What is a STATEMENT OF COMPREHENSIVE INCOME or SCI?

 It is a statement that reports the results of operations of the business for one reporting period.
 It contains the following information:
 Revenue generated by operating the business
 Costs spent to generate the revenue
 Income, which is the excess of revenue over costs

A financial statement is a set of interconnected reports. SCI is prepared first. The bottom line of the SCI is net income
(Figure 1)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 ending capital.

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.

Elements of the Statement of Comprehensive Income

INCOME and EXPENSE are the general terms used to describe the elements of the SCI.
 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 the owner’s contribution.
 Expenses are 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.

What are the TWO KINDS OF INCOME?

 Revenues are income generated from the primary operations of the business.
 Gains are income derived from other activities of the business.

Sale of merchandise to customers is an example of revenue. It is because the primary operation of the store is to sell its
inventory. 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. Interest income is not revenue. However, for a bank whose primary
operation is to give out loans, interest income is considered revenue.

Accrual Concept of Accounting

What is ACCRUAL?
 Accrual is an accounting concept that dictates when an item must be reported on the SCI.
 It 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.
When are revenues earned and expenses incurred?
 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 may be a direct one to one correspondence or an indirect estimate based on rational allocation.
 However, should there be no rational way to allocate, the costs are expensed on the period they were incurred.

Elements of the Statement of Comprehensive Income

REVENUE
A. Service Income
 The service Income account is generally used to described 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.
 Revenue services is recognized when they have already been rendered
Contract of Services
 Contract of services may take a long time to complete.
 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.
B. 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.
 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.

EXPENSES
A. Cost of Goods Sold (Cost of Sales)
 For trading/merchandising operations, Cost of Sales collects the cost of the merchandise sold.
 It 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.
 is an account used by companies that sell goods instead of services.

Recording Inventory
Cost of sales is part of inventory accounting. Accountants have two ways of keeping records of inventory – perpetual
inventory system 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.
• Periodic means the Inventory account is only “periodically” updated, meaning the inventory account is updated
only at end of the year or end of the month.
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:

B. Operating Expenses
 Operating expenses refer to all other expenses related to the operation of the business, other than cost
of sales.
 It includes salaries of employees, supplies, utilities (electricity, telephone and water bills), gasoline
expense, representation, bad debts expense, depreciation and amortization.
 Bad debts expense, which is an estimated expense, is an operating expense related to accounts receivable.

C. 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 PPE (proceeds from sale less net book value of
PPE on date of sale).

Formats in Presenting the Statement of Comprehensive Income

1. Single-Step Statement of Comprehensive Income
 It groups all revenue items together and all expense items together.
 It is called as such because net income is computed through only one step, deducting total expenses from total
revenues, while subtotals are not computed and presented on the SCI.
 It is generally used by small businesses and service businesses because of its simplicity.
 It is also closely linked to the nature of expense format by listing down the expenses based on the source of
expenses such as salaries, purchases, supplies, utilities, fuel and depreciation.
 Josh Company
Statement of Comprehensive Income
For the year ended December 31, 2019
(In Philippine Pesos)

Service Revenue 200,000

Rental Income 50,000
Interest Income 3,000
Increase in Inventory * 2,500
Total Revenue and Income 255,500
Less: Expe nses
Net Purchases 95,000
Depreciation Expense - Building 5,500
Utilities Expense 12,000
Salaries Expense 25,000
Interest Expense 1,200
Insurance Expense 8,250
Supplie s Expense 5,400
Total Expenses (152,350)
Net Income 103,150

* Increase in Inventory = Ending Inventory - Be ginning Inventory

2. Multi-Step Statement of Comprehensive Income

 It is characterized by the presentation of several subtotals until net income is determined.
 It is more popularly used in business.
 The subtotals are additional information that give the readers more understanding of the operations of the business.

Multi-Step Statement of Comprehensive Income Sub-totals

 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

Multi-Step Statement of Comprehensive Income

 It is also associated with as the function of expense format.
 It 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 refer to those incurred in the daily operations and management
of the business.
 Selling Expenses are costs related to marketing, selling and distributing the company’s merchandise.
Josh Company
Statement of Comprehensive Income
For the year ended December 31, 2019
(In Philippine Pesos)

Gross Sales 930,000

Less: Sales Returns and Allowances (10,500)
Sales Discounts (30,300)
Net Sales 889,200
Less: Cost of Goods Sold (425,000)
Gross Profi t 464,200
Less: Operating Expenses
General and Adminsitrative Expenses 100,000
Selling Expenses 125,000 (225,000)
Income from Operations 239,200
Add: Interest Income 3,600
Less: Interest Expense (1,975)
Net Income 240,825
Normal Balances of Accounts of Statement of Comprehensive Income
 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.
 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 accounts is debit.
Normal Balances of Revenue Accounts – CREDIT
Normal Balances of Expense Accounts – DEBIT

What Is the Statement of Changes in Equity (SoCE)?

 The SoCE is prepared to meet the requirements of the readers to understand the transactions that cause the
movements in equity accounts.
 The SoCE is a statement dated “for the year-ended”.
 The report shows a reconciliation of the beginning and ending balances of the equity accounts.
 It summarizes the equity transactions with the owners of the business that occurred during the year.

Objectives of the SoCe

Forms of Business Organizations
1. Sole Proprietorship
 It is the simplest form of a business organization.
 There is only one owner referred to as sole proprietor, who oftentimes also acts as the manager.
 The business has no legal personality separate from its owner, meaning the business and the owner is
one entity in the eyes of the law.
2. Partnership
 It is a business owned by two or more owners called partners, who pool their resources together such
as money, property, and industry, to operate a business and divide the profit among themselves.
 Partners are generally involved in the management of the business.
 The agreement of the partners is stated in the contract of partnership. Most importantly, it
emphasizes the partners’ profit and loss sharing.
3. Corporation
 It is the most complex form of business organization.
 It is owned by many owners called stockholders or shareholders.
 Ownership is divided into common stocks or shares of stocks. One shareholder can own many stocks.
 One of its characteristics is the separation of ownership and management. Shareholders invest their
funds but are not normally involved in the day-to day-operations. Rather, the corporation is managed
by professional managers.
 three basic forms of business organizations, namely: (1) sole proprietorship, (2) partnership, and (3) corporation.
They differ in terms of number of owners, legal personality of the business, and ease of transferability of
ownership.
  In sole proprietorship, the business and the owner are taxed as one. Also, the claim of the creditors of the
business extends to the personal assets of the owner. As a result, raising capital for the business is constrained to
the owner’s resources and credit standing.
 Partnership has a legal personality separate from its owners. It is taxed separately from the partners except for
those formed for the practice of the profession of the partners (i.e. lawyers, accountants, etc.). However, the
claims of the partnership creditors may extend to the partners’ personal assets.
 Note that in policy setting of corporation, each stock is normally entitled to one vote. A stockholder that owns
1,000 stocks has 1,000 votes. Therefore, the stockholder that owns 50% +1 of the total stock outstanding can
control the corporation. Rules that govern the management of the corporation are written in the Articles of
Incorporation and By-Laws.

Preparation of SoCE
1. Sole Proprietorship

Owner’s Capital Account

The owner’s Capital account tracks the following transactions of the owner:
• Capital contributions;
• Withdrawals; and
• Net income or net loss generated by the business.
Consider these:
• The net income generated from the operations of the business is owned by the owner; and
• The capital account represents the part of the business that belongs to the owners.
Therefore, the net income that belongs to the owner should be included in his capital account.
 2. Partnership
Each partner’s Capital account will track his/her:
• contributions to the business;
• share in the net income; and
• drawings.

QUESTION: How do we determine the amount of net income that will be closed to each partner’s capital account
when there are several capital accounts in the partnership accounting records?
ANSWER: Accountants call this process “allocation of net income.” Net income is allocated based on the profit
and loss sharing agreement stipulated in the partnership contract. Allocation of net income is unique only to
partnership.

• Partnership is owned by two or more partners, your objective is to account for the equity of each partner.
Therefore, you need more than one capital account. As a matter of fact, the number of capital accounts that will
be reported on the SoCE and the SFP is equal to the number of partners.
• In partnership, each partner’s Capital account tracks information similar to that of Capital account used in sole
proprietorships. A Drawings account is also maintained for each partner. The naming convention for both the
capital and drawings accounts is the same as in sole proprietorship.
• Help the class recall that net income is closed to the capital account.

3. Corporation
1. Capital Stock, January 1, 20x1
 Number of Stocks issued as of January 1, 20x1 10,000
 Par Value P 10
 Capital Stock, January 1, 20x1 P 100,000
2. Additional Paid-in Capital, January 1, 20x1
 Number of Stocks issued as of January 1, 20x1 10,000
 Issued Price in Excess of Par Value (P20-P10) P 10
 Additional Paid –in Capital, January 1, 20x1 P 100,000
3. Capital Stock, Issuance
 Number of Stocks issued on July 1, 20x1 1,000
 Par Value P 10
 Capital Stock Issuance P 10,000
4. Additional Paid-in Capital Issuance
 Number of Stocks issued on July 1, 20x1 1,000
 Issued Price in Excess of Par Value (P25-P10) P 15
 Additional Paid –in Capital Issuance P 15,000
5. Dividends
 Number of Stocks issued as of February 1, 20x1 10,000
 Dividend per Share P 2.15
 Dividends for 20x1 P 21,500

Statement of Changes in Equity (SoCE)

Definition: Statement of Changes in Equity is a statement that reflects all the elements that caused changes in an
entity’s equity. It is prepared to help the readers understand the transactions that affected the balance of the equity
accounts.

In a Sole Proprietorship:
 Only one equity account is presented on the SFP and the SoCE of s sole proprietorship business.
 SoCE tracks the contributions from the owner, net income/net loss from the operations of the business and owner’s
drawings.
 The owner’s drawings account is used to record withdrawals of the owner. Drawing is closed to the Capital account
at the end of the year.

In a Partnership:
 The number of capital account that will be presented on the SFP and the SoCE is equal to the number of partners.
 Each capital account contains the contributions of the specific owner, his share in the net income/net loss from the
operations of the business and his drawings.
 The partnership net income/net loss is allocated to individual partners based on their profit and loss sharing
agreement.

In a Corporation:
The Stockholders’ Equity of a Corporation is divided into Two Parts:
1. Paid –In Capital/Capital Stock or Share Capital – represents funds contributed by the shareholders. It is the
amount of contributions given or will be given to the corporation in exchange for its common stocks.
 Forms of Paid-in Capital:
A. Capital Stock - reflects the par value or stated value indicated in the face of the share as authorized by the
Securities and Exchange Commission (SEC). Other names: Common Stocks

Par Value – is the minimum price by which corporations can issue stocks to shareholders.

B. Additional Paid –in Capital/Share Premium – reflects the excess of the issue price over the par value.

2. Retained Earnings –reports the undistributed earnings of the corporation.

Net Income less Net Losses and Dividends Distributed from the date of incorporation up to the cut-off or date of
the Statement of Financial Position will result to the balance of retained earnings.

Dividends – the income generated from the corporation business distributed to stockholders; similar to owner’s
drawings in sole proprietorship and partnership.

Note: Classification in Stockholders’ Equity of a Corporation may include Reserves which includes appropriation reserve
revaluation adjustment, foreign currency translation reserve)

What Is the Statement of Cash Flow (SCF)?

 The SCF is the financial statement that explains the net change in cash for the year.
 Like the SCI and SoCE, the SCF is dated “for the year-ended”, which means the statement shows the transactions
for the year that reconciles the beginning balance of cash to its year-end balance.
 The report is presented based on the three major activities of the business – operating, investing, and financing.

1. Operating Activities
 Cash flows from operating activities are primarily derived from the main revenue producing activities of the
business, which means that the transactions reported in this section represents the cash components of the
events that enter into the determination of net income in the SCI.
 On revenue: Revenue is reported on the SCI on the year when goods and services are delivered. On the
other hand, collections from customers will be reported on the SCF on the year when cash is received.
 On expenditures: Expenses are reported on the SCI based on three accrual approaches – matching principle,
rational allocation and immediate recognition. However, the cash disbursements for these expenses are
reported on the SCF on the year payments are made.
 The SCI shows a net income computed based on accrual. On the other hand, SCF shows net cash flows
provided by or used in operating activities.
  Examples of cash flow transactions reported under operating activities are:
 Cash received from customers (cash receipts from sale of goods and rendering of services)
 Cash received from fees, commissions, and other income
 Cash payments to suppliers
 Cash payments to employees
 Cash payments for other operating expenses
 Interest payments
2. Investing activities
 Reported within this section are cash used for acquisition of property, plant and equipment, intangible
assets and other long term assets as well as cash proceeds from the disposals of such long term assets.
 Cash flows from investing activities hints on the company’s ability to generate cash in the future.
 A negative cash flows from investing activities implies that the company used cash to acquire long-term
assets intended to generate cash and revenue in the future. On the other hand, a positive cash flow from
investing activities may indicate that the company is divesting or downsizing.
 Examples of cash flow transactions reported under investing activities:
 Cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
 Cash receipts from sale of property, plant and equipment, intangibles and other long-term assets.
 Cash loans made to other parties (long term note receivable).
 Cash collection on long term note receivable.
3. Financing activities
 Cash flow from financing activities is the last section of the SCF. This section reports cash received and cash
paid to equity owners and long-term creditors.
 Examples of cash flow transactions reported under financing activities:
1. Cash received from issuing common shares (or capital contribution from owners).
2. Cash received from issuing notes or getting a long term loan from a bank.
3. Cash dividends distributed to shareholders.
4. Cash withdrawals of owners.
5. Cash payment for principal of long-term loan.

Preparing the SCF

There are two methods of preparing the operating section of the SCF.
 Direct method
 Indirect method
Preparing the SCF (Indirect Method)
Adjustments to net income include…
Indirect Method – shows the reconciliation from accrual net income to net cash flows from operations.
 Non-cash expenses such as depreciation and amortization are added back to net Income. They are non-cash
expenses.
 Changes in current assets and current liabilities
Change in Current Assets/Current Liabilities Adjustment to Net Income
Increase in Current Assets Deduct from Net Income
Decrease in Current Assets Add to Net Income
Increase in Current Liabilities Add to Net Income
Decrease in Current Liabilities Deduct from Net Income
Classifications of the following Transactions: Operating, Investing or Financing Activities

1. Cash Received from Customers - Operating Activity

2. Cash paid to Suppliers - Operating Activity
3. Cash Paid to Employees – Operating Activity
4. Cash paid to purchase equipment (Company does not sell equipment) – Investing Activity
5. Cash received from sale of furniture (company’s main line of business is not related to furniture. – Investing Activity
6. Depreciation Expense – Non-Cash Expense
7. Sale of goods on Credit – Non-Cash Income
8. Purchase of goods on Credit – Non-Cash Purchased
9. Cash Received from getting a loan from a bank – Financing Activity
10. Cash paid to owners – Financing Activity

What Is Financial Statement Analysis?

Financial Statement Analysis
 is the process of evaluating risks, performance, financial health, and future prospects of a business using
computational and analytical techniques with the objective of making economic decisions.
Horizontal Analysis
 Horizontal analysis is also known as Trend Analysis.
 It is a technique that involves comparison of a line item (account) over a number of periods. Imagine
comparative financial statements are laid down side by side. One line will contain the account and its reported
balances over time.
 The technique borrowed its name from the horizontal direction of the analysis.
 The objective of the analysis is to answer the following questions:
 What is the behavior of the account over time? Is it increasing, decreasing or not moving?
 What is the relative or the percentage change in the balances of the account over time?
 Horizontal analysis uses financial statements of two or more periods.
 Horizontal analysis may be performed on all financial statements, specifically for both the SFP and SCI.
 Changes can be expressed in monetary value (peso) or percentages computed by using the following formulas:
Peso change = Balance of Current Year – Balance of Prior Year

Vertical Analysis
  Vertical analysis is the preparation of common-size financial statements. It is a technique that expresses each
financial statement line item as a percentage of a base amount. For the SFP, the base amount used is total
assets. On the other hand, sales or net sales is used as base amount for the SCI.
 A common-size SFP shows each line account as a percentage of total assets. From the asset side, we can infer
the composition of assets. On the other side, we can determine the company’s financing mix – the percentage of
asset financed by liability and equity.
 A common-size SCI expresses each line as a percentage of sales. This way, we can see how a sale is “used up” by
various expenses. Effectively, net income is the portion of sales not eaten up by expenses.

Statement of Changes in Equity

Problem A. (Sole Proprietorship) Compute for the Balance of Drawings Account
The Playdate Kiddie Gym is owned and managed by Cris Roxas. The balance of the Cris Roxas, Capital is P
765,430 and P 857,340 on December 31, 20x1 and December 31, 20x2, respectively. Net Income for 20x2 is P 115,465.
Cris did not make additional contribution to the business in 20x2.
Requirement: Determine the Balance of Cris Roxas, Drawings account on December 31, 20x2.

Problem B. (Partnership) Prepare the Partnership’s Statement of Changes in Equity as of December 31, 20x4.
The following are taken from the accounting records of MNO Partnership.
December 31, 20x3
Mario, Capital P 58,960
Nancy, Capital 63,200
Olga, Capital 64,890
The Partnership generated income of P 75,400 in 20x4. According to the partnership contract, the profit and loss
sharing ratios are as follows: Mario (25%), Nancy (37.5%) and Olga (35%).
The following were transactions with the partners during the year:
 Mario made additional contribution of P 7,640.
 Nancy withdrew P 5,000 from the business.
 Olga contributed P 12,000 but withdrew P 5,430.
Requirement: Prepare the partnership’s Statement of Changes in Equity as of December 31, 20x4.

Problem C. (Corporation) Compute the Net Income of the Corporation.

 The Retained Earnings of PQR Inc., shows a January 1, 20x2 balance of P 199,760. The Board of Directors of PQR
Inc., distributed cash dividends of P 11,000 to the company’s stockholders. As of December 31, 20x2, the Retained
Earnings reported a balance of P 280,990.
Requirement: Determine PQR’s Net Income for 20x2.