UNIT II: PREPARATION OF THE STATEMENT OF COMPREHENSIVE INCOME

Lesson 3c. The Statement of Comprehensive Income (Merchandising Business)

What is a statement of comprehensive income?

The statement of comprehensive income is a financial statement prepared at the end of the
period that shows the results of operation for a given period. It is actually composed of two parts, the
statement of income (also called the statement of profit or loss) and the statement of other
comprehensive income (also called the statement of other comprehensive items  this will be
discussed in the next accounting course FM 561).
The income statement shows the profit or loss of the company for the year.
If total revenues > total expenses ------ the result is a net income
If total revenues < total expenses ------ the result is a net loss
There are two forms of the “Income Statement”
 Single-step form (Natural Form)
- This form simply grouped together all the revenues and all the expenses and
the difference is either a net income or a net loss.
- This is the form usually used by service businesses
 Multi-step form (Functional Form)
- This form is the traditional and common form of the income statement
because it shows the different classification of the income statement
elements (the net sales, the cost of goods sold, the gross profit, the operating
income or loss and the net income or loss)
Format of the single-step form:
Name of the Company
Statement of Income heading
For the period (year) ended December 31, 2022
Revenues:
Net sales (1) xxx
Other income (2) xxx
Total revenues xxx
Less expenses:
Cost of sales (3) xxx
Selling and marketing expenses (4) xxx
General and administrative expenses (5) xxx
Other expenses (6) xxx
Total expenses xxx
Net income / (Loss) xxx
The numbers in ( ) indicate the “Number in the Notes to the Financial
Statements” where the detailed computations are shown.

Format of the multiple-step form: (DETAILED)

 Name of the Company
Statement of Income
For the period (year) ended December 31, 2022

Sales xxx
Less: Sales returns and allowances xxx
Sales discounts xxx xxx
Net sales xxx
Less cost of goods sold:
Beginning inventory xxx
Add net purchases:
Purchases xxx
Add freight in xxx
Total xxx
Less: Purchase returns and allowances xxx
Purchase discounts xxx xxx xxx
Total goods available for sale xxx
Less Ending inventory xxx xxx
Gross profit xxx
Add other income: Non-operating income
Interest income xxx
Dividend income xxx xxx
Total gross income xxx
Less operating expenses:
Marketing and selling expenses:
Sales salaries (or Salaries Expense – Sales Department) xxx
Advertising and promotion expense xxx
Freight out xxx
All expenses of the store, sales
Commissions xxx
and marketing department
Store supplies expense xxx
etc. xxx xxx
General and administrative expenses:
Office salaries All expenses of the general and xxx
Office supplies expenses executive offices xxx
Depreciation expense-office equipment xxx
Bad debts expense xxx
etc. xxx xxx
Other expenses Non-operating expenses xxx
Total expenses xxx
Operating Income / (loss) also called Earnings Before Interest and Taxes (EBIT) xxx
Less interest expense also called finance cost xxx
Income before tax xxx
Less income tax xxx
Net income / (loss) xxx
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Other expenses Non-operating expenses (including interest expense) xxx
 Total expenses xxx
Operating Income xxx

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Format of the multiple-step form: (SIMPLIFIED)

Name of the Company
Statement of Income
For the period (year) ended December 31, 2022

Net sales (1) xxx

Less cost of goods sold (2) xxx
Gross profit xxx
Add other income (3) xxx
Total gross income xxx
Less operating expenses:
Marketing and selling expenses (4) xxx
General and administrative expenses: (5) xxx
Other expenses (6) xxx
Total expenses xxx
Operating Income xxx
Less interest expense xxx
Income before tax xxx
Less income tax xxx
Net income / (loss) xxx

Purchases
Add Freight in
Total
Less: Purchase returns and allowances
Purchase discounts
Net Purchases

ILLUSTRATIVE EXAMPLE (FOR PURPOSE OF ILLUSTRATION WE WILL FOCUS ON A

MERCHANDISING BUSINESS TO HAVE A COMPREHENSIVE EXAMPLE)
The following is the trial balance of ECQ Company as of December 31, 2022
ECQ Company
Trial Balance
December 31, 2022
Cash P 748,400
Accounts receivable 370,000
Allowance for bad debts The amount of merchandise inventory on the P 8,000
Notes receivable balance sheet before adjustment is the 450,000
Merchandise inventory beginning balance – PERIODIC INVENTORY 800,000
Office equipment SYSTEM 820,000
Accumulated depreciation – office equipment 248,000
Accounts payable 667,000
Notes payable 500,000
Ernesto C. Quizon, Capital 1,897,900
Sales 3,450,000
Sales returns and allowances 62,000
Sales discount 96,000
Purchases 2,460,000
Freight in 146,500
Purchase returns and allowances 68,500
Sales salaries expense 258,000
Store supplies expense 26,000
Advertising and promition expense 150,000
Miscellaneous selling expense 14,500
Office salaries expense 320,000
Insurance expense 100,000
Miscellaneous office expense 18,000 .
P 6,839,400 P6,839,400
The following data were gathered at the end of the year. (REQUIRE AN ADJUSTING ENTRIES)
1. Merchandise inventory on hand as of December 31, 2022 is P720,000.
2. Depreciation of office equipment is 10% per annum.
3. Unpaid office sales salaries is P45,000.
4. Notes receivable is a 10%, 90-day customer’s note dated December 16, 2022.
To prepare the income statemet, first lets adust the accounts that need to be adjusted…
1. There are two ways of adjusting the merchandise inventory account:
Journal entry method Direct extension method
Cost of good sold 2,618,000
Merchandise Inventory-end 720,000 NO ENTRY, THE DIFFERENCE BETWEEN BEGINNING
Purchase returns and allowances 68,500 AND ENDING INVENTORY WILL BE REFLECTED
Merchanidise inventory-beg 800,000 DIRECTLY IN THE INCOME STATEMENT, COST OF
Purchases 2,460,000 GOODS SOLD SECTION.
Freight in 146,500

The amount of cost of goods sold is the difference between the total debit and total credit since all other accounts are found in the
trial 2.
balance except theExpense
Depreciation cost of –goods
Officesold. IT CAN ASO(820,000
equipment BE OBTAINED
x 10%)USING THE FORMULA IN THE PREVIOSU PAGE.
82,000
Accumulated depreciation - Office equipment 82,000
 All property, plant and equipment except land are subject to depreciation. AT the end of the year the depreciation is to be
computed using based on the estimate of the company, in this case 10% per annum (meaning they assumed that every
period the value of the asset is decreased by 10% and the decrease in the value is called depreciation expense)

3. Office salaries expense 45,000

Office salaries payable 45,000

If at the end of the period, there are expenses already incurred but not yet paid, they are called accrued expenses. Since they
are not yet paid, they are also assumed not yet recorded, hence as adjusting entry we just have to record the expense and
recognize a payable.

4. Interest receivable (450,000 x 10% x 15/360) 1,875

Interest income 1,875

Opposite to accrued expense is accrued income. Accrue income are income already earned but not yet received. In the case
of the interest on notes receivable, since it was issued on Dec 16 to the end of the period Dec 31, 15 days have already
passed therefore, the company is entitled to receive the interest for that period only. However, the interest on the note will
be received only when the notes itself is paid on its maturity which is 90 days. So as an adjusting journal entry, we have to
recognize a receivable for the interest income already earned for the period 12/16-31.

At this point we can now update the trial balance by incorporating the (4) adjusting entries. We will only
illustrate here the accounts affected.

TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE

ACCOUNT TITLES
Debit Credit Debit Credit Debit Credit
Merchandise inventory 800,000 1) 720,000 1) 800,000 800,000
Accumulated depreciation - OE 248,000 2) 82,000 330,000
Purchases 2,460,000 1) 2,460,000
Freight-in 146,500 1) 146,500
Purchase returns and allowances 68,500 1) 68,500
Offi ce salaries expense 320,000 3) 45,000 365,000

Cost of goods sold 1) 2,618,000 2,618,000

Depreiciation expense - OE 2) 82,000 82,000
Accrued salaries payable 3) 45,000 45,000
Interest receivable 4) 1,875 1,875
Interest income 4) 1,875 1,875

In combining the amounts:

if both debit: add and write the balance in the debit
If both credit: add and write the balance in the credit
If debit before adjustment and credit in the adjustment: subtract and write in the side of higher amount
If credit before adjustment and debit in the adjustment: subtract and write in the side of higher amount

ECQ Company
Trial Balance
 December 31, 2022
Cash P 748,400
Accounts receivable 370,000
Allowance for bad debts P 8,000
Notes receivable 450,000
Merchandise inventory 720,000
Office equipment 820,000
Accumulated depreciation – office equipment 330,000
Accounts payable 667,000
Notes payable 500,000
Ernesto C. Quizon, Capital 1,897,900
Sales 3,450,000
Sales returns and allowances 62,000
Sales discount 96,000
Purchases 0
Freight in 0
Purchase returns and allowances 0
Sales salaries expense 258,000
Store supplies expense 26,000
Advertising and promotion expense 150,000
Miscellaneous selling expense 14,500
Office salaries expense 365,000
Insurance expense 100,000
Miscellaneous office expense 18,000
Cost of goods sold 2,618,000
Depreciation expense – office equipment 82,000
Accrued salaries payable 45,000
Interest receivable 1,875
Interest income 1,875
P 6,899,775 P6,899,775

After adjusting the amounts, we can now prepare the income statement, take note of the adjusted accounts.
For this illustration, I will do the simplified format for simplicity and will just show the computation in the
notes to the financial statements.

ECQ Company
Statement of Income
For the year ended December 31, 2022
Net sales (1) P 3,292,000
Less cost of goods sold (2) 2,618,000
Gross profit 674,000
Add other income (3) 1,875
Total gross income 675,875
Less operating expenses:
Marketing and selling expenses (4) 448,500
General and administrative expenses: (5) 565,000
Total expenses 1,013,500
Income before tax (net income) (337,635)
Less income tax since net loss there will be no tax because tax is based on net income 0
Net income / (loss) a separate course in 3rd year will discuss income taxation P(337,625)

Notes to Financial Statements

1. Computation of net sales
Sales P3,450,000
Less: Sales returns and allowances 62,000
Sales discount 96,000 158,000
Net sales P3,292,000

2. Computation of cost of goods sold

Beginning inventory P 800,000
Add net purchases:
Purchases 2,460,000
Add freight in 146,500
Total 2,606,500
Less purchase returns and allowances 68,500 2,538,000
Total goods available for sale 3,338,000
Less Ending inventory 720,000
Cost of goods sold P 2,618,000

3. There is only one other income which is the interest income of P1,875 resulting from the accrued
interest in notes receivable:
Interest = Principal x rate x time
take note that the time here should only be the accrued
period (passed) from Dec. 16 – Dec. 31
= 450,000 x 10% x 15/360
= P1,875

4. Computation of the marketing and selling expenses

Sales salaries expense P 258,000
Store supplies expense 26,000
 Advertising and promition expense 150,000
Miscellaneous selling expense 14,500
Total marketing and selling expenses P 448,500

5. Computation of the general and administrative expenses

Office salaries expense P 365,000
Insurance expense 100,000
Depreciation expense 82,000
Miscellaneous office expense 18,000
Total general and selling expenses P 565,000

PRACTICE EXERCISE
A. The following information is taken from the ledger of SAP Trading as of December 31, 2022:
Cash P 520,000
Accounts receivable 690,000
Notes receivable 170,500
Prepaid insurance 80,000
Merchandise inventory, beginning 400,000
Merchandise inventory, end 565,000
Store supplies 100,700
Office supplies 150,200
Furniture and fixture 830,500
Accounts payable 450,000
Notes payable 500,000
Sallie A. Perez, capital
Sallie A. Perez, drawing 380,000
Sales 4,200,000
Sales returns and allowances 200,000
Purchases 2,800,000
Purchase discount 200,000
Transportation in (Freight in) 180,000
Store salaries 360,000
Advertising 140,000
Transportation out (Freight out) 80,000
Office salaries 240,800
Rent expense 360,000
Other office expense 50,000
Interest income 2,000
Required: Assuming adjustments have been incorporated already in the balances, prepare a simplified
statement of income with supporting notes to the financial statement as of December 31, 2022.
Disregard income tax.
Now that you know how to prepare the income statement, let us have some
exercise on the various computations in the income statement.
For each of the missing item, show your computation in a yellow paper and
submit a copy in the forum intended for the submission of the assignment.

Sample answer for Liz’s Cosmetics

Using the computation for net sales:
Sales 90,000 a. Sales – sales returns = net sales
Less Sales returns ? = 16,000 90,000 – X = 74,000
Net sales 74,000 X = 90,000 – 74,000
= 16,000
Using the computation for cost of good sold: Only this computation you need to show
Beginning inventory 14,000 in your assignment.
Add net purchases:
Purchases 88,000
Less Purchase returns 6,000 82,000
Goods available for sale 96,000 GAS – Ending inventory = CGS
Ending inventory ? = 32,000 96,000 – X = 64,000
Cost of good sold 64,000 X = 96,000 – 64,000
= 32,000
Note: The ending inventory of the previous year becomes the beginning inventory of the following year.