, 20x2. On what date should the restaurant record the revenue
from your birthday party? Finally, on what period should the costs of the foods served and other
items used I your party be reported on the SCI?

Accrual is one of the fundamental concepts of financial accounting. Specifically, this is the
concept that dictates when an item must be reported on the SCI. Accrual states that revenue must be
reported on the accounting period that it was earned. Similarly, expenses must be reported during the
same reporting period they were incurred. But what does it all mean? When are revenue earned and
expenses incurred?

Generally, revenue is earned upon delivery of goods and services, not when payment is
received from the customer. More specifically, sale of goods are reported on the SCI on the period of
delivery. On the other hand, revenues from services are counted on the period when services are
rendered. Neither order from a customer nor signed contract of service count as sales. More
importantly, cash collections are not revenue. Cash may be received from customers prior to delivery
such as in the case of down payments. At this point, it is a liability called Unearned Income. On the
other hand, delivery may come ahead of cash collections such as sales made on account. This gives
rise to an asset called Accounts Receivable.

Recall that we have discussed unearned income and accounts receivable in Chapter 1.
Referring back to your party, the downpayment received on November 29, 20x is reported on the
December 31, 20x1 SFP as Unearned Income. It is not counted as revenue or sales on the 20x1 SCI.
Revenue was earned when the birthday party package was delivered on January 2, 20x2 SCI. so how
will the fast food restaurant account for the collection from the credit card company on January 3,
20x2? It is definitely not recognized as revenue. To do so will be double counting the revenue from
your party. Rather, the transaction is a collection of a receivable. Upon rendering the services on
January 2, 20x2, the recording of revenue will coincide with recording a receivable from the credit card
company (recall double entry accounting from Fundamentals of Accountancy, Business, and
Management 1). Therefore, the receipt on January 3, 20x2 is a collection of that receivable.

We now know when to recognize or not recognize revenue. When do we record expense? By
following the concept of accrual, expense I recognized when an item is used to generate revenue.
Example, the food items in the birthday party may have been purchased on December 31, 20x1. At
this point, the food items are raw materials inventory. However, when the food items were served at
the party, these were used to generate revenue. Hence, it ceased being an asset and became an
expense on January 2, 20x2. This is referred to as the Matching Principle. Expenses are “matched”
and recorded in the same period that the revenue it generated was recognized.

If only everything was as simple as the food example above, then reporting expenses would
have been easier. There are expenditure items that are used in the business for more than one year.
Take for example the table and chairs used in the party. Theses fixtures are used for many years and
for many parties. How do we match the costs of the tables and chairs to the birthday party? Let us try
to estimate it in the best way we can. How can years do you think the restaurant can use those
fixtures before they are too worn out and will need replacement? Assume that based on previous
experiences of the restaurant and according to the manufacturer, the fixtures are usable for five years.
Next, assume further that the fixtures will be used evenly throughout the five year period. This means
that if we believe there will be 200 parties in one year, the fixtures will be used 200 times in one year
or 1,000 times over five years. Simply put, our assumption implies that the fixtures will have equal
usage per year over five years. Well this assumption certainly simplifies things. We can just divide the
cost of the futures over five years and we get the estimated peso value of the annual usage. This
estimate is our best effort to “match” the expense used to generate the revenue and is referred to as
Rational Allocation. The principle of rational allocation requires the cost of long-term expenditure to
be rationally allocated over the period of usage based on the expected pattern of usage. An example
of expenses estimated using rational allocation is the depreciation of equipment.

In cases when accountants cannot determine how long the expenditure will benefit the
business or if there is any benefit at all, then conservatism dictates that the cost of the expenditure
should be charged to expense immediately. Why? Because we cannot rationally estimate the “life” of
the benefit. Hence, the cost is charged to expenses immediately, generally in the year it was spent.
This method is used for costs of advertising. For example, the inspiration to celebrate your birthday
party at the fast food restaurant came from the television commercial featuring a famous family. We
need to consider how long this commercial can inspire others in the same way it inspired you. Unlike
the case of long this commercial can inspire others in the same way it inspired you. Unlike the case of
the fixtures, this one is very difficult to estimate. Moreover, our estimate is also difficult to validate.
Rather than be arbitrary, accountants choose to be conservative and charge the whole costs of
television commercial aired in 20x1 as advertising expense on the 20x1 SCI.

To summarize, we have discussed that revenue is recognized on the period of delivery.

Expense, on the other hand, is recorded in the same period of the revenue it was able to generate.
The allocation maybe a direct one to one correspondence or an indirect estimate based on rational
allocation. However, should these be no rational way to allocate, the costs is expensed immediately.

( Discussion Questions 1: Before moving on to the next part, answer the following review questions: )

Elements of the Statement of Comprehensive Income

We have already discussed income and expenses in the previous sections. Here, we will
identify in more detail the elements of the SCVI and we will introduce the different account names
under revenues.

Revenues
Service Income

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

Recall that 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 sometime in May or June, you initially signed a service 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 (Figure 2). Your enrolment contract is for June of the current to
March of the next year. However, revenue to be reported in the SCI is for service rendered to students
from January to December of the current year. How do we solve the problem of misalignment time
period?

Accountants use the percentage of completion to allocate revenue to the appropriate period.
It is generally assumed that services are rendered evenly throughout the contract period. For
example, tuition fee for one school year is P 50,000 per student. One school year is equivalents to 10
months (June to March). Then tuition fee revenue from June to December is P 35,000 (P
50,00/10months x 7months).

School Year
June 20x1 – March 20x2 April – May 20x2 June 20x2 – Mar 20x3
320x1 January 20x2 – December 20x 20x

Calendar Year
Figure2: Misalignment of School Year and Calendar Year

Example: Tuition Fee Revenue

Twinkle-twinkle Pre-school collected tuition fee of P 1,250,000 and P 1,455,000 for the school years
20x1-20x2 and 20x2-20x3 respectively. The school closed in April and May.

Requirement: Determine the tuition fee revenue to be reported on SCI for the calendar year
20x2.

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. Recall that we
already counted the goods delivered as Sales on the date of delivery. When goods are returned, it is
not deducted from Sales. Rather, normal accounting practice is to report it under the account name
Sales Return and Allowances – a Contra Sales account.

In our Chapter 1 discussion of Account Payable, we mentioned that suppliers give discounts to
their customers to encourage early payments. Let us revisit that discussion from the supplier’s point
of view. 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 discounts period. Accounting practice does not deduct the
discount from Sales Revenue. Rather, we use another Contra-Sales account called Sales Discount.

Only Net Sales is reported on the face of the SCI. 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 ball point pens to Mrs. Susan
Gonzales on account at a price of P 150 per box or P 15 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 advantage of the discount.

Requirement:
Determine the amount of Sales, Sales Return, Sales Discount and Net Sales from the transaction
with Mrs. Gonzales.

( Discussion Questions 2: before moving on to the next part, answer the following questions: )
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 to the premises of the company. This
shipment cost is called Freight-in.

Cost of sales I 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 Cost of Goods Sold account is updated
every time a sale is made.

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. So what happens when merchandise are acquired or sold? Cost of
merchandise acquired is collected using the Purchase 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 – Purchase Returns –
Purchase Discount). Observe that this is similar to the accounting practice for sales.

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

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.

Friendly Convenience Store: Cost of Goods Sold

Juana dela Cruz, owner of Friendly Convenience Store, asked for your help to determine the cost of
sale 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 she 430
shops for merchandise at Divisoria)
Purchase Returns 760
Based on the inventory count taken at the last day of the year, the ending inventory is valued at P
2,320.

Requirement:
How much is cost of sales?

Operating Expenses

Operating expenses refer to al other expenses related to the operation of the business, other
than of sales. These include salaries of employees, supplies, utilities (electricity, telephone and water
bills), gasoline expense, representation, bad debts expense, depreciation and amortization.

Bad debts expense is an expense related to account 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 analyse the
collectability of Account Receivable and; (2) to immediately charge to expense the amount deemed
uncollectible. 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.

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.

Requirement: Determine bad debts expense given the following:

1. Juana dela Cruz, the manager-owner decided to use percentage of total sales method.
2. Juana dela Cruz, the manager-owner decided to use percentage of credit sales method.

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 borrowings and gain or loss from sale of equipment (proceeds from
sale less net book value of PPE on date of sale).

( Discuss Questions 3: Before moving on to the next part, answer the following questions: )

Presentation of Statement of Comprehensive 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 (Figure 3) 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 business 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.

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 analyse 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 sold 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.

ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20x1

Service Revenue xxxx

 Rental Income xxxx
Interest Income xxxx
Increase in inventory*
Total revenues and income xxxxx
Net purchases yyyy
Depreciation expense yyyy
Utilities expense yyyy
Salaries expense yyyy
Interest expense yyyy
Insurance expense yyyy
Supplies expense yyyy
Total expenses yyyyy
Net Income xxxxx-yyyyy

*Increase in inventory = Ending inventory – Beginning inventory

Figure 3: Single-step Statement of Comprehensive Income

Multi-step Statement of Comprehensive Income

The multi-step SCI (Figure 4) is characterized by the presentation of several subtotals until net
income is determined. The multi-step SCI is more popularly used in business. The subtotals are
additional information that give the readers more understanding of the operations of the business.
The first subtotal is gross profit which is computed as Net Sales less Cost of Goods Sold (Net Sales –
Cost of Goods Sold). The next subtotal, income from Operations, is computed by deducting Operating
Expenses from Gross Profit (Gross Profit-Operating Expenses). Net income is next determined by
adding Other Income (i.e. interest income) and deducting Other Expenses (i.e. interest expenses) from
Income from Operations.

ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20x1

Gross Sales A
Sales returns and allowances B
Sales discounts C
Net Sales D=A-B-C
Cost of Goods Sold E
Gross Profit F=D-E
Operating Expenses:
General and Administrative expense G
Selling expense H I=G+H
Income from Operation J=F-I
Interest income K
Interest expense L
Net Income J+K-L

Figure 4: Multi-step Statement of Comprehensive Income

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 (Figure 4). General and
Administrative Expenses 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.

How are operating expenses classified into functions? Take the case of Salaries Expense. It is a
line item in the nature of expense SCI. This expense refers to the services rendered by the employees
of the company. Assume the company has four employees, namely, manager, secretary, store clerk
and delivery van driver. The manager and the secretary are involved in the daily management of the
business. Hence their salaries are reported as General and Administrative Expenses when the function
of expense is used. The store clerk and the delivery van driver are involved in the selling activities of
the business. Their salaries are presented as Selling Expenses. We perform the same analysis for all
the operating expenses under the nature of expense and classify them as to their function in the
business operations (Figure 5).

ABC Company ABC Company

Statement of Comprehensive Income Statement of Comprehensive Income
For the year ended December 31, 20x1 For the year ended December 31, 20x1

Salaries Sales
Less: Less: Cost of goods sold
Purchases Gross profit
Inventory adjustment Less: Operating expenses:
Salaries expense General & Administrative expenses
Utilities
Depreciation Selling expenses
Supplies
representation

Operating income Operating income

Other income Other income
Other expenses Other expenses
Net Income Net Income
Nature of Expense Function of Expense

Figure 5: Comparison of Nature and Function of Expense Format

Normal Balances

Recall our discussion of normal balances in Chapter 1. An account is increased by an entry on

the side of its normal balance. Similarly, it is decreased by an entry on the opposite side of its normal
balance. The normal balance of equity accounts is credit. Recall the effect of income and expenses on
equity. Income increases equity and expenses decreases equity. Combined together – income
increases equity and equity is increased by credit. Therefore, the normal balance of all income
accounts is credit. The same analysis is true for expenses. Expenses decrease equity and equity is
decreased by debit. Therefore, the normal balance of all expense account is debt.

+ -
Expense Account

Ending Balance = Debits - Credit

Expense Account
1,900 990
Ending Balance P910
Figure 6: Analysis of Expense Account using a T-Account

Take the case of an expense account. Expenses have normal debit balances. During the year, the total
debit and credit entries amount to P 1,900 and P 990, respectively. This expense account will have an
ending balance of P 910 (Figure 6).

We will analyse a revenue account in the next example. Total debit entries amounted to P 900
and credit entries amounted to P 1,990 during the year. Recall that the normal balance of a revenue
account is credit. Hence, credit entries will increase this account. As a result, the revenue account will
have an ending balance of P 1,090 (Figure 7).

- +
Revenue Accounts
 Ending Balance = Credits - Debit

Revenue Account
900 1,990
Ending Balance P 1.090
Figure 7: Analysis of Revenue Account using a T-Account

Look back at our example of income and expense. Observe that there are no beginning
balances in both examples. Recall that income and expenses are measure “for the year ended”. This
means that income and expense accounts really have no balances at the beginning of the accounting
period. The ending balance is a measure of the activities that occur during the year. After the
preparation of the SCI, income and expense accounts are “closed”. This prepares the accounts will be
discussed in detail in Chapter 8. The SCI accounts are also called nominal accounts because it is closed
at the end of the year. On the contrary, the Statement of Financial Position accounts are real
accounts.

( Discussion Questions 4: before moving on to the next part, answer the following questions: )

Comprehensive Illustrative Problem: Miras’s tore (continuation)

On February 1, 20a4, Mira Delamar opened a store that sells school supplies. Mira wanted to know
the results of operating the store. Mira knew you were studying accounting so she asked for your
help. The following ere taken from the accounting records of Mira’s Store.
Balance Debit Credit
Sales P 114,567
Sales return 1,544
Sales discount 1,675
Purchases 61,558
Purchase return 504
Purchase discount 1,076
Freight-in 765
Utilities expense 4,000
Salaries expense 14,000
Rent expense 10,000
Depreciation 500

Additional information:
a. Physical inventory conducted at the end of the year revealed an ending inventory of P
15,345.
b. Depreciation is for shelves and cabinet used as display racks and storage in the store.
c. Mira has a small office inside the store. Allocate 15% of rent and utilities to general and
administrative expenses.
d. 25% of Emily’s salaries are allocated to General and Administrative Expense. Aside from
tending the store, she was also tasked to file receipts and maintain some records.

Requirements:

1. All accounts above have normal balances. Indicate whether the above accounts have debit
or credit balances.
2. Prepare the year ended SCI using the single-step approach.
3. Prepare the year ended SCI using the multi-step approach.

Additional requirements:

Compute the following (a) Net Sales; (b) Cost of Goods Sold; and (c) Operating Expenses.

Solution format:

Requirement 1
Account name Balance Debit Credit
Sales P 114,567
Sales return 1,544
Sales discount 1,675
Purchases 61,558
Purchase return 504
 Purchase discount 1,076
Freight-in 765
Utilities expense 4,000
Salaries expense 14,000
Rent expense 10,000
Depreciation 500

Requirement 2: single-step SCI

Mira’s Store
Statement of Comprehensive Income
For the year ended December 31, 20a4

Net sales
Increase in inventory*

Less: Expenses
Net purchases
Salaries expense
Rent expense
Utilities expense
Depreciation

Net income

Requirement 3: Multi-step SCI

Mira’s Store
Statement of Comprehensive Income
For the year ended December 31, 20a4

Net sales
Less: Cost of Goods Sold
Gross profit
Less: Operating Expenses
Selling expenses
General and administrative expense

Net income

Additional computations:

1. Net Sales
Sales
Less: Sales return
Less: Sales discount
Net Sales

2. Cost of Goods Sold

Beginning inventory
Purchases
Add: freight-in
Less: Purchase return
Less: Purchase discount
Net purchases
Less: Ending Inventory
 Cost of goods sold

3. Operating Expenses
Balance Selling General and
expense administrative
expense (G&A)
Utilities expense 15% to G&A P 4,000
Salaries expense 25% to G&A 14,000
Rent expense 15% to G&A 10,000
Depreciation 500
Total 28,500

End of Chapter Summary

1. The SCI is a statement that reports the results of operations of the business for one period.
The SCI is described as a “for the period” repot.
2. Income refers to 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.
3. Expenses are transactions that decreases assets and/or increase liabilities leading to decrease
in equity resulting from the operation of the business and not because of distribution to
owners.
4. There are two kinds of income – revenue and gains.
a. Revenues are income generated from the primary operation of the business.
b. Gains are income derived from other activities of the business.
5. There are two kinds of expenses – expenses and losses.
a. Expenses are related to the primary operation of the business.
 b. Losses are from other activities of the business.
6. Revenue is earned upon delivery of goods and services.
7. There are three approaches in recognizing expenses.
a. The matching principle requires that expenses should be recorded in the same period in
which the revenue, to which those expenses relate, it recognized.
b. The principle of rational allocation requires the cost of long-term expenditures to be
rationally allocated over the period of usage based on expected pattern of usage.
c. Expenditures are charged immediately to expense if the period and the pattern of usage is
not clear such that there is no rational way to allocate.
8. Two kinds of revenue were discussed.
a. Service Income, used by service operations, is recorded based on percentage of
completion of contractual services.
b. Sales Revenue, used by trading operations, is recognized when goods are delivered.
i. Sales Returns and Allowances is a contra-sales account used to report the selling
price of goods returned by customers.
ii. Sales Discount is a contra-sales account used to report the amount of discount
taken by customers.
iii. Net Sales is computed as gross sales less sales returns and allowances and sales
discount.
9. Cost of Sales refers to the cost of inventories sold. There are two kinds of inventory
accounting.
a. Perpetual inventory accounting means that the inventory account is “perpetually”
updated for goods purchased and sold.
b. Periodic inventory accounting does not update the inventory account for purchases
and sales.
I. A separate account Purchases, is used to report acquisition of merchandise for sale.
II. Purchase Returns and Allowance is a contra-purchase account that reports the costs of
goods returned to suppliers.
III. Purchase Discount is a contra-purchase account that reports the amount of discount
taken by the company.
IV. Freight-In refers to shipping cost necessary to bring inventory purchased from the
seller to the premises of the company.
V. Net Purchases is gross purchases plus Freight-In less Purchase Returns and Allowance
and Purchases Discounts.
VI. Inventory is determined by actual physical count of merchandise owned.
VII. Cost of Sales is determined as follows: beginning inventory + Net purchases – Ending
Inventory = Cost of goods sold.
10. Operating expenses refer to all other expenses related to the operation of the business, other
than cost of sales. Examples are salaries and utilities.
11. Bad debts expense is the estimated amount of loss resulting from uncollectible accounts
receivable.
12. Losses and other expenses as well as gains and other income are reported separately after the
operating section of the SCI.
13. There are two acceptable formats of the SCI:
a. Single-Step SCI
I. Groups all revenue together and groups all expenses together. Net
income is simply computed as total revenues – total expenses.
II. Expenses are listed based on the source of the expense such as salaries,
purchases, supplies, utilities, fuel and depreciation.
b. Multi-Step SCI
I. Revenue and expenses are classified and presented on the following
sections: gross profit, operating section and non-operating section. Sub-
totals are presented at the end of each section, namely, gross profit,
operating income and net income.
II. Expenses are listed based on usage of function of expense. Operating
expenses are categorized into cost of sales, general and administrative
expenses and selling expenses.
14. The normal balance of revenue accounts is credit.
15. The normal balance of expenses accounts is debit.