Intermediate Accounting III Statement of Comprehensive Income

INCOME STATEMENT

An income statement is a formal report that shows the financial performance—profit or

loss—of an entity over a specific period.

The financial performance of an entity is primarily assessed based on the level of income
generated through the effective and efficient use of resources. This performance is also
referred to as the results of operations.

The income statement for a period presents the income, expenses, gains, losses, and
net income or loss recognized during that period.

The transaction approach, which is the traditional method of preparing an income

statement in accordance with PFRS, computes net income or loss by determining the
income earned and the expenses incurred to generate that income.

Information about an entity's financial performance, particularly its profitability, is

valuable for predicting its ability to generate cash flows from existing resources.

Comprehensive income

Comprehensive income is the change in equity during a period resulting from

transactions and other events, other than changes resulting from transactions with
owners in their capacity as owners.

Accordingly, comprehensive income includes profit or loss and other comprehensive

income.

Profit or loss

Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income. This amount is the "bottom line" in the traditional income
statement. An entity may use net income or net loss to describe profit or loss.

Other comprehensive income (OCI)

Other comprehensive income comprises items of income and expense including

reclassification adjustments that are not recognized in profit or loss as required or
permitted by Philippine Financial Reporting Standards.

The components of other comprehensive income include the following:

1. Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income
2. Unrealized gain or loss on debt investment measured at fair value through other
comprehensive income
3. Gain or loss from translating the financial statements of a foreign operation
4. Revaluation surplus during the year
5. Unrealized gain or loss from derivative contracts designated as cash flow hedge
6. Remeasurements of defined benefit plan

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Intermediate Accounting III Statement of Comprehensive Income

7. Change in fair value attributable to credit risk of a financial liability designated

at fair value profit or loss

Presentation of other comprehensive income

PAS 1, paragraph 82A, provides that the other comprehensive income section shall
present line items for amounts of other comprehensive income in the period, classified
by nature.

The line items for amounts of OCI shall be grouped as:

1. OCI that will be reclassified subsequently to profit or loss when specific conditions
are met.

2. OCI that will not be reclassified subsequently to profit or loss but to retained
earnings.

OCI that will be reclassified subsequently to profit or loss

a) Gain or loss from translating financial statements of a foreign operation.

b) Unrealized gain or loss on derivative contracts designated as a cash flow hedge.
c) Unrealized gain or loss on debt investment measured at fair value through OCI.

Reclassification adjustments are amounts reclassified to profit or loss in the current

period that were recognized in other comprehensive income in the current or previous
periods.

OCI that will be reclassified to retained earnings

1. Unrealized gain or loss on equity investment measured at fair value through OCI
Under PFRS 9, the unrealized gain or loss is reclassified to retained earnings
upon disposal of the investment.

2. Change in revaluation surplus – The realization of the revaluation surplus is

through retained earnings.

3. Remeasurements of a defined benefit plan – The remeasurements are not recycled

subsequently to profit or loss but may be transferred within equity or retained
earnings.

4. Gain or loss attributable to credit risk of a financial liability designated at fair

value through profit or loss – The gain or loss may be recycled subsequently
within equity or retained earnings.

Presentation of comprehensive income

PAS 1, paragraph 81, provides that an entity has two options of presenting
comprehensive income, namely:

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Intermediate Accounting III Statement of Comprehensive Income

1. Two-statement approach
➢ An income statement showing the components of profit or loss.
➢ A statement of comprehensive income beginning with profit or loss as shown in
the income statement plus or minus the components of other comprehensive
income.

2. Single statement approach

➢ This is the combined statement showing the components of profit or loss and
components of other comprehensive income in a single statement of
comprehensive income.

Sources of income

1. Sales of merchandise to customers – The income from sales shall include all sales
to customers during the period minus sales returns, allowances and discounts.

2. Rendering of services - Income from rendering of services, among others, includes

professional fees, media advertising commissions, insurance agency
commissions, admission fees for artistic performance and tuition fees.

3. Use of entity resources – This income includes interest, rent, royalty and dividend
income.

4. Disposal of resources other than products – Examples include gain on sale of

investments, gain on sale of property, plant and equipment and gain on sale of
intangible assets.

Components of expense

1. Cost of goods sold or cost of sales

2. Distribution costs or selling expenses
3. Administrative expenses
4. Other expenses
5. Income tax expense

Classifications of expenses

Distribution costs or selling expenses constitute costs which are directly related to
selling, advertising and delivery of goods to customers.

Distribution costs include:

✓ Salesmen's salaries
✓ Sales commissions
✓ Traveling and marketing expenses
✓ Advertising and publicity expenses
✓ Freight out
✓ Depreciation of delivery equipment and store equipment

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Intermediate Accounting III Statement of Comprehensive Income

Administrative expenses constitute cost of administering the business. These ordinarily

include all operating expenses not related to selling and cost of goods sold.

Administrative expenses include:

1. Doubtful accounts
2. Office salaries and expenses of general executives
3. Office supplies expense
4. Contributions to charity
5. Professional fees
6. Depreciation of office building and office equipment
7. Amortization of intangible assets

Other expenses are those expenses which are not directly related to the distribution and
administrative function.

The other expenses are the expenses and losses from peripheral or incidental
transactions of the entity.

Other expenses include:

✓ Loss on sale of trading investment

✓ Loss on sale of property, plant and equipment
✓ Loss on sale of noncurrent investment
✓ Loss on sale of intangible asset
✓ Casualty loss from earthquake, typhoon, hurricane, tsunami, flood, fire, storm
surge and other natural disaster
✓ Expropriation loss

No extraordinary items

PAS 1, paragraph 87, explicitly prohibits an entity from presenting any income and
expense items as extraordinary items in the income statement, statement of
comprehensive income, or in the notes.

Unusual and infrequent income and expense items are considered part of the income
from continuing operations.

As such, losses from expropriation and casualties due to natural disasters such as
earthquakes, typhoons, floods, and fires are classified as components of income from
continuing operations.

Separate disclosure

PAS 1, paragraph 97, requires that when items of income and expense are material,
their nature and amount must be disclosed separately. Paragraph 98 outlines the
circumstances that would necessitate the separate disclosure of such income and
expense items.

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Intermediate Accounting III Statement of Comprehensive Income

Items of income and expense requiring disclosure

✓ Write-down of inventory to net realizable value and reversal of such write-down

✓ Write-down of property, plant and equipment to recoverable amount and reversal
of such write-down
✓ Restructuring of the activities of an entity and reversal of any provision for the
cost of restructuring
✓ Disposal of an item of property, plant and equipment
✓ Disposal of investment
✓ Discontinued operation
✓ Litigation settlement
✓ Other reversal of provision

Line items

PAS 1, paragraph 32, provides that the line items in the statement of comprehensive
income are:

✓ Revenue
✓ Gain or loss from derecognition of financial asset measured at amortized cost as
required by PFRS 9
✓ Finance cost
✓ Share of income or loss of associate and joint venture accounted for using the
equity method
✓ Income tax expense
✓ A single amount comprising discontinued operations
✓ Profit or loss for the period
✓ Other comprehensive income
✓ Comprehensive income for the period

The following items shall be disclosed on the face of the income statement and statement
of comprehensive income.

➢ Profit or loss attributable to noncontrolling interest and owners of the parent.

➢ Total comprehensive income attributable to noncontrolling interest and owners
of the parent.

An entity shall present additional line items, headings and subtotals in the statement
of comprehensive income or separate income statement when such presentation is
relevant to an understanding of the financial performance of the entity.

Forms of income statement

PAS 1, paragraph 99, requires an entity to present an analysis of expenses on the face
of the income statement, using a classification based on either the function of expenses
or their nature, depending on which provides more reliable and relevant information.

As a result, the income statement may be presented using either a functional or natural
classification.

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Intermediate Accounting III Statement of Comprehensive Income

Functional presentation

The functional presentation is the traditional and most commonly used format for the
income statement. It is also referred to as the cost of goods sold method. This approach
classifies expenses based on their function, such as cost of goods sold, distribution
costs, administrative expenses, and other activities.

Entities using the functional classification for expenses must disclose additional
information about the nature of these expenses, including depreciation, amortization,
and employee benefit costs.

Natural presentation

This presentation is known as the nature of expense method. Under this approach,
expenses are aggregated based on their nature rather than being allocated across
different functions within the entity. In other words, expenses are no longer classified
as cost of goods sold, distribution costs, administrative expenses, or other activities.
Instead, expenses of the same nature are grouped together and presented as a single
item.

Which form of income statement?

There is no prescribed format for the presentation. PAS 1, paragraph 105, states that
since each method of presentation has its advantages for different types of entities,
management must select the method that provides the most reliable and relevant
information.

The cost of goods sold method typically offers more relevant information to users.
Additionally, this format is straightforward and easy to understand.

Statement of comprehensive income

As stated earlier, in addition to the income statement, statement of comprehensive

income is also prepared in order to show the total comprehensive income. The statement
of comprehensive income starts with the net income or loss as shown in the income
statement plus or minus the components of other comprehensive income.

The purpose of this statement is to provide a more comprehensive information on

financial performance measured more broadly than the income as traditionally
computed. Comprehensive income includes the net income or loss for the period plus
or minus the components of other comprehensive income.

Single statement of comprehensive income

Another option in presenting the components of profit or loss and components of other
comprehensive income is to prepare a single statement of comprehensive income. The
single statement is the combined income statement and statement of comprehensive
income.

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Intermediate Accounting III Statement of Comprehensive Income

PROBLEMS

Problem 1

ABC Company provided the following information for the year ended December 31,
2024:

Sales 8,000,000
Sales salaries 520,000
Advertising 120,000
Indirect labor 600,000
Delivery expense 160,000
Freight in 80,000
Depreciation – machinery 50,000
Factory taxes 130,000
Purchases 1,600,000
Direct labor 1,480,000
Factory supplies expense 120,000
Office supplies expense 30,000
Office salaries 800,000
Factory superintendence 480,000
Doubtful accounts 100,000
Factory maintenance 150,000
Factory heat, light and power 220,000
Income tax expense 170,000

Inventory balances at the end of the fiscal period as compared with balances at the
beginning of the fiscal period were as follows:

Finished goods 200,000 decrease

Goods in process 90,000 decrease
Raw materials 100,000 increase

a. What is the amount of cost of goods sold for the current period?
b. What is the amount of general and administrative expense for the current period?
c. What is the amount of selling and distribution expense for the current period?
d. What is the amount of net profit for the current period?

Problem 2

ABC Corporation reports operating expenses in two categories: (1) selling and (2) general
and administrative. The adjusted trial balance at December 31, 2024, included the
following expense and loss accounts:

Accounting and legal fees 120,000

Advertising 150,000

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Intermediate Accounting III Statement of Comprehensive Income

Freight out 80,000

Interest 70,000
Loss on sale of long-term investment 30,000
Officers’ salaries 225,000
Rent for office space 220,000
Sales salaries and commissions 140,000

One-half of the rented premises are occupied by the sales department. ABC’s total
selling expenses for 2024 are

Problem 3

The following costs were incurred by ABC Co., a manufacturer, during 2024:

Accounting and legal fees 25,000

Freight in 175,000
Freight out 160,000
Officers’ salaries 150,000
Insurance 85,000
Sales salaries and commissions 215,000

What amount of these costs should be reported as general and administrative expense
for 2024?

Problem 4

ABC Company decided to discontinue its electronics division, a separately identifiable

component of business. On December 31, 2024, the division has not been completely
sold. However, negotiations for the final and complete sale are progressing in a year.
Analysis of the records for the year disclosed the following relative to the Electronics
Division:

Operating loss for the year 8,000,000

Loss on disposal of some Electronics Division assets during 500,000
2024
Expected operating loss in 2025 preceding final disposal 1,000,000
Expected gain in 2025 on disposal of division 2,000,000

What amount should be reported as pretax loss from discontinued operation in 2024?

Problem 5

On May 1, 2024 ABC Company approved a plan to disclose of a business segment. It is

expected that the sale will occur on March 1, 2025. On December 31, 2024, the carrying
amount of the net assets of the segment was P2,000,000 and the fair value was
P1,800,000. During 2024, the company paid employee severance and relocation costs

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Intermediate Accounting III Statement of Comprehensive Income

of P100,000 as a direct result of discontinued operation. Income tax rate is 30%. The
revenues and expenses of the discontinued segment during 2024 were:

Revenue Expenses
January 1 to April 30 1,500,000 2,000,000
May 1 to December 31 700,000 900,000

How much will be reported as discontinued operation for the year 2024?

Problem 6

ABC Company provided the following information for the current year:

Income from continuing operation 4,000,000

Income from discontinued operation 500,000
Unrealized gain on financial asset – FVPL 800,000
Unrealized loss on equity investment – FVOCI 1,000,000
Investment gain on debt investment – FVOCI 1,200,000
Unrealized gain on future contract designated as a cashflow 400,000
hedge
Translation loss on foreign operation 200,000
Net “remeasurement” gain on defined benefit plan during the 600,000
year
Loss on credit risk of financial liability at FVPL 300,000
Revaluation surplus 2,500,000

a. What net amount should be reported as other comprehensive income for the
current year?
b. What amount should be reported as comprehensive income for the current year?

Problem 7

ABC Company reported the following in the statement of comprehensive income for
2024:

Unrealized gain on trading securities 1,750,000

Unrealized loss on futures contract designated as cash flow 560,000
hedge
Revaluation surplus in 2020 2,500,000
Actuarial gain on projected benefit obligation 1,680,000
Exchange differences in translating foreign operations – 750,000
credit
Unrealized gain on equity investment at FVOCI 1,000,000
Unrealized gain on debt investment at FVOCI 1,500,000

a. What net amount may be subsequently recognized in profit or loss?

b. What net amount will not subsequently be recognized in profit or loss?

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Intermediate Accounting III Statement of Comprehensive Income

Problem 8

ABC Company provided the following information for the current year:

Net income 6,000,000

Unrealized loss on FVTOCI investments 500,000
Translation reserve – credit 600,000
Revaluation reserve 2,000,000
Accumulated profits adjustment – debit 100,000
Appropriated reserve 200,000
Gain on sale of treasury shares 150,000

What amount of comprehensive income should be reported for the current year?

THEORIES

1. The term comprehensive income

a) Must be reported on the face of the income statement.
b) Includes all changes in equity except those resulting from investments by and
distribution to owners.
c) Is the net change in owners' equity for the period.
d) Is synonymous with the term net income.

2. All of the following components of other comprehensive income are reclassified to

profit or loss, except:
a) Gain from translating the financial statements of a foreign operation
b) Loss from remeasuring debt investment at FVOCI
c) The effective portion of gain or loss on hedging instrument in a cash flow hedge
d) Gain on remeasuring equity investment at FVOCI

3. Which component of other comprehensive income should be reclassified to retained

earnings?
a) Revaluation surplus
b) Remeasurement of defined benefit plan
c) Changes in fair value attributable to credit risk of financial liability designated at
FVPL
d) All these components of OCI should be reclassified to retained earnings

4. Why is reclassification adjustment used when reporting other comprehensive income?

a) To reclassify an item of comprehensive income as another item of comprehensive
income
b) To avoid double counting of items
c) To make net income equal comprehensive income
d) To adjust the income tax effect of OCI

5. The components of OCI include all, except

a) Unrealized gain on derivative contract designated as cash flow hedge
b) Loss from translating the financial statements of a foreign operation

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Intermediate Accounting III Statement of Comprehensive Income

c) Actuarial gain on defined benefit plan

d) Dividend paid to shareholders

6. Which is not a component of OCI?

a) Foreign currency translation adjustment
b) Unrealized gain on financial asset held for trading
c) Deferred loss on derivative financial instrument designated as cash flow hedge
d) Change in revaluation surplus

7. Which is not a component of OCI?

a) Remeasurement of defined benefit plan
b) Treasury shares at cost
c) Foreign currency translation adjustment
d) Unrealized gain on equity investment measured at

8. Which of the following options for displaying other comprehensive income is

preferred?
a) A continuation from net income in the income statement
b) A separate statement that begins with net income
c) In the statement of changes in equity
d) A continuation from net income in the income statement or a separate statement
that begins with net income

9. How should exchange gain or loss resulting from foreign currency transaction be
accounted for?
a) Included as component of income from continuing operations for the period in
which the rate changes
b) Included as component of other comprehensive income for the period in which
the rate changes
c) Included in the statement of financial position
d) Included in net income for gain but deferred for loss

10. Unusual and infrequent gain should be presented as

a) Component of income from continuing operations but not net of applicable
income tax.
b) Component of income from continuing operations, net of applicable income tax.
c) Extraordinary item
d) Prior period error, net of applicable income tax.

***

Resources

▪ Financial Accounting Volume 3 by Conrado Valix and Jose Peralta

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