Answer problem 6-1 to 6-7

PROBLEMS Problem 6-2 (IAA) Problem 6-1 (IAA) Masay Company provided the following information for 2016: Sales 7,500,000 Karla Company provided the following information for 2016: Inventories - January 1: Raw materials 200,000 Purchases Goods in process Purchase returns and allowances 5,250,000 240,000 150,000 Finished goods 360,000 Rental income Inventories - December 31: Selling expenses 250,000 Raw materials 280,000 Freight out 175,000 Goods in process 170,000 Salesmen's commission 650,000 Finished goods 300,000 Depreciation - store equipment 125,000 Purchases 3,000,000 Merchandise inventory, January 1 Direct labor 950,000 Merchandise inventory, December 31 1,000,000 1,500,000 Indirect labor 250,000 Sales 7,850,000 Superintendente 210,000 Sales returns and allowances 140,000 Light, heat and power 320,000 Sales discounts 10,000 Rent - factory building 120,000 Administrative expenses Repair and maintenance . machinery 50,000 Officers' salaries 500,000 Factory supplies used 110,000 Depreciation - office equipment 300,000 Sales salaries 400,000 Freight in Income tax 500,000 Advertising 160,000 70,000 Loss on sale of equipment 250,000 Depreciation - store equipment Office salaries 150,000 Purchase discounts 50,000 Dividend revenue 100,000 Depreciation - office equipment 40,000 50,000 Depreciation - machinery 50,000 Loss on sale of investment .50,090 Sales returns and allowances 50,000 Interest income 10,000 Required: Gain on sale of equipment .100,000 Delivery expenses 200,000 a. Prepare an income statement for the year using the Accounting and legal fees 150,000 "functional" method with supporting notes. Office expenses 250,000 Earthquake loss 300,000 Prepare an income statement for the year using the Gain from expropriation of asset 100,000 Income tax expense 320,000 'natural" method with supporting notes. Required: a. Statement of cost of goods manufactured b. Income statement using the "cost of goods sold" method c. Income statement using the "nature of expense" method 168 169 Problem 6-3 (IAA) Problem 6-4 (IAA) Christian Company provided the following data for the year Ronald Company prepared the following statement for ended December 31, 2016: 2016: Sales 8,000,000 Sales 7,120,000 Sales salaries 520,000 Increase in inventories 380,000 7,500,000 Advertising 120,000 Cost of goods sold: Indirect labor 600,000 Sundry manufacturing costs 5,300,000 Delivery expense 160,000 Depreciation of factory building 280,000 Freight in 80,000 Freight on purchases 220,000 5,800,000 Depreciation - machinery 50,000 Gross income 1,700,000 Factory taxes 130,000 Other income: Purchases 1,600,000 Purchase discounts 20.000 Direct labor 1,480,000 Interest revenue 160,090 Factory supplies expense 120,000 Total 180,000 Office supplies expense 30,000 Other expense: Office salaries 800,000 Sales returns and allowances 140,000 40,000 Factory superintendente 480,000 1,740,000 Doubtful accounts 100,000 Operating income Administrative expenses 340,000 Factory maintenance 150,000 200,000 Factory heat, light and power . 220,000 Selling expenses Income tax 200,000 740,000 Income tax expense 170,000 Net income 1,000,000 Inventory balances at the end of the fiscal period as compared Inventories, January 1: with balances at the beginning of the fiscal period were as Materials 1,120,000 follows Factory supplies 660,000 Goods in process 360,000 420,000 2,560,000 Finished goods 200,000 decrease Finished goods Goods in process 90,000 decrease Inventories, December 31:" Raw materials 100,000 increase Materials 1,560,000 Required: Factory supplies 540,000 Goods in process 320,000 Finished goods 520,000 2,940,000 Prepare an income statement for the year ended December 380,000 31, 2016 supported by a schedule of cost goods manufactured. Increase in inventories 170 85-86 / 110The sundry manufacturing costs include the following: Problem 6-5 Multiple choice (PAS 1) Materials purchases 1,600,000 1. It is change in equity during a period resulting from transactions and other events, other than those changes Direct labor 2,000,000 600,000 resulting from. transactions with owners in their capacity Heat, light and power as owners. Repairs and maintenance 100,000 Indirect labor 360,000 Profit or loss Other factory overhead 3-40,000 b. Comprehensive income Factor supplies purchased 300,000 Other comprehensive income Share capital Total sundry manufacturing costs 5,300,000 2. Comprehensive income includes Required: Profit or loss Prepare an income statement in good form supported by b. Other comprehensive income Both profit or loss and other comprehensive income schedule of cost of goods manufactured. Neither profit or loss nor other comprehensive income 3. It is the total of income less expenses, excluding other comprehensive income. Comprehensive income b. Profit or loss C. Accounting income d. Economic income 1. It comprises items of income and expense, including reclassification adjustments, that are not recognized in profit or loss as required or permitted by PFRS. Comprehensive income b. Other comprehensive income C. Profit or loss d. Retained profit 5. What is the two-statement approach of presenting comprehensive income? A comparative statement of comprehensive income a. A combined statement of comprehensive income and retained earnings A combined income statement and a statement of C. changes in equity d. A separate income statement and a separate statement of comprehensive income 173 172 except 6. Other comprehensive income includes all of the following, Problem 6-6 Multiple choice (IAA) a. Gain and loss arising from translating the financial 1. The income statement reveals statements of a foreign operation. b. Gain and loss from debt investment measured at fair value through OCT. a. Resources and equity at a point in time. Gain and loss on hedging instrument in a cash flow hedge. b. Resources and equity for a period of time. d Dividend paid to shareholders. c. Net earnings at a point in time. d. Net earnings for a period of time. 7. Which component of other comprehensive income shall be reclassified subsequently to profit or loss? 2. The income statement information would help in which a. Change in revaluation surplus of the following tasks? Remeasurement of defined benefit plan c. Gain and loss from equity investment measured at a. Evaluate liquidity fair value through OCI b. Evaluate solvency d. Gain and loss on hedging instrument in a cash flow hedge. c. Estimate future cash flows 8. An entity shall present an analysis of expenses based on d. Estimate future financial flexibility a. The nature of expense 3. Conceptually, net income is a measure of b. The function of expense d. c. Either the nature of expense or the function of expense a. Wealth Neither the nature of expense nor the function of expense b. Change of wealth . Separate line items in an analysis of expenses by nature Capital maintenance include d. Cash flow a. Purchases, employee benefits, depreciation, 4. Which of the following terms cannot be used to describe extraordinary items. a line item in the statement of comprehensive income? b. Purchases, distribution costs, employee benefits, depreciation. Depreciation, purchases, transport costs, employee benefits. Revenue C. Cost of goods sold, administrative costs, transport b. Gross income costs and distribution costs. c. Income before tax d. Extraordinary item 10. Separate line items in an analysis of expenses by function include 5. Items of other comprehensive income should be analyzed a. Purchases, employee benefits, depreciation, extraordinary items. a. By nature b. Purchases, distribution costs, administrative costs, b. By function employee benefits. c. Either by nature or by function C. Depreciation, purchases, employee benefits, d. Neither by nature nor by function advertising costs. d. ost of goods sold, administrative expenses and distribution expenses. 174 175 6. Comprehensive income includes all of the following, except Problem 6-7 Multiple choice (AICPA Adapted) Revenue and gain 1. What is the purpose of reporting comprehensive income? b. . Expense and loss c. Preference share dividend a. To report changes in equity due to transactions with owners. d. Unrealized gain and loss on derivative contract b. To report a measure of overall entity performance. d' To replace net income with a better measure. 7. Comprehensive income includes all of the following, To combine income from continuing operation with except income from discontinued operation. 2. Which of the following changes during a period is not a a. Dividend revenue component of other comprehensive income? b. Loss on disposal of asset c. . Investment by owners a. Actuarial gain on defined benefit plan d. . Unrealized gain on trading investment b. Treasury share d c.. Foreign currency tanslation adjustment Unrealized gain on equity instrument measured at fair 8. Which of the following is not generally accepted in value through other comprehensive income presenting the income statement? 3. Which of the following items would cause net income to a. Including prior period error in determining income differ from comprehensive income? . The condensed income statement a. Unrealized loss on equity investment measured at fair . The consolidated income statement value through other comprehensive income 1. Including income tax in determining income b. Unrealized loss on investment held for trading c. Loss on exchange of similar assets d . Which of the following does not appear in a statement of Loss on exchange of dissimilar assets retained earnings? 4. Which of the following is not an acceptable option in presenting other comprehensive income? a. Net loss b. Prior period error a. In a separate income statement . Preference share dividend . In a single statement of comprehensive income d. Other comprehensive income c. In the notes to financial statements d. In a statement of changes in equity 10. Which of the following would appear first in a statement 5. When a complete set of financial statements is presented, of retained earnings? comprehensive income and its components should a. Net income a. Appear in the statement of retained earnings . Be reported net of related income tax effect, in total b. . Prior period error and individually. c. Cash dividend C. Appear in a supplemental schedule in the notes to d. Share dividend financial statements. d. Be displayed in a statement that has the same prominence as other financial statements. 176d. A sinking fund Investment c. Other asset 10. Which of the following is usually classified as a d. Reduction of shareholders' equity noncurrent asset? 5. The term "deficit" refers to a. Plant expansion fund a. An excess of current assets over current liabilities. b. Prepaid rent b. An excess of current liabilities over current assets. c. Supplies . Goods that are in the process of being completed for c. A debit balance in retained earnings. another entity d. A prior period error. 147 146 Definition An income statement is a formal statement showing the financial performance of an entity for a given period of time. CHAPTER 6 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. STATEMENT OF COMPREHENSIVE INCOME An introduction The financial performance is also known as the results of operations of the entity. TECHNICAL KNOWLEDGE The income statement for a period presents the income, expenses, gains, losses and net income or loss recognized statement To understand the objective and usefulness of an income during the period. Information about financial performance is useful in To understand the concept of comprehensive income, profit predicting future performance and ability to generate future or loss and other comprehensive income. cash flows To identify the components of other comprehensive income. Comprehensive income Comprehensive income is the change in equity during a period To understand the subsequent reclassification of the resulting from transactions and other events, other than components of other comprehensive income. changes resulting from transactions with owners in their capacity as owners. To know the minimum line items in the statement of comprehensive income. Accordingly, comprehensive income includes: Components of profit or loss o know the natural and functional presentation of the Components of other comprehensive income income statement. Profit or loss o be able to prepare and present a separate income statement and a single statement of comprehensive The term "profit or loss" is the total of income less expenses, income. excluding the components of other comprehensive income. In other words, this is the "bottom line" in the traditional income statement. An entity may use "net income" or "net loss" to describe profit or loss. 148 149 Other comprehensive income (OCI) Components of OCI that will be reclassified subsequently Other comprehensive income comprises items of income and to profit or loss include: expenses including reclassification adjustments that are not recognized in profit or loss as required or permitted by a. Unrealized gain or loss on debt investment measured Philippine Financial Reporting Standards. at fair value through other comprehensive income. The components of "other comprehensive income" include b. Gain or loss from translating financial statements of a the following: foreign operation. 1. Unrealized gain or loss on equity investment measured Unrealized gain or loss on derivative contracts designated at fair value through other comprehensive income as cash flow hedge. 2. Unrealized gain or loss on debt investment measured Components of. OCI that will not be reclassified at fair value through other comprehensive income. subsequently to profit or loss include: 3. Gain or loss from translation of the financial statements a. Unrealized gain or loss on equity investment measured of a foreign operation at fair value through other comprehensive income. 4. Revaluation surplus during the year. The Application Guidance of PFRS 9, paragraph B5.7.1, 5. Unrealized gain or loss from derivative contracts provides that such unrealized gain or loss is reclassified designated as cash flow hedge to retained earnings upon disposal of the investment. 6. "Remeasurements" of defined benefit plan, including b. Revaluation surplus during the year actuarial gain or loss The realization of the revaluation surplus is through 7. Change in fair value attributable to credit risk of a retained earnings. financial liability designated at fair value through profit c. Remeasurements of defined benefit plan, including or loss. actuarial gain or loss. Presentation of other comprehensive income The remeasurements are not reclassified subsequently but are permanently excluded from profit or loss. PAS 1, paragraph 82A, provides that the statement of comprehensive income shall present line items for amounts However, the remeasurements may be transferred within of other comprehensive income during the period classified equity or retained earnings. by nature. d. Change in fair value attributable to credit risk of a The line items for amounts of OCI shall be grouped as follows: financial liability designated at fair value through profit a. OCI that will be reclassified subsequently to profit or or loss. loss when specific conditions are met. Such gain or loss from change in fair value attributable to credit risk of a financial liability may be transferred b. OCI that will not be reclassified subsequently to profit within equity or retained earnings. or loss. 150 151 Classifications of expenses No more extraordinary items Distribution costs constitute costs which are directly related PAS 1, paragraph 87, specifically mandates that an entity to selling, advertising and delivery of goods to customers. shall not present any items of income and expense as Distribution costs ordinarily include: extraordinary items, either on the face of the income statement or statement of comprehensive income or in the 1. Salesmen's salaries notes. b. Salesmen's commissions . Traveling and marketing expenses Line items d. Advertising and publicity e. Freight out PAS 1, paragraph 82, provides that as a minimum, the income . Depreciation of delivery equipment and store equipment statement and statement of comprehensive income shall include the following line items: Administrative expenses constitute cost of administering the business. a. Revenue Administrative expenses ordinarily include all operating . Gain and loss from the derecognition of financial asset measured at amortized cost as required by PFRS 9. expenses not related to selling and cost of goods sold. . Finance cost Examples include: d. Share in income or loss of associate and joint venture accounted for using the equity method a.. Doubtful accounts e. Income tax expense b. Office salaries A single amount comprising discontinued operations c. Expenses of general executives. g. Profit or loss for the period d. . Expenses of general accounting and credit department h. Total other comprehensive income e. Office supplies used i Comprehensive income for the period being the total of comprehensive income.a. Salesmen's salaries statement or statement of comprehensive income or in the b. Salesmen's commissions notes. c. Traveling and marketing expenses 1. Advertising and publicity Line items e. Freight out PAS 1, paragraph 82, provides that as a minimum, the income Depreciation of delivery equipment and store equipment statement and statement of comprehensive income shall Administrative expenses constitute cost of administering the include the following line items: business. a. Revenue Administrative expenses ordinarily include all operating b. Gain and loss from the derecognition of financial asset expenses not related to selling and cost of goods sold. measured at amortized cost as required by PFRS 9. Examples include: C. Finance cost d. Share in income or loss of associate and joint venture a.. Doubtful accounts accounted for using the equity method b. Office salaries e. Income tax expense C. .Expenses of general executives f. A single amount comprising discontinued operations d. . Expenses of general accounting and credit department Profit or loss for the period e. Office supplies used . Total other comprehensive income f. i. Comprehensive income for the period being the total of Certain taxe profit or loss and other comprehensive income. g. Contribution h. Professional fees The following items shall be disclosed on the face of the i. Depreciation of office building and office. euipment income statement and statement of comprehensive income: i. Amortization of intangible assets Other expenses are those expenses which are not directly a. Profit or loss for the period attributable to noncontrolling related to the selling and administrative function. . interest and owners of the parent Examples include: b. Total comprehensive income for the period attributable to noncontrolling interest and owners of the parent. a. Loss on sale of trading investments b. Loss on disposal of property, plant and equipment c. Loss on sale of noncurrent investment d. Casualty loss - flood, earthquake, fire 154 155 Forms of income statement 'Functional" income statement PAS 1, paragraph 99, provides that an entity shall present an analysis of expenses recognized in profit or loss using a EXAMPLAR COMPANY classification based on either the function of expenses or their Income Statement nature within the entity, whichever provides information Year ended December 31, 2016 that is reliable and more relevant. Note Accordingly, the income statement may be presented in two Net sales (1) 9,000,000 Cost of goods sold (2) ways, namely functional and natural. (5,400,000 Gross income 3,600,000 Functional presentation Other income (3) 900,000 Investment income 500,000 This form classifies expenses according to their function as Total income 5,000,000 part of cost of goods sold, distribution costs, administrative expenses and other expenses. Expenses: Distribution costs (5) 1,350,000 1,000,000 The functional presentation is also known as the cost of goods Administrative expenses 320,000 sold method. Other expenses Finance cost (8) 200,000 2,870,000 An entity classifying expenses by function shall disclose Income before tax 2,130,000 additional information on the nature of expenses, including Income tax expense 580,000 depreciation, amortization and employee benefit costs. Net income ,550,000 Natural presentation Note 1 - Net sales The natural presentation is referred to as the nature of Gross sales 9,300,000 expense method. Sales return and allowance 100,000) Sales discount 200,000) Under this form, expenses are aggregated according to their Net sales 9,000,000 nature and not allocated among the various functions within the entity. Note 2 - Cost of goods sold In other words, the expenses are no longer classified as cost 1,500,000 of goods sold, distribution costs, administrative expenses and Inventory, January 1 Purchases 6,000,000 other expenses. Freight in 300,000 6,300,000 The expenses which are of the same nature are grouped or Total 150,000) aggregated. and presented as one item. Purchase return and allowance Purchase discount 250,000) 5,900,000 Goods available for sale 7,400,000 For example, depreciation, purchases of raw materials, (2,000,000) transport costs, employee benefit costs and advertising costs Inventory, December 31 are presented separately. Cost of sales 5,400,000 156 157 Presentation of comprehensive income Components of expense An entity has two options of presenting comprehensive income, namely: a. Cost of goods sold or cost of sales 1. Two statements: . Distribution costs or selling expenses c. Administrative expenses a. An income statement showing the components of profit - d. Other expenses or loss. e. Income tax expense b. A statement of comprehensive income beginning with profit or loss as shown in the income statement plus Cost of goods sold of merchandising concern or minus the components of. other comprehensive income. Beginning inventory 500,000 Net purchases 2,000,000 2. Single statement of comprehensive income Goods available for sale 2,500,000 Ending inventory 300,000) This is the combined statement showing the components of profit or loss and components of other comprehensive Cost of goods sold 2,200.000 income in a single statement. Gross purchases 1,900,000 Freight in 150,000 Sources of income Total 2,050,000 a. Sales of merchandise to customers Purchase returns, allowances and discounts 50,000) The income from sales shall include all sales to customers Net purchases 2,000,000 during the period. Cost of goods sold of manufacturing concern Sales returns, allowances and discounts shall be deducted 500,000 from gross sales to arrive at net sales. Beginning raw materials Net purchases 2.000,000 Rendering of services Raw materials available for use 2,500,000 Ending raw materials 300 000) Income from rendering of services, among others, includes 2,200,000 professional fees, media advertising commissions, Raw materials used 3,000,000 insurance agency commissions, admission fees for artistic Direct labor Factory overhead 1,300,000 performance and tuition fees. Total manufacturing cost 6,500,000 900,000 c. Use of entity resources Beginning goods in process 7,400,000 Total cost of goods in process This income category includes interest, rent, royalty and (1,000,000) Ending goods in process dividend income. 6,400,000 Cost of goods manufactured 1,600,000 d. Disposal of resources other than products Beginning finished goods 8,000,000 Goods available for sale (1,500,000) Examples include gain on sale of investments, gain on Ending finished goods sale of property, plant and equipment and gain on sale of 6,500,000 Cost of goods sold intangible . assets. 153 152 Note 3 - Other incTotal distribution costs Depreciation (8) 240,000 1,350,000 Taxes and licenses 20,000 Note 6 - Administrative expenses Doubtful accounts 40,000 Other expenses (9) 320,000 Office salaries Finance cost (10) 650,000 200,000 8.279,900 SSS and Philhealth - office 30,000 Income before tax 2,130,000 Bonuses 100,000 Income tax expense 580,000 Office supplies expense 70,000 1,550,000 Taxes and licenses 20,00 Net income Doubtful accounts 40,000 Depreciation - office equipment 90,000 Note 1-Net sales Total administrative expenses 1,000,000 Gross sales 9,300.000 Sales return and allowance 100,000) Note 7 - Other expenses Sales discount 200,000) Loss on sale of investment 30,000 Net sales 9,000,000 Loss on sale of property 120,000 Casualty loss from earthquake 170,000 Note 2-Other income Total 320,000 180,000 Interest revenue Note. 8 - Finance cost 120,000 Dividend revenue 100,000 Interest expense on bank loan 50,000 Rent revenue 500,000 Interest expense on bonds payable 150,000 Gain from expropriation 900,000 Total finance cost 200,000 Total 159 Note 3 - Investment income Note 9- Other expenses Share in net income of associate (25%) 500,000 Loss on sale of investment 30,000 Loss on disposal of property 120,000 Note 4- Increase in inventory Casualty loss from earthquake 170,000 Total 320,000 Inventory - December 31 2,000,000 Inventory - January 1 1,500,000 Note 10 - Finance cost Increase in inventory 500,000 Interest expense on bank loan 50,000 Note 5 - Net purchases Interest expense on bonds payable 150,000 200,000 Purchases Total finance cost 6,000,000 Freight in 300,000 Purchase return and allowance Which form of income statement? 150,000) Purchase discount ( 250,000) PAS 1 does not prescribe any format. Net purchases 5,900,000 Paragraph 105 simply states that "because each method of Note 6 - Employee benefit costs presentation has merit for different types of entities, management is required to select the presentation that is Sales salaries 600,000 reliable and more relevant". SSS and Philhealth - sales. 20,000 Office salaries 650,000 Statement of comprehensive income SSS and Philhealth - office 30,000 Bonuses 100,000 As stated earlier, in addition to the income statement, a Total employee costs 1,400,000 statement of comprehensive income is also prepared in order to show the total comprehensive income. Note 7 - Supplies expense The statement of comprehensive income starts with the profit Store supplies 50,000 or loss as shown in the income statement plus or minus the Office supplies 70,000 components of other comprehensive Total supplies expense 120,000 The purpose of this statement is to provide a more Note 8 - Depreciation comprehensive information on financial performance measured more broadly than the income as traditionally Depreciation - store 150,000 computed. Depreciation - office 90,000 Total depreciation 240,000 161 160 Illustration EXAMPLAR COMPANY Using the data in the preceding illustration, the statement Statement of Comprehensive Income of comprehensive income may appear as follows: Year Ended December 31, 2016 EXAMPLAR COMPANY Net sales 9,000,000 Statement of Comprehensive Income Cost of goods sold (5,400,000) Year Ended December 31, 2016 Gross income 3,600,000 Other income 900,000 Net income 1,550,000 Investment income 500,000 Other comprehensive income to be reclassified to profit or loss: Foreign currency translation gain Total income 5,000,000 150,000 Unrealized loss on derivative contract Expenses: designated as cash flow hedge Distribution costs 1,350,000 (100,000) 50,000 Administrative expenses 1.000,000 Comprehensive income 1,600,000 Other expenses 320,000 Finance cost 200,000 2.870.000 Comprehensive income for a period includes the net Income before tax 2,130,000 income or loss for the period plus or minus the components Income tax expense 580,000 of other comprehensive income. Net income 1,550,000 However, the comprehensive income of P1,600,000. is not Other comprehensive income to be reclassified to profit or loss: Foreign currency translation gain 150,000 carried to retained earnings. Only the net income of Unrealized loss on derivative contract P1,550,000 is included in the determination of retained designated as cash flow hedge ( 100,000) 50,000 earnings unappropriated. Comprehensive income 1,600,000 The net other comprehensive income of P50,000 is carried to 'reserves" or shown separately in the statement of changes Statement of retained earnings in equity. The statement of retained earnings shows the changes Single statement of comprehensive income affecting directly the retained earnings of an entity and relates the income statement to the statement of financial Another option in presenting the components of profit or position. loss and components of other comprehensive income is to prepare a single statement of comprehensive income. The important data affecting the retained earnings that should be clearly disclosed in the statement of retained Again, this single statement is the combined income earnings are: statement and statement of comprehensive income. a. Profit or loss for the period b. Prior period errors Using the preceding data, the single statement of c. Dividends declared and paid to shareholders comprehensive income following the "functional d. Effect of change in accounting policy presentation" may appear as follows: e. Appropriation of retained earnings 162 163 Illustration - all amounts are assumed Illustration - all amounts are assumed EXAMPLAR COMPANY EXAMPLAR COMPANY Statement of Retained Earnings Statement of Changes in Equity Year Ended December 31, 2016 Year Ended December 31, 2016 Retained earnings, January 1 1,000,000 Share Retained Correction of error resulting capital Reserves earnings from prior year underdepreciation Change in accounting policy from weighted ( 100,000) Balances - January 1 5,000,000 2,000,000 1,000,000 Correction of error resulting average to FIFO inventory valuation from prior year underdepreciation 100,000) resulting in an increase 300,000 Change in accounting policy from Corrected beginning balance weighted average to FIFO - credit 300,000 Net income for the period 1,200,000 Issuance of 10,000 ordinary shares Dividends declared during the year 1,550,000 with P100 par at P150 per share 1,000,000 500.000 Appropriated for contingencies 400,000) Issuance of 5,000 preference shares 200,000) with P50 par at P100 per share 250,000 250,000Using the data in the preceding illustration, the statement Statement of Comprehensive Income of comprehensive income may appear as follows: Year Ended December 31, 2016 EXAMPLAR COMPANY Net sales 9,000,000 Statement of Comprehensive Income Cost of goods sold (5,400,000) Year Ended December 31, 2016 Gross income 3,600,000 Other income 900,000 Net income 1,550,000 Investment income 500,000 Other comprehensive income to be reclassified to profit or loss: Foreign currency translation gain Total income 5,000,000 150,000 Unrealized loss on derivative contract Expenses: designated as cash flow hedge Distribution costs 1,350,000 (100,000) 50,000 Administrative expenses 1.000,000 Comprehensive income 1,600,000 Other expenses 320,000 Finance cost 200,000 2,870,000 Comprehensive income for a period includes the net Income before tax 2,130,000 income or loss for the period plus or minus the components Income tax expense 580,000 of other comprehensive income. Net income 1,550,000 However, the comprehensive income of P1,600,000 is not Other comprehensive income to be reclassified to profit or loss: Foreign currency translation gain 150,000 carried to retained earnings. Only the net income of Unrealized loss on derivative contract P1,550,000 is included in the determination of retained designated as cash flow hedge ( 100,000) 50,000 earnings unappropriated. Comprehensive income 1,600,000 The net other comprehensive income of P50,000 is carried to "reserves" or shown separately in the statement of changes Statement of retained earnings in equity. The statement of retained earnings shows the changes Single statement of comprehensive income affecting directly the retained earnings of an entity and relates the income statement to the statement of financial Another option in presenting the components of profit or position. loss and components of other comprehensive income is to The important data affecting the retained earnings that prepare a single statement of comprehensive income. should be clearly disclosed in the statement of retained Again, this single statement is the combined income earnings are: statement and statement of comprehensive income. a. Profit or loss for the period b. Prior period errors Using the preceding data, the single statement of c. Dividends declared and paid to shareholders comprehensive income following the "functional d. Effect of change in accounting policy presentation" may appear as follows: e. Appropriation of retained earnings 162 163 Illustration - all amounts are assumed Illustration - all amounts are assumed EXAMPLAR COMPANY EXAMPLAR COMPANY Statement of Retained Earnings Statement of Changes in Equity Year Ended December 31, 2016 Year Ended December 31, 2016 Retained earnings, January 1,000,000 Share Retained Correction of error resulting capital Reserves earnings from prior year underdepreciation ( 100,000) Balances - January 1 5,000,000 2,000,000 1,000,000 Change in accounting policy from weighted Correction of error resulting average to FIFO inventory valuation from prior year underdepreciation (100,000) resulting in an increase 300,000 Change in accounting policy from Corrected beginning balance weighted average to FIFO - credit 300,000 Net income for the period 1,200,000 Issuance of 10,000 ordinary shares 1,550,000 Dividends declared during the year . with P100 par at P150 per share 1,000,000 500,000 400,000) Appropriated for contingencies Issuance of 5,000 preference shares 200,000) with P50 par at P100 per share 250,000 250,000 Retained earnings, December 31 2,150,000 Comprehensive income: Net income 1,550,000 Statement of changes in equity Other comprehensive income 50,000 Dividends paid during the year ( 400,000) The statement of changes in equity is a basic statement that Current appropriation for shows the movements in the elements or components of the contingencies 200,000 ( 200,000) shareholders' equity. Balances - December 31 5.250,000 3,000,000 2.150,000 The statement of retained earnings is no longer a required basic Statement of cash flows statement but it is a part of the statement of changes in equity. The statement of cash flows is a basic component of the An entity shall present a statement of changes in equity showing the following: financial statements which summarizes the operating, investing and financing activities of an entity. 1. Comprehensive income for the period. 2. . For each component of equity, the effects of changes in In simple language, the statement of cash flows provides accounting policies and corrections of errors. information about the cash receipts and cash payments of an entity during a period. 3. For each component of equity, a reconciliation between the carrying amount at the beginning and end of the period, The preparation of the statement of cash flows and a more separately disclosing changes from: detailed discussion of the statement of financial position, a. Profit or loss income statement, statement of comprehensive income and statement of changes in equity are taken up exhaustively in b. Each item of other comprehensive income Financial Accounting, Volume Three. c. Transactions with owners in their capacity as owners showing separately contributions by and distributions to owners. 164 165 QUESTIONS 16. Define administrative expenses. 17. Define other expenses. 1. Define an income statement. 18. As a minimum, what re repor 2. Explain the usefulness of an income statement. on the face of the `me comprehensive in 82-83 / 110 3. Define comprehensive income. 19. Explain the two for. 4. Distinguish components of profit or loss and components 20. Which form of income statement is required? of other comprehensive income. 21. What is a single statement of comprehensive income? 5. Identify components of other comprehensive income. 22. Define a statement of retained earnings. 6. Explain the presentation of other comprehensive income. 23. What are the common items that directly affect retained 7. What are the components of other comprehensive income earnings? that are subsequently reclassified to profit or loss? 24. Define a statement of changes in equity. B. What are the components of other comprehensive income that are not subsequently reclassified to profit or loss? 25. Define a statement of cash flows. 9. Explain the reclassification of the components of other comprehensive income that are not reclassified to profit or loss. 10. Explain the two options of presenting comprehensive income 11. Identify the common sources of income. 12. Identify the components of expenses. 13. What is the formula in computing cost of goods sold of a merchandising concern? 14. What is the formula in computing the cost of goods sold of a manufacturing entity? 15. Define distribution costs. 166 167