Chapter 4

• 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 preparation of income statement in conformity with PFRS.
• 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.
• Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.
• Other comprehensive income comprises items of income expense including reclassification adjustments that recognized in profit or loss as required or permitted Philippine Financial Reporting Standards.
• 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 be reclassified subsequently to retained earnings.
• OCI that will be reclassified subsequently to profit or loss:

  1. Gain or loss from translating financial statements of a foreign operation.
  2. Unrealized gain or loss on derivative contracts designated as a cash flow hedge.
  3. Unrealized gain or loss on debt investment measured at fair value through OCI.
  4. Difference between total insurance finance income or expense for the period and a systematic allocation of the expected total insurance finance income or expense over the duration of the group of insurance contracts.
• 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.
• Under PFRS 9, the unrealized gain or loss is reclassified to retained earnings upon disposal of the investment.
• The realization of the revaluation surplus is through retained earnings.
• OCI that will be reclassified to retained earnings:

  1. Unrealized gain or loss on equity investment measured at fair value through OCI
  2. Change in revaluation surplus
  3. Remeasurements of a defined benefit plan
  4. Gain or loss attributable to credit risk of a financial liability designated at fair value through profit or loss.
• PAS 1, paragraph 81, provides that an entity has two options of presenting comprehensive income, namely:

  1. Two-statement approach
  2. Single statement approach
• Two-statement approach

  An income statement showing the components of or loss.
• 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.
• Components of expense

  1. Cost of goods sold or cost of sales
  2. Distribution costs or selling expenses
  3. Administrative expenses
  4. Other expenses
• Sources of income

  1. Sales of merchandise to customers
  2. Rendering of services
  3. Use of entity resources
  4. Disposal of resources other than products
  5. Income tax expense
• Sales of merchandise to customers

  The income from sales shall include all sales to customers during the period minus sales returns, allowances and discounts.
• 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.
• Use of entity resources

  This income includes interest, rent, royalty and dividend income.
• 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.
• Distribution costs or selling expenses constitute costs which directly related to selling, advertising and delivery of goods customers.
• Distribution costs

  1. Salesmen's salaries
  2. Sales commissions
  3. Traveling and marketing expenses
  4. Advertising and publicity expenses
  5. Freight out
  6. 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 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.
• PAS 1, paragraph 87, specifically mandates that an entity shall not present any income and expense as extraordinary in the income statement or statement of comprehensive income or in the notes.
• Expropriation loss and casualty loss from earthquake, typhoon, flood, fire and other natural disaster are considered component of income from continuing operations.
• PAS 1, paragraph 97, provides that when items of income and expense are material, their nature and amount shall be disclosed separately.
• Accordingly, the income statement may be presented in two ways, namely functional and natural.
• The functional presentation is the traditional and common form of income statement.
• The functional presentation is also known as the cost of goods sold method.
• Functional presentation

  This form classifies expenses according to their function as part of cost of goods sold, distribution costs, administrative activities and other activities.
• The natural presentation is referred to as the nature of expense method.
• Natural presentation

  The expenses which are of the same nature are grouped or aggregated and presented as one item.
• 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.
• Comprehensive income includes the net income or loss for the period plus or minus the components of other comprehensive income.