Fundamentals in Accounting, Business, and Management 2

Income Statement

STATEMENT OF COMPREHENSIVE INCOME

Definition

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 the following:

1. Components of profit or loss

2. Components of other comprehensive income

Profit or loss

Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income. In other words, this is the “bottom line” in the traditional income
statement. An entity may use other terms to describe this amount as long as the meaning is
clear. For example, an entity may use “net income” or “net loss” to describe profit or loss.

Other comprehensive income

Other comprehensive income comprises items of income and expense including reclassification
adjustments that are not recognized in profit or loss as required or permitted in the Philippine
Financial Reporting Standards.

Presentation of Comprehensive Income

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

Income Statement

An income statement is a formal statement showing the financial performance 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 its 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 and thereby presents an indication in conformity with PFRS
of the results of the profit-directed activities during the period.

An income statement is prepared “for a period of time”. In other words, a period must expire
before the financial performance of an entity can be properly measured. The income statement
covers a period, unlike a statement of financial position which is prepared as of given date or
particular moment in time.

For example, if an entity commences operations on January 1, 2014, a statement of financial

position can be prepared on such date. However, an income statement cannot be prepared yet.
The entity has not been in operation for a “period of time”. Thus by December 31, 2014, an
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Income Statement

income statement can now be prepared since the entity has already been in operations for 12
months. The income statement will be “for the year ended December 31, 2014.”

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. It is also
useful in forming judgment about the effectiveness of employing additional resources.

Transaction approach

The transaction approach is the conventional or traditional preparation 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. The difference between the income and the expenses is net
income or net loss.

The transaction approach is the direct result of the application of the principle of matching costs
with revenue that is why, this procedure is also called the matching approach. This approach has
proved to be the acceptable procedure of determining income. It offers a detailed presentation
of all the income and expenses incurred in earning the revenue.

Income

The Conceptual Framework defines income as “increase in economic benefit during the
accounting period in the form of inflow or increase in asset or decrease in liability that results in
increase in equity, other than contribution from equity participants”. Simply stated, income is
inflow of future economic benefit that increases equity, other than contribution by owners.

Sources of Income

Specifically, income is derived from the following ordinary activities:

1. Sales of merchandise to customers

The income from sales shall include all sales to customers during the period. Sales returns,
allowance, and discounts shall be deducted from gross sales to arrive at net sales.
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.

Distinction between income and revenue

The definition of income encompass both revenue and gains

Technically, revenue arises in the course of the ordinary regular activities of an entity and is
referred to by a variety of different names including sales, fees, interest, dividends, royalties,
and rent. Gains represent other items that meet the definition of income and do not arise in the
course of ordinary regular activities of an entity.

The sales of merchandise to customers and the revenue from rendering of services are the
principal income of the entity. The income from use of entity resources and disposal of other
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Income Statement

resources is known as other income. Other income represents the revenue and gains from
peripheral or incidental transactions of the entity.

Expense

Under the Conceptual Framework, expense is defined as “decrease in economic benefit during
the accounting period in the form of outflow or decrease in asset and increase in liability that
results in decrease in equity, other than distribution to equity participants.”

Simply stated, expense is outflow of future economic benefit that decreases equity, other than
distribution or dividend paid to owners.

Specifically, expenses include the following:

1. Cost of sales or cost of goods sold 4. Other expenses

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

This is the traditional and common form of income statement. It is also known as the cost of
sales method. This form classifies expenses according to their function as part of cost of sales,
distribution costs, administrative activities and other activities.

Natural presentation

This 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 sales, distribution costs,
administrative and other activities. The expenses which are of the same nature are grouped or
aggregated and presented as one item.
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Income Statement
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Income Statement

Which form of income 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 sales” method usually would provide more relevant information to
the users.

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 more comprehensive information on financial

performance measured more broadly than the income as traditionally computed.

Illustration

Using the net income in the preceding illustration, the statement may appear as follows:

EXEMPLAR COMPANY
Statement of Comprehensive Income
Year Ended December 31, 2018
Net Income P1,550,000
OCI to be reclassified to profit or loss:
Foreign currency translation gain 150,000
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 is shown separately in the statement of changes in equity.