ABM 2

TOPIC 1: STATEMENT OF COMPREHENSIVE INCOME

LEARNING OBJECTIVES:

Dear student, after completing this topic you will be able to:

1. define Statement of Comprehensive Income (SCI)

2. define and describe the two forms of SCI
3. differentiate the Statement of Comprehensive Income of a Service Company and of a
Merchandising Company
4. identify and describe each elements of SCI for service business and merchandising business
ACTIVITY 1.1
1. Write your monthly allowance (computed by daily allowance x number of days in a month)
2. Write the amount you spend on food, transportation, phone load, etc. (make it monthly to
match with your allowance)
3. Deduct the amount you spend from the amount of your allowance.
Answer the following questions:
 From the activity, what can you consider as your revenues? How about your spending?
 From the activity, how can you say that there is a NET INCOME/NET LOSS?

 Write your answer on your ABM activity notebook.

1.1 UNLOCKING DIFFICULTIES
 STATEMENT OF COMPREHENSIVE INCOME
– Also known as the income statement. Contains the results of the company’s operations for a
specific period of time which is called net income if it is a net positive result while a net loss if it
is a net negative result. This can be prepared for a month, a quarter or a year. (Haddock, Price, &
Farina, 2012)
 TEMPORARY ACCOUNTS
– Also known as nominal accounts are the accounts found under the SCI. They are called such
because at the end of the accounting period, balances under these accounts are transferred to
the capital account, thus having only temporary amounts and resulting to zero beginning
balances at the beginning of the following year.(Haddock, Price, & Farina, 2012)
Examples of temporary accounts include revenues, sales, utilities expense, supplies expense,
salaries expense, depreciation expense, interest expense among others.
 SERVICE BUSINESS
– A business that provides work performed in an expert manner by an individual or team for the
benefit of its customers. The typical service business provides intangible products.
Examples:
 Accounting Firms, Laundry Shop, School, Repair Shop, Salon
MERCHANDISING BUSINESS
– It is a business that purchases finished products and resells them to consumers for profit. It is
also known as “Buy & Sell” business.
Examples:
 Grocery Store, Sari-Sari Store, Vegetable Vendor, Ukay-ukay Store

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ACTIVITY 1.2
Instruction: Observe the two illustrations below. Make a list of differences between the Single-Step SCI and
Multi-Step SCI you have observed. Use the template provided.

ILLUSTRATION 1 ILLUSTRATION 2

Template for Answers:

Single-Step SCI Multi-Step SCI

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1.2 TWO FORMS OF STATEMENT OF COMPREHENSIVE INCOME

1.2 DIFFERENCE BETWEEN SCI OF A SERVICE BUSINESS AND MERCHANDISING BUSINESS:

The main difference of the Statements of the two types of business lies on how they generate
their revenue.
 A service business provides services in order to generate revenue and the main cost associated
with their service is the cost of labor which is presented under the account Salaries Expense.
 A merchandising business sells goods to customers and the main cost associated with the
activity is the cost of the merchandise which is presented under the line item Cost of Goods
Sold.
In presenting these items on the Statement of Comprehensive Income;
 a service business will separate all revenues and expenses (as seen in the single-step format)
 a merchandising business will present total sales and cost of goods sold on the first part of the
statement which will net to the company’s gross profit before presenting the other expenses
which are classified as either administrative expenses or selling expenses (as seen in the multi-
step format).

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ACTIVITY 1.3: MODIFIED MATCHING TYPE
Instruction: Match the accounts on the table as to what type of SCI they are recorded. Write your
answer on the template provided.

SALES PURCHASE RETURNS AND ALLOWANCES DEPRECIATION EXPENSE

SERVICE REVENUE COST OF GOODS SOLD PURCHASES
EXPENSES FREIGHT-IN ENDING INVENTORY
SALES RETURNS AND ALLOWANCES BEGINNING INVENTORY CONSULTING REVENUES
SALES DISCOUNT PURCHASE DISCOUNTS OPERATING EXPENSES

SINGLE-STEP SCI

MULTI-STEP SCI

1.3 ELEMENTS OF SCI OF A SERVICE BUSINESS:

1. SERVICE REVENUE

 Service Revenue pertains to income earned from rendering services (intangible products). It is
the main revenue account of service-type businesses.

2. EXPENSES

 An expense in accounting is the money spent or cost incurred in an entity's efforts to generate
revenue. Expenses represent the cost of doing business where doing business is the sum total of
the activities directed towards making a profit.

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SINGLE-STEP SCI

1.4 ELEMENTS OF SCI OF A MERCHANDISING BUSINESS:

1. SALES

 This is the total amount of revenue that the company was able to generate from selling products

2. CONTRA-REVENUE ACCOUNTS

 called contra because it is on the opposite side of the sales account. The sales account is on the
credit side while the reductions to sales accounts are on the debit side. This is “contrary” to the
normal balance of the sales or revenue accounts. (Haddock, Price, & Farina, 2012)
2.a: Sales Returns & Allowances
- This account is debited in order to record returns of customers or allowances
for such returns. (Haddock, Price, & Farina, 2012) Sales returns occur when customers
return their products for reasons such as but not limited to defects or change of
preference.
2.b: Sales Discounts
- This is where discounts given to customers who pay early are recorded.
(Haddock, Price, & Farina, 2012) Also known as cash discount. This is different from
trade discounts which are given when customers buy in bulk. Sales discount is awarded
to customers who pay earlier or before the deadline.
NOTE: Sales - Sales returns & Allowances and Sales discount = Net Sales

3. COST OF GOODS SOLD

 This account represents the actual cost of merchandise that the company was able to sell
during the year. (Haddock, Price, & Farina, 2012)
3.a: Beginning Inventory
- This is the amount of inventory at the beginning of the accounting period. This is also
the amount of ending inventory from the previous period.

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3.b: Net Purchases

- Net Purchases = Purchases – (Purchase discount and purchase returns & allowances)

 Purchases – amount of goods bought during the current accounting period.

 Contra Purchases - An account that is credited being “contrary” to the normal balance
of Purchases account (Purchase discount and Purchase Returns & Allowances)

 Purchase discount – Account used to record early payments by the company to the
suppliers of merchandise. (Haddock, Price, & Farina, 2012) This is how buyers see a sales
discount given to them by a supplier.

 Purchase returns – Account used to record merchandise returned by the company to

their suppliers. (Haddock, Price, & Farina,2012) This is how buyers see a sales return
recorded by their supplier

3.c: Freight-In
- Freight in is defined as the shipping cost to be paid by the buyer of merchandise
purchased when the terms are FOB shipping point. Freight-in is considered to be part of
the cost of the merchandise and should be included in inventory if the merchandise has
not been sold.
 Add Beginning inventory and Net cost of Purchases to get Cost of Goods Available
for Sale

3.d: Ending inventory

- amount of inventory presented in the Statement of Financial Position. Total cost of
inventory unsold at the end of the accounting cycle.
NOTE: Sales – Cost of Goods Sold = Gross Profit

4. OPERATING EXPENSES
– Operating expenses are those expenditures that a business incurs to engage in activities not directly
associated with the production of goods or services. These expenditures are the same as selling, general
and administrative expenses.
General and administrative expenses - These expenses are not directly related to the merchandising
function of the company but are necessary for the business to operate effectively. (Haddock, Price, &
Farina, 2012)

Selling expenses – These expenses are those that are directly related to the main purpose of a
merchandising business: the sale and delivery of merchandise. This does not include cost of goods sold
and contra revenue accounts. (Haddock, Price, & Farina, 2012)

NOTE: Gross Profit – Operating Expenses = Net Income for a positive result while Net Loss for a
negative result

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MULTI-STEP SCI

ACTIVITY 1.5: MODIFIED MATCHING TYPE

Instruction: Classify the line accounts on the table as to single-step/nature of expense or multi-
step/function of expense SCI.

Net Sales Rent expense Utilities expense

Net Purchases Cost of Sales Interest expense
Depreciation and amortization expense Bad debts expense
General and administrative expense Selling expense
Salaries expense Advertising expense

SINGLE-STEP SCI

MULTI-STEP SCI

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SELF-CHECK 1-1: TRUE or FALSE

Instruction: Read each sentence carefully and determine whether the statement is True or False.

1. The SCI is a picture of results of operations of the company as of the cut-off date.
2. The result of the company’s operation is a Net Income if the expense amount is lower than the
Revenue/Income.
3. The result of the company’s operation is a Net Loss if the expense amount is higher than the
Revenue/Income.
4. The major elements of the SCI are income and expenses.
5. Income are transactions that decreases assets.
6. Expenses refers to a transaction that increases assets.
7. The single-step SCI is usually used by a service business while the multi-step SCI is usually used
by merchandising businesses.
8. The Sales revenue account is generally used to describe revenue/income derived from rendering
of services.
9. The Service income account is generally used to describe revenue/income derived from selling
of goods.
10. Income and expenses accounts are classified as temporary or nominal accounts.

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