Contextualized Learning Material 12- FABM 2 - Quarter 1 - 003

Lesson 3

The Elements of the Statement of

Comprehensive Income (SCI) for a
Service and a Merchandising Business

I. Introduction

What I Need to Know

This module was designed and written with you in mind. It is here to help you master
the skills, knowledge, and attitudes required to identify the elements of the Statement of
Comprehensive Income (SCI) for a service business and a merchandising business. The
scope of this module permits it to be used in many different learning situations. The language
used recognizes the diverse vocabulary level of students. The lessons are arranged to follow
the standard sequence of the course. But the order in which you read them can be changed
to correspond with the textbook you are now using.

Most Essential Learning Competency (MELC)

The learners identify the elements of the SCI and describe each of these items for a service
business and a merchandising business

Learning Objectives
1. compare the elements of the SCI of a ser vice bu siness from a mercha ndising
busine ss
2. make an own list of income and expe nse acc ount
3. recognize the impo rtance of managing expenses in daily lives .

What ’s New

Activity 1: Considering the concept of Comprehensive Income, arrange the jumbled words
below. Write your answer in capital letters.

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1. _______________________ A S I N G

2. _______________________
S E S L O S

3. _______________________
E N I O M C

4. _______________________

R I T F O P
5. _______________________
C E V I R E S

6. _______________________

G I N L L E S
7. _______________________
T E S T R E I N

8. _______________________

P E N S E E X S
9. _______________________
C H A N D I M E R S I N G

10. ______________________
M I N R A T E A D I T I V S

II. Development

What I Know

Activity 2: Diagnostic Test

Before the lesson starts, let’s check your initial knowledge about the topic. Read and analyze the
following items below.

I. Multiple Choice. Choose the letter of your answer.

1. It represent other items that meet the definition of income and may or may not arise in the
course of the ordinary activities of an entity.
A. Expenses B. Gains
C. Income D. Losses

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2. These are increases in economic benefits during the period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to investments by the business owners.
A. Expenses B. Gains
C. Income D. Losses
3. It happens when income is less than expenses.
A. Expenses B. Gains
C. Income D. Losses
4. These are decreases in economic benefits during the period in the form of outflows or
depletions of assets or increases of liabilities that result in decreases in equity, other than
those relating to distributions to the business owners.
A. Expenses B. Gains
C. Income D. Losses 5. It is an enterprise
composed of a professional or team of experts that deliver work or aid in
completing a task for the benefit of its customers.
A. Manufacturing B. Merchandising
C. Retail D. Service
6. It is a business that purchases finished products and resells them to consumers.
A. Manufacturing B. Merchandising
C. Retail D. Service
7. These are costs attributable to selling activities.
A. Cost of Sales B. Distribution Cost
C. Income Tax D. Interest Expense
8. It is the cost incurred by an entity for borrowed funds.
A. Cost of Sales B. Distribution Cost
C. Income Tax D. Interest Expense
9. It includes taxes on income.
A. Cost of Sales B. Distribution Cost
C. Income Tax D. Interest Expense
10. It refers to the direct costs of producing the goods sold by a company.
A. Cost of Sales B. Distribution Cost
C. Income Tax D. Interest Expense

II. True or False. Write INCOME if the statement is correct and EXPENSE if it is incorrect.
11. If income is greater than expenses, the difference is loss.
12. If income is less than expenses, the difference is profit.
13. The product a service business delivers isn't like a product you buy at the store, such as a
television, piece of clothing, or food item.
14. Much of the inventory calculation is manifested through the line item cost of goods sold,
which is an expense account describing the cost of purchasing inventory and delivering it to
customers.
15. If you look at the SCI for a service company, you will not see a line item for the cost of goods
sold.

What’s In

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Activity 3: Make your own list of income and expense account of a Service and Merchandising
Business.

Income Accounts Expense Accounts

1. 6.
2. 7.
3. 8.
4. 9.
5. 10.

What is It

The Statement of Comprehensive Income (SCI)

The Statement of Comprehensive Income (SCI) or the Statement of Profit or Loss and Other
Comprehensive Income shows information on an entity’s financial performance during the
period. More specifically, it shows the following:
1. Profit or loss
2. Other comprehensive income
3. Comprehensive income
The Statement of Comprehensive Income (SCI) is different from the Income Statement.
Income Statement or the Statement of Profit and Loss shows only the profit or loss while the
SCI shows not only the profit or loss but also other comprehensive income.

Income Statement vs. Statement of Comprehensive Income

Income Statement Statement of Comprehensive Income

Income ₱ 1,000 Income ₱ 1,000

Expenses (600) Expenses (600)
Profit or Loss ₱ 400 Profit or Loss ₱ 400
Other comprehensive income 50
Comprehensive income ₱ 450

The standards require entities to present a Statement of Comprehensive Income.

Meaning, presenting an Income Statement alone without “other
comprehensive income” is prohibited.

Elements of the Statement of Comprehensive Income

1. Income are increases in economic benefits during the period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to investments by the business owners.

Income includes both revenue and gains.

a. Revenue arises in the course of the ordinary activities of a business and is referred to
by a variety of different names including sales, fees, dividends, royalties and rent.

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b. Gains represent other items that meet the definition of income and may or may not
arise in the course of the ordinary activities of an entity.

2. Expenses are decreases in economic benefits during the period in the form of outflows or
depletions of assets or increases of liabilities that result in decreases in equity, other than
those relating to distributions to the business owners.

Expenses include both expenses and losses.

a. Expenses arise in the course of the ordinary activities of a business.
b. Losses represent other items that meet the definition of expenses, and may, or may not, arise
in the course of the ordinary activities of the entity.

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The difference between income and expense represents profit or loss.
- If income is greater than expenses, the difference is profit. -
If income is less than expenses, the difference is loss.

Presentation of Expenses
Expenses may be presented in the Statement of Comprehensive Income using either of the
following methods:
1. Nature of expense method. Under this method, expenses are presented according to
their nature (for example, depreciation, purchase of materials, transport costs, employee
benefits and advertising costs) and are not reallocated among their functions within the
entity. This method is simple to apply because no reallocations of expenses are necessary.
A Statement of Comprehensive Income that shows expenses by their nature is referred to as
prepared using a Single-step approach. This is applicable to a service type of business.

Service Business
A service business is an enterprise composed of a professional or team of experts that
deliver work or aid in completing a task for the benefit of its customers. The product a service
business delivers isn't like a product you buy at the store, such as a television, piece of
clothing, or food item. A service business delivers a product that is primarily composed of
personal labor and expertise to deliver the desired work. For example, you may use a real
estate agent to buy your first house because you want to take advantage of their expertise,
negotiating skills, and knowledge of the required contracts.
Service companies have the most basic income statement of all the types of companies.
Since service-based companies do not sell a product, the income statement will not contain
cost of goods sold. Therefore, the income statement will be a basic breakdown of income
and expenses.

Example of a Statement of Comprehensive Income using a Single-step approach.

MARIWASA COMPANY
Statement of Comprehensive Income
For the Month Ended July 31, 2020

Revenues ₱ 20,000.00
Expenses:
Rent Expense ₱ 3,000.00
Salaries Expense 4,000.00
Utilities Expense 2,000.00 (9,000.00)
Net Income ₱ 11,000.00

2. Function of expense method (Cost of Sales method). Under this method, expenses
are classified and presented according to their function as part of the cost of sales or, for
example, the costs of distribution or administrative activities. At a minimum, an entity
discloses its costs of sales under this method separately from other expenses.
A Statement of Comprehensive Income that show expenses by their function is referred to
as prepared using a Multi-step approach. This is applicable to a merchandising business.

Merchandising Business
A merchandising business, sometimes called merchandisers, is one of the most
common types of businesses we interact with daily. It is a business that purchases finished
products and resells them to consumers.

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 Merchandising companies hold and account for product inventory, which makes their SCI
inherently more complicated. Much of the inventory calculation is manifested through the line
item cost of goods sold, which is an expense account describing the cost of purchasing
inventory and delivering it to customers. If you look at the SCI for a service company, you will
not see a line item for the cost of goods sold.

The following are the major categories of expenses under the function of expense method:
1. Cost of Sales (or Cost of Goods Sold) refers to the direct costs of producing the goods
sold by a company. This amount includes the cost of the materials and labor directly used
to create the good.
2. Distribution costs (or Selling expenses) are costs attributable to selling activities.
Examples include: freight-out or delivery expenses, sales commissions, advertising,
salaries of sales personnel, depreciation on delivery equipment, rent pertaining to space
occupied by the sales department, and the like.
3. Administrative expenses (or General and administrative expenses) is a residual
category of expenses, meaning, an expense that does not qualify for classification under
the other categories.
Examples include: insurance, taxes and licenses (except income tax expense), salaries of
non-sales personnel, depreciation of assets not used by the sales department, rent
pertaining to office space, and the like.
4. Other expenses includes losses, like casualty losses and losses on sale of properties.
5. Interest expenses (or Finance cost) is the cost incurred by an entity for borrowed funds.
Interest expense is a non-operating expense shown on the income statement. It
represents interest payable on any borrowings like bonds, loans, convertible debt or lines
of credit.
6. Income tax expense includes taxes on income. Other taxes are presented in
administrative expenses category under the “taxes and licenses” account.

Example of a Statement of Comprehensive Income using a Multi-step approach.

MARIWASA COMPANY
Statement of Comprehensive Income
For the Month Ended July 31, 2020

Net Sales ₱ 20,000.00

Cost of Goods Sold (10,000.00)
Gross Profit 10,000.00
Operating Expenses
General and Administrative Expenses ₱ 4,000.00
Selling Expenses 2,000.00 (6,000.00)
Operating Income 4,000.00
Interest Expense (0.00)
Net Income ₱ 4,000.00

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 III. Engagement

What’s More
Activity 4: Write GAE if the given account is part of the General and Administrative
Expenses and SE if part of the Selling Expenses.
1. Salaries of admin personnel 6. Depreciation of office equipment
2. Salaries of janitors 7. Depreciation of delivery van
3. Salaries of sales agents 8. Advertising
4. Utilities of home office 9. Salaries of production workers
5. Rent of office building 10. Cost of merchandise sold during
the year

What I Can Do

Activity 5: Evaluate your family’s income and expenses by answering the questions below.
You may ask your parent/guardian in doing this activity.
1. What are the sources of your family income?
2. Is your family income enough to pay all the family expenses? Explain your answer.
3. What composed of your family expenses? Give at least five (5) examples.
4. What can you say about your family expenses? Is it fixed or changing? Why?
5. What is the importance of managing your expenses at home?

IV. REFLECTION
Write your personal insights about the lesson using the prompts below. Write your answer on
the space provided below.

I understand that _____________________________________________________

I realize that ________________________________________________________

References

Printed sources
CHED-PNU, Teaching Guide for Senior High School, Fundamentals of Accountancy, Business and
Management 2, 2016
Ferrer, Rodiel C., et. al, Fundamentals of Accountancy, Business and Management 2, 2017

Online sources https://accountinginfocus.com/managerial-accounting-2/introduction-managerial-

accounting-
2/income-statements-for-service-companies/
https://study.com/academy/lesson/merchandising-business-definition-examples.html
https://study.com/academy/lesson/what-is-a-service-business.html
https://www.freeagent.com/en/glossary/income-accounts/
https://www.investopedia.com/terms/c/cogs.asp
https://www.investopedia.com/terms/i/interestexpense.asp
https://wps.prenhall.com/wps/media/objects/11463/11738516/Fill_in/PowerPoint_Chapter_1
_1B.pdf
https://www.thebalance.com/is-it-important-to-track-my-expenses-2385679

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