CHAPTER 4

STATEMENT OF COMPREHENSIVE INCOME

TECHNICAL KNOWLEDGE
To understand the nature and usefulness of the income
statement.

To understand the concept of comprehensive income, profit or

loss and other comprehensive income.

To identify the components of other comprehensive income.

To recognize the reclassification adjustment related to other

comprehensive income.

To be able to present the income statement following the

functional and natural presentation.

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INCOME STATEMENT
An income statement is a formal statement showing the
financial performance or profit or loss of an entity for a period of
time.
The financial performance of an entity is primarily measured in
terms of the level of income earned by the entity through the
effective and efficient utilization of resources.
The financial performance is also known as the results of
operations.
The income statement for a period presents the income, expenses,
gains, losses and net income or loss recognized during the period.
The transaction approach is the conventional or traditional
prepáration of income statement in conformity with PFRS.
This approach of computing net income or loss requires the
determination of how much income was earned during the year and
how much expenses were incurred in earning the revenue.
Information about the financial performance of an entity; in particular
its profitability, is useful in predicting the capacity of the entity 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 othér 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.
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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

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:

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

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b. OCI that will be reclassified subsequently to retained
earnings.
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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
a. 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.
b. Change in revaluaiion surplus

The realization of the revaluation surplus is through

retained earnings.
c. 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.
d. 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.

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Presentation of comprehensive income
PAS 1,paragraph 81, provides that an entity has two
options of presenting comprehensive income, namely:
1. Two-statement approach
a. An income statement showing the components of
profit or loss.
b. A statenient 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 comprehènsive income.
Sources of income
a. Sales of merchandise to customers
The income from sales shall include all sales to
customers during the period minus sales. returns,
allowances and discounts..

b. 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.

c. Use of entity resources

This income includes interest, rent, royalty and dividend
income.

d. 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.
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Components of expense
a. Cost of goods sold or cost of sales

b. Distribution costs or selling expenses

c. Administrative expenses

d. Other expenses

e. Income tax expense

Cost of goods sold of a merchandising entity

500,000
Beginning inventory 500,000
2,000,000
Net purchases
Goods available for sale 2,500,000
Ending inventory 300,000)

Cost ofgoods sold 2,200,000

Gross purchases 1,900,000

1500
Freight in ,00

2,050,000
Total
Purchase retürns, allowances and discounts. (50,000)

Net purchases 2,000,000

Cost of goods sold of a manufacturing entity

Beginning raw materials 500,000

Net purchases 2,000,000

Raw materials available for use 2,500,000

Ending raw materials (300,000)

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Raw materials used 2,200,000

Direct labor 3,000,000

Factory overhead 1,300,000

Total manufacturing cost 6,500,000

Beginning goods in process 900,000

Total cost of goods in process 7,400,000

Ending goods in process (1,000,000)

Cost of goods manufactured 6,400,000

Beginning finished goods 1,600,000

Goods available for sale 8,000,000

Ending finished goods (1,500,000)

Cost of goods sold 6,500,000

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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:
a Salesmen's salaries b.
Sales commissions
Traveling and marketing expenses
d. Advertising and publicity expenses
e. Freight out
f Depreciation of delivery equipment and store equipment
Administrative expenses constitute cost of administering the
business. These ordinarily include all operating expenses not
related to selling and cost of good's sold.
Administrative expenses include: a.
Doubtful accounts
b. Office salaries and expenses of general executives
c. Office supplies expense
d. Contributions to charity
e. Professional fees
f. Depreciation of office building and office equipment
g. Amortization of intangible assets
Other expenses are those expenses which are not directly related to
the distribution and administrative function.

Thé other expenses are the expenses and losses from

peripheral or incidental transactions of the entity.
Other expenses include:

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a. Loss on sale of trading investment
b. loss on sale of property, plant and equipment
c. Loss on saleof noncurrent investment
d. Loss on sale of intangible asset
e. Casualty loss from earthquake, typhoon,
hurricane,tsunami, flood,fire, storm surge and other natural
disaster f Expropriation loss

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No more extraordinary items
PAS 1,paragraph87,specifically mandates that an entity shall not
present any items of income and expense as extraordinary items, in the
income statement or statement of comprehensive income or in the
notes.
Unusual and infrequent items of income and expense are
considered component of income from continuing operations.
Thus,expropriation loss and casualty loss from earthquakse,
typhoon,food,fire and other natural disaster are considered component
of income from continuing operations.

Separate disclosure
PAS 1, paragraph 97, provides that when items of income and
expense are material, their nature and amount shall be disclosed
separately,

Paragraph 98 provides the circumstances that would give rise to

the separate disclosure of items of income and expense.
Items of income and expense requiring disclosure
a. Writedown of inventory to net realizable value and reversal
of such writedown

b. Writedown of property, plant and equipment to recoverable

amount and reversal of such writedown

c. Restructuring of the activities of an entity and reversal of

any provision for the cost of restructuring

d. Disposal of an item of property,plant and equipment

e. Disposal of investment

f. Discontinued operation

g. Litigation settlement

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h. Other reversal of provision

122
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Line items
PAS 1,paragraph 82, provides that the line items in the statement
of comprehensive income are:

a. Revenue

b. Gain or loss from derecognition of financial asset measured at

amortized cost
c. Finance cost

d. Share of income or loss of associate and joint venture

accounted for using the equity method e. Income tax expense

f. Gain or loss on reclassification of a financial asset from

amortized cost to fair value through profit or loss.

g. Gain or loss on reclassification of a financial asset from fair

value through OCI to fair value though profit or loss.

The cumulative amount in OCI is reclassified to profit or loss.

h. A single amount comprising discontinued operations

i. Profit or loss for the period

j. Other comprehensive income

k. Comprehensive income for the period

The following items shall be disclosed on the face of the income

statement and statement of comprehensive income:

a. Proft or loss attributable to noncontrolling interest and owners

of the parent.

b.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
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statement when such presentation is relevant to an understanding
of the financial performance of the entity.
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123
Forms of income statement
PAS 1, paragraph 99, provides that an entity shall present on the face of
the income statement an analysis of expenses using a classification based
on either the function of expenses or their nature within the entity,
whichever provides information that is reliable and more.relevant.

Accordingly,the income statement may be presented in two ways,

namely functional and natural.

Functional presentation
The functional presentation is the traditional and common form
of income statement.
The functional presentation is.
This form classifies expenses according to their function as part of cost of
goods sold, distribution costs, administrative activities and other activities.
Entities classifying expenses by function shall disclose additional
information on the nature of expenses, including depreciation,
amortization and employee benefit costs.

Natural presentation
This presentation is referred to as the nature of expense
method.
Under this form, expenses are aggregated according to their
nature and not allocated among the various functions within the
entity..
In other words, the natural expenses are no longer classified as
cost of goods sold, distribution costs, administrative and other
activities.

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The expenses which are of the same nature are grouped or
aggregated and presented as one item.
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 Functional income statement

EXAMPLAR COMPANY

Income Statement Year ended

December 31,2021

Note
Net sales (1) 9,000,000
Cost of goods sold (2) (5,400,000)

Gross income 3,600,000

Other income (3) 900,000

Investment income (4) 500,000

Totalincome 5,000,000

Expenses:

Distribution costs (5) 1,350,000

Administrative expenses (6) 1,000,000
Other expenses (7) 320,000
Finance cost (8) 200,000 2,870,000

Income before tax 2,130,000

Income tax expense 580,000

Net income 1,550,000

Note 1-Net sales

Gross sales 9,300,000

Sales return and allowance (100,000)

Sales discount ( 200,000)

Net sales 9,000,000

Note 2-Cost of goods sold

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Inventory,January 1 1,500,000

Purchases 6
,000,000

Freight in 300,000

Total ,300,000
6

Purchase return and allowance ) 150,000)

Purchase discount 250,000) 5,900,000

Goods available for sale 7,400,000

Inventory,December 31 (2,000,000)

Cost of goods sold 5,400,000

5,400,000

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 Note 3-Other income
Interest revenue
180,000
Dividend revenue 120,000
Rent revenue 100,000
Gain from expropriation 500,000

Total 900,000

Note 4-Investment income

500,000
Share in net income of associate (25%)
Note 5-Distribution costs

Sales salaries
600,000
SSS and Philhealth - sales
20,000
Sales commission
180,000
Advertising
100,000
Store supplies expense 50,000
Delivery expense 250,000
150,000
Depreciation-store equipment

Total distribution costs 1,350,000

Note 6 - Administrative expenses

Office salaries 650

,00
SSS and Philhealth - office
30

Bonuses ,000
100,000

Office supplies expense

70
,000
Taxes and licenses
2

,000
Doubtful accounts
4

,000
Depreciation - office equipment
90,000

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 Total administrative expenses 1,000,000

Note 7-Other expenses

Loss on sale of investment 30,000

Loss on sale of property

120,000
Casualty loss from earthquake
170,000

Total
320,000

Note 8-Finance cost

Interest expense on bank loan Interest 50,000

expense on bonds payable
150,000

Total finance cost

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 Natural income statement

EXAMPLAR COMPANY

Income Statement
Year ended December 31,2021

Note

Net sales (1) 9,000,000

Other income (2) 900,000
Investment income (3) 500,000

Total income 10,400,000

Expenses:

Încrease in inventory (4) 500,000)

Net purchases (5) 5,900,000
Employee benefit costs (6) 1,400,000
Sales commission 180,000
Advertising 100,000
Supplies expense (7) 120,000
Delivery expense 250,000
Depreciation (8) 240,000
Taxes and licenses 20,000
Doubtful accounts 40,000
Other expenses (9) 320,000
Finance cost (10) 200,000 8,270,000

Income before tax 2,130,000

Income tax expense 580,000

Net income 1,550,000

Note 1 - Net sales

Gross sales 9,300,000

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 Salès return and allowance ( 100,000)
Sales discount ) 200,000)

Net sales 9,000,000

Note 2 - Other income

Interest revenue 180,000

Dividend revenue
120,000
Rent revenue
100,000

Gain from expropriation 500,000

180,000

120,000

100,000

500,000

Total 900,000
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Note 3-Investment income
500,000

Share in net income of associate(25%)

2,000,000
Note 4-Increase in inventory
1,500,000
Inventory-December 31
Inventory-January 1 500,000

Increase in inventory
Note 5 -Net purchases
6,000,000
Purchases
300,000
Freight in

Purchase return and allowance )

Purchase discount 150,0
Net purchases
00)
( 250,000)

5,900,000
Note 6-Employee benefit costs

Office
Sales salaries supplies
SSS and Philhealth - salos Total
Office salaries supplies
expense
SSS and Philhealth - office
Bonuses Note
Total employee costs 8Deprecia
tion
Note 7 - Supplies expense
Depreciati
Store,supplies

on-store
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Depreciation-office
600,00
0
Total depreciation
20,000

650,00
0

30,000

100,00
0
1,400,0
00

50,000

70,000
120,00
0

150,00
0

90,000

240,00
0
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Note 9- Other expenses

30,000
120,000
Loss on sale of investment
Loss on disposal of property 170,000
Casualty loss from earthquake 320,000
Total

Note 10 - Finance cost

Interest expense on bank loan 50,000
Interest expense on bonds payable 150,000
Total finance cost
200,000 Which form of incomè statement?
There is no prescribed format.
PAS 1, paragraph 105, simply states that because each method of
presentation has merit for different types of entities, management is
required to select the presentation that is reliable and more relevant.

The cost of goods sold method usually would provide more relevant
information to the users.

Besides, the income statement is simple and easy to

understand.
STATEMENT OF COMPREHENSIVE INCOME
As stated earlier, in addition to the income statement, a
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.

128
Illustration
Using the net income in the preceding illustration, the separate
statement of comprehensive income may appear as follows:

EXAMPLAR COMPANY
Statement of Comprehensive Income
Year ended December 31,2021

Net income
1,550,000 OCI to be reclassified to profit or loss:
150,000
Foreign currency translation gain
Unrealized loss on derivative contract
designated as cash
flow hedge
(100,000) 50,000

Comprehensive income
1,600,000

Comprehensive income includes the net income or loss for the

period plus or minus the components of other comprehensive
income.
However, the comprehensive income of P1,600,000 is not carried
to retained earnings.

Only the net income of P1,550,000 is included in the determination of

retained earnings unappropriated.

The net other comprehensive income of P50,000 is carried to

"reserves" or shown separately in the statement of changes in
equity.

129
Single statement of comprehensive income
Another option in presenting the components of profit or loss
and components ofother comprehensive income.is to prepare
a single statement of comprehensive income.
This single statement is the combined income statement and
statement of comprehensive income.
The single statement of comprehensive income following the
functional presentation may appear as:

EXAMPLAR COMPANY
Statement of Comprehensive Income
Year ended December 31,2021

Net sales 9,000,000

Cost of goods (5,400,000)

sold 3,600,000
Gross income 900,000

Other income
Investment
income Total
income

Expenses: 1,350,000
Distribution costs 1,000,000
Administrative expenses
Other expenses 320,000 2,870,000
Finance cost 200,000

Income before tax Unrealiz

Income tax expense ed loss on
Net income derivative
contr
act
OCI to be reclassified to profit or loss: Foreign designated
currency translation gain 150,000

130
as ( 100,000) 2,130,000
cash flow hedge
Comprehensive income

50,000 1,600,000

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