Chapter 2

Statement of Comprehensive Income

The Statement of Comprehensive Income
The “Statement of Comprehensive Income” – short for “Statement of profit or loss and other comprehensive income” is
the 2nd component of a complete set of financial statements. The “Statement of 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; and
3. Comprehensive income.

The “Statement of profit or loss and other comprehensive income” is different from the “income statement.” The
income statement (or statement of profit or loss) shows only the profit or loss, while the “Statement of profit or loss and
other comprehensive income” shows profit or loss and “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 profit or loss and other comprehensive income.” Meaning,
presenting an income statement alone without “other comprehensive income” is prohibited.
However, the standards allow the presentation of an income statement together with the statement of
comprehensive income. This is called the “two-statement presentation.”
Single-statement vs. Two-statement presentation
I. Single-statement presentation:
ABC Co.
Statement of Comprehensive Income
For the period ended December 31, 20x1
Income ₱1,000
Expenses (600)
Profit for the year 400
Other comprehensive income 50
Comprehensive income for the year ₱450

II. Two-statement preparation:

a. First of two statements – the “Income statement”
ABC Co.
Income Statement
For the period ended December 31, 20x1
Income ₱1,000
Expenses (600)
Profit or loss ₱400
b. Second of two statements
ABC Co.
Statement of Comprehensive Income
For the period ended December 31, 20x1
Profit or loss ₱400
Other comprehensive income 50
Comprehensive income ₱450

“Other comprehensive income” is discussed in higher accounting studies. So, right now, we don’t need to worry about
this. In our succeeding illustrations, we will use the “single-statement” presentation of the “statement of comprehensive
income” but we will assign a zero amount for “other comprehensive income.”
Elements of the Statement of Comprehensive Income
The elements of the Statement of Comprehensive Income are income and expenses. Let us recall the definitions from
Part 1 of this book:

1. INCOME – is increases in economic benefits during the period in the form of increases in assets, or decreases in
liabilities, that result in increases in equity, excluding those relating to investments by the business owner.

Income includes both revenue and gains.

a. Revenue arises in the course of the ordinary activities of a business, e.g., sales and service fees.
 Service fees refer to revenue earned by a service business from rendering business.
 Sales revenue or Sales refer to the revenue earned by a merchandising business from selling goods.
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 decreases in assets, or
increases in liabilities, that result in decreases in equity, excluding those relating to distributions to the business
owner.

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.

The difference between income and expenses represents profit or loss.

 If income is greater than expenses, the difference is profit.

 If income is less than expenses, the difference is loss.

Illustration: SCI of a service business

The trial balance of ABC Co. on December 31, 20x1 shows the following information:
Accounts Dr. Cr.
Service fees ₱870,000
Interest income 60,000
Gains 20,000
Salaries expense ₱300,000
Rent expense 30,000
Utilities expense 20,000
Supplies expense 10,000
Depreciation expense 40,000
Taxes and license 70,000
Transportation and travel expense 5,000
Interest expense 2,000
Miscellaneous expense 1,000
Losses 15,000
Totals ₱493,000 ₱950,000
Requirement: Prepare the statement of comprehensive income
Solution:
ABC Co.
Statement of Comprehensive Income
For the period ended December 31, 20x1

INCOME
Service fees ₱870,000
Interest income 60,000
Gains 20,000
TOTAL INCOME 950,000

EXPENSES
Salaries expense 300,000
Rent expense 30,000
Utilities expense 20,000
Supplies expense 10,000
Depreciation expense 40,000
Taxes and licenses 70,000
Transportation and travel expense 5,000
Interest expense 2,000
Miscellaneous expense 1,000
Losses 15,000
TOTAL EXPENSES 493,000

PROFIT FOR THE YEAR 457,000

Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YEAR ₱457,000

Presentation of Expenses
Expenses may be presented in the statement of comprehensive using either of the following methods:

1. Nature of expense method

2. Function of expense method (Cost of sales method)

Nature of expense method

Under this method, expenses are presented according to their nature (for example, depreciation, purchases of materials,
transport costs, employee benefits, advertising costs, etc.) 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.
Function of expense method
Under this method, expenses are classified and presented according to their function as part of cost of sales or, for
example, the costs of distribution or administrative activities. At a minimum, cost of sales is presented separately from
other expenses.
A statement of comprehensive income that shows expenses by their function is referred to as prepared using a
multi-step approach.
 The following are the major categories of expenses under the function of expense method:

1. Cost of sales (or Cost of goods sold)

2. Distribution costs (or Selling expenses)
3. Administrative expenses (or General and administrative expenses)
4. Other expenses
5. Interest expenses (or Finance cost)
6. Income tax expense
 Distribution costs (or Selling costs) – are costs attributable to selling activities.

Examples: 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.

 Administrative expenses – is a residual category of expenses, meaning an expense that does not qualify for
classification under the other categories (i.e., numbers 1, 2 and 4 to 6) is included in this category.

Examples: 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.

 Other expenses – includes losses, like casualty losses and losses on sale of properties.
 Income tax expense – includes taxes on income. Other taxes are presented in the administrative expenses category
under the “taxes and licenses” account.

Again, line items are used in order to promote comparability of financial statements between different
businesses. An entity shall use its judgement when determining the need to present additional line items.
Illustration: Function of expense
The accounts of an entity show the following balances:
Cost of goods sold ₱250,000
Insurance expense 120,000
Advertising expense 18,000
Freight-out 36,000
Loss on sale of equipment 4,000
Rent expense (one-half pertains sales department) 120,000
Salaries expense (1/4 pertains to non-sales personnel) 200,000
Sales commission expense 20,000
Bad debts expense 6,000
Interest expense 1,000

Requirements: Determine the amounts of expenses classified as (1) distribution costs and (2) administrative expenses.
Solution:
(1) Selling expenses
Advertising expense ₱18,000
Freight-out 36,000
Rent expense (120,000 x ½) 60,000
Salaries expense (200,000 x ¾*) 150,000
Sales commission expense 20,000
Selling expenses ₱284,000
*(1 minus ¼ pertaining to non-sales personnel = ¾ pertaining to sales personnel)
 (2) Administrative expenses
Insurance expense ₱120,000
Rent expense (120,000 x ½) 60,000
Salaries expense (200,000 x ¼) 50,000
Bad debts expense(a) 6,000
Administrative expenses ₱236,000
(a) Bad debts expense is classified as administrative expenses. This is because credit granting is an administrative

function and bad debts normally result from poor credit policies or decisions. However, if material, the amount of bad
debts shall be presented separately and not included in the categories of expenses.

 “Cost of goods sold” is presented separately.

 The “Loss on sale of equipment” is presented under the “Other expenses” category. However, material amounts of
losses shall be presented separately.
 “Interest expense” is presented separately.

Illustration: SCI of a merchandising business

The nominal accounts columns of the trial balance of ABC Co. on December 31, 20x1 show the following information:
Accounts
Sales ₱900,000
Interest income 60,000
Gains 20,000
Inventory, beg. ₱50,000
Purchases 200,000
Freight-in 10,000
Purchase returns 5,000
Purchase discounts 7,000
Freight-out 25,000
Sales commission 30,000
Advertising expense 15,000
Salaries expense 300,000
Rent expense 30,000
Depreciation expense 40,000
Utilities expense 20,000
Supplies expense 10,000
Transportation and travel expense 5,000
Insurance expense 12,000
Taxes and licenses 70,000
Interest expense 2,000
Miscellaneous expense 1,000
Loss on the sale of equipment 15,000
Totals ₱835,000 ₱992,000
Additional information:
a. Ending inventory is ₱80,000.
b. One-half of the salaries, rent, and depreciation expenses pertain to the sales department. The sales department does
not share in the other expenses.

Requirements: Prepare the statement of comprehensive income using the following:

a. Nature of expense method (Single-step approach)
b. Function of expense method (Multi-step approach)
Solutions:
Requirement (a): Single-step approach
ABC Co.
Statement of Comprehensive Income
For the period ended December 31, 20x1

INCOME
Sales ₱900,000
Interest income 60,000
Gains 20,000
TOTAL INCOME 980,000

EXPENSES
Net purchases(a) 198,000
Change in inventory(b) (30,000)
Freight-out 25,000
Sales commission 30,000
Advertising expense 15,000
Salaries expense 300,000
Rent expense 30,000
Depreciation expense 40,000
Utilities expense 20,000
Supplies expense 10,000
Transportation and travel expense 5,000
Insurance expense 12,000
Taxes and licenses 70,000
Interest expense 2,000
Miscellaneous expense 1,000
Loss on sale of equipment 15,000
TOTAL EXPENSES 743,000

PROFIT FOR THE YEAR 237,000

-
Other comprehensive income

COMPREHENSIVE INCOME FOR THE YEAR ₱237,000

“Net purchases” is computed as follows:

(a)

Purchases ₱200,000
Freight-in 10,000
Purchase returns (5,000)
Purchase discounts (7,000)
Net Purchases ₱198,000

(b) “Change in inventory” is the difference between the beginning inventory and ending inventory. This is computed as
follows:
Inventory, beg. ₱50,000
Inventory, end 80,000
Change in inventory – increase (₱30,000)
 - An increase in inventory is a deduction.
- A decrease in inventory is an addition.

Notice the inverse relationship.

The treatments for “Net purchases” and “Change in inventory” are necessary so that “cost of goods sold” is
properly reflected on the single-step statement of comprehensive income. Analyze the computations below:

Regular computation:
Inventory, beg. ₱50,000
Purchases 200,000
Freight0in 10,000
Purchase returns (5,000)
Purchase discounts (7,000)
Total goods available for sale 248,000
Inventory, end (80,000)
Cost of goods sold ₱168,000

As reflected on the statement of comprehensive income above:

Net purchases ₱198,000
Change in inventory – increase (30,000)
Cost of goods sold ₱168,000
Requirement (b): Multi-step approach
ABC Co.
Statement of Comprehensive Income
For the period ended December 31, 20x1

Notes
Sales ₱900,000
Cost of Sales 1 (168,000)
GROSS PROFIT 732,000
Other income 2 80,000
Distribution costs 3 (255,000)
Administrative expenses 4 (303,000)
Other expenses 5 (15,000)
Interest expense (2,000)
PROFIT FOR THE YEAR 237,000
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YR. ₱237,000
The breakdowns of the line items are shown in the “Notes” as follows:

Note 1: Cost of sales

This account consists of the following:
Inventory, beg. ₱50,000
Purchases 200,000
Freight-in 10,000
Purchase returns (5,000)
Purchase discounts (7,000)
Total goods available for sale 248,000
Inventory, end (80,000)
Cost of sales ₱168,000

Note 2: Other income

This account consists of the following:
Interest income ₱60,000
Gains 20,000
Other income ₱80,000

Note 3: Distribution costs

This account consists of the following:
Freight-out ₱25,000
Sales commission 30,000
Advertising expense 15,000
Salaries expense (300,000 x ½) 150,000
Rent expense (30,000 x ½) 15,000
Depreciation expense (400,000 x ½) 20,000
Distribution costs ₱255,000

Note 4: Administrative expenses

This account consists of the following:
Salaries expense (300,000 x ½) ₱150,000
Rent expense (30,000 x ½) 15,000
Depreciation expense (40,000 x ½) 20,000
Utilities expense 20,000
Supplies expense 10,000
Transportation and travel expense 5,000
Insurance expense 12,000
Taxes and licenses 70,000
Miscellaneous expense 1,000
Administrative expenses ₱303,000
Note 5: Other expenses
This account consists of a loss incurred on the sale of equipment.

Chapter 2 Summary:

 A “Statement of profit or loss and other comprehensive income” (or simply ‘Statement of comprehensive income’)
is different from an income statement in that a statement of comprehensive income does not only show
information on profit or loss but also other comprehensive income.
 A statement of comprehensive income may be presented using a “single-statement” presentation or a “two-
statement” presentation. A “two-statement” presentation consists of (1) an income statement showing the profit or
loss and (2) a statement showing other comprehensive income.
 The elements of a statement of comprehensive income are income and expenses. Income encompasses both
revenues and gains, while expenses encompass both expenses and losses.
 The difference between income and expenses represents profit or loss.
 Expenses may be presented in the statement of comprehensive income using either the: (1) Nature of expense
method (Single-step approach) or (2) Function of expense method (Multi-step approach).
 The following are the major categories of expenses under the function of expense method: (1) Cost of sales; (2)
Distribution costs; (3) Administrative expenses; (4) Other expenses; (5) Interest expense; and (6) Income tax
expense.
 Chapter 3
Statement of Changes in Equity

Learning Competencies
The learners should be able to………………..

1. Discuss the different forms of business organization.

2. Prepare an SCE for a single proprietorship.

Introduction
The accounting for assets and liabilities remains the same regardless of the form of a business organization. What
changes is the accounting for equity. Recall the following forms of business organization:
Form of business
Ownership Formation/Registration
organization
1. Sole proprietor  One individual (i.e., sole  Registered with the DTI.
proprietor)
2. Partnership  More than one (i.e., partners)  Formed by contractual
agreement.
 Registered with the SEC.

3. Corporation  More than one (i.e.,  Formed by operation of law.

stockholders)  Registered with the SEC.

4. Cooperative  More than one (i.e., members)  Formed in accordance with

the Cooperative Code.
 Registered with the CDA.

The balance sheets of the different forms of business organization are shown below. Notice the similarities and
differences.
Exhibit 1: Sole proprietorship
Mr. A’s Tuno-tuno BBQ
Statement of Financial Position
As of December 31, 20x1

ASSETS
Cash and cash equivalents ₱10,000
Trade and other receivables 50,000
Inventory 80,000
Total current assets 140,000

Property, plant & equipment 260,000

Total noncurrent assets 260,000

TOTAL ASSETS ₱400,000

LIABILITIES
Trade and other payables ₱100,000
Total current liabilities 100,000

EQUITY
Mr. A’s, Capital 300,000

TOTAL LIABILITIES AND EQUITY ₱400,000

Exhibit 2: Partnership
ABC Partnership
Statement of Financial Position
As of December 31, 20x1

ASSETS
Cash and cash equivalents ₱10,000
Trade and other receivables 50,000
Inventory 80,000
Total current assets 140,000

Property, plant & equipment 260,000

Total noncurrent assets 260,000

TOTAL ASSETS ₱400,000

LIABILITIES
Trade and other payables ₱100,000
Total current liabilities 100,000

EQUITY
Mr. A’s, Capital 120,000
Ms. B’s, Capital 100,000
Ms. C’s, Capital 80,000
TOTAL EQUITY 300,000

TOTAL LIABILITIES AND EQUITY ₱400,000

Exhibit 3: Corporation
ABC Corporation
Statement of Financial Position
As of December 31, 20x1

ASSETS
Cash and cash equivalents ₱10,000
Trade and other receivables 50,000
Inventory 80,000
Total current assets 140,000

Property, plant & equipment 260,000

Total noncurrent assets 260,000

TOTAL ASSETS ₱400,000

LIABILITIES
Trade and other payables ₱100,000
Total current liabilities 100,000

EQUITY
Share capital 100,000
Retained earnings 130,000
Other components of equity 70,000
 TOTAL EQUITY 300,000

TOTAL LIABILITIES AND EQUITY ₱400,000

Exhibit 4: Cooperative
ABC Multi-Purpose Cooperative
Statement of Financial Position
As of December 31, 20x1

ASSETS
Cash and cash equivalents ₱10,000
Trade and other receivables 50,000
Inventory 80,000
Total current assets 140,000

Property, plant & equipment 260,000

Total noncurrent assets 260,000

TOTAL ASSETS ₱400,000

LIABILITIES
Trade and other payables ₱100,000
Total current liabilities 100,000

EQUITY
Share capital 160,000
Donations and grants 60,000
Statutory funds 80,000
TOTAL EQUITY 300,000

TOTAL LIABILITIES AND EQUITY ₱400,000

Observe the following:

 The equity of a partnership is similar to the equity of a sole proprietorship except that the equity of a partnership is
subdivided into the partners’ capital balances.
 The equity of a corporation is similar to the equity of a cooperative, in the sense that both have “Share capital.”
However, a peculiar characteristic of the equity of a cooperative is that it includes “statutory funds.” Recall from
our discussion in Part 1 of this book that a cooperative is required by law to appropriate a portion of its annual
profit to some funds. These funds are referred to as “statutory funds.”

We will only discuss the changes in equity of a sole proprietorship. The equities of the other forms of
business organization are discussed in higher accounting studies.

The Statement of Changes in Equity

As the title suggests, a Statement of Changes in Equity provides information on the changes or movements in “Owner’s
equity” during the period.
The following are transactions that cause changes in owner’s equity during a period:
Transactions Effect on Owner’s equity
1. Additional investment or contribution to the business by - Increase
the owner.
2. Withdrawals or drawings from the business by the owner. - Decrease
3. Earning of profit by the business. - Increase
4. Incurrence of loss by the business. - Decrease

Illustration:
The owner’s equity of Boy Astig Laundry Shop has a balance of ₱90,000 on January 1, 20x1. Transactions affecting
equity during 20x1 are as follows:
a. Mr. Astig, the sole proprietor, provided additional investment of ₱180,000 to the business.
b. Mr. Astig ‘s drawings during the period totalled ₱70,000.
c. The business earned profit of ₱220,000.

Requirement: Prepare the statement of changes in equity.

Solution:
Boy Astig Laundry Shop
Statement of Changes in Equity
For the period ended December 31, 20x1

Astig, Capital – beg. ₱90,000

Additional Investment 180,000
Drawings (70,000)
Profit 220,000
Astig, Capital - end ₱420,000

Chapter 3 Summary:

 The Statement of Changes in Equity shows the movements in owner’s equity during the period.
 Transactions that affects owner’s equity are as follows:
(a) Additional investment by owner (increase);
(b) Drawings by owner (decrease)
(c) Profit (increase); and
(d) Loss (decrease)
 Chapter 4
Statement of Cash Flows

Learning Competencies
The learners should be able to………………..

1. Discuss the components and structures of a CFS.

2. Prepare a CFS.

The Statement of Cash Flows

The Statement of Cash Flows (or Cash Flow Statement) provides information on the sources and utilization of cash during
the period. Simply stated, the statement of cash flows provides information on cash inflows and cash outflows during the
period.

Presentation of Statement of Cash Flows

Cash inflows and outflows are presented in the statement of cash flows according to what activities have been generated
or utilized. These activities are as follows:

1. Operating activities
2. Investing activities
3. Financing Activities

Operating Activities
Cash flows from operating activities result primarily from transactions that affect income and expenses. Examples
include:

a. Cash receipts from the sale of goods and the rendering of services.
b. Cash receipts from interest income.
c. Cash payments for purchases of inventory.
d. Cash payments for expenses.

Investing activities
Cash flows from investing activities result primarily from the acquisition and disposal of long-term assets and other
investments, like property, plant and equipment. Examples include:

a. Cash payments for the acquisition of property, plant and equipment.

b. Cash receipts from sales of property, plant and equipment.

Financing activities
Cash flows from financing activities result primarily from transactions with the owner and from borrowings. Examples
include:

a. Cash receipts from investments of owner to the business.

b. Cash payments on drawings by owner.
c. Cash receipts on loan.
d. Cash payments on settlement of loans.
Remember the following:
Type of activity Nature of transactions
1. Operating activities  Affect income and expenses.

2. Investing activities  Acquisition and disposal of PPE.

3. Financing activities  Investment and drawings by owner and loan

transactions.

Note:
Only those transactions that affect cash are included in the statement of cash flows. Transactions that do not affect cash
are excluded from the statement of cash flows.

Reporting cash flows from Operating activities

Cash flows from operating activities may be presented using either:

a. Direct method, or
b. Indirect method

Direct Method
The direct method shows each major class of gross cash receipts and gross cash payments.

Example: Direct Method

Cash flows from operating activities:
Cash receipts from sale of goods ₱xx
Cash paid of purchases of inventory (xx)
Cash paid for salaries expense (xx)
Cash paid for utilities expense (xx)
Cash paid for interest expense (xx)
Net cash from operating activities ₱xx

Indirect method
The indirect method adjusts accrual basis profit or loss for the effects of changes in operating assets and liabilities and
effects of non-cash items.

Example: Indirect Method

Cash flows from operating activities:
Profit (loss) ₱xx
Non-cash items:
Depreciation xx
Gain on sale of equipment (xx)
Total xx
Changes in operating assets & liabilities:
Increase in accounts receivable (xx)
Decrease in inventory xx
Increase in prepaid assets (xx)
Increase in accounts payable xx
Decrease in salaries payable (xx)
Net cash from operating activities ₱xx
Guidelines: Indirect Method

1. Non-cash expenses
 Depreciation expense is added to accrual basis profit because depreciation decreases accrual basis profit but
does not affect cash.
 Losses on sale of property, plant and equipment are added to accrual basis profit because losses on sale of PPE
decrease accrual basis profit but they pertain to investing activities.
2. Non-cash income
 Gains on sale of property, plant, and equipment are deducted from accrual basis profit because gains on sale of
PPE increase accrual basis profit but they pertain to investing activities.
3. Increases in operating current assets, except cash, (e.g., accounts receivable, trade notes receivable, inventory
and prepayments) are deducted from accrual basis profit.
4. Decreases in operating current assets, except cash, (e.g., accounts receivable, trade notes receivable, inventory
and prepayments) are added to accrual basis profit.
5. Increases in operating current liabilities (e.g., accounts payable, trade notes payable, accrued expenses, and
unearned income) are added to accrual basis profit.
6. Decreases in operating current liabilities (e.g., accounts payable, trade notes payable, accrued expenses, and
unearned income) are deducted from accrual basis profit.
 Under the indirect method, the “net cash flows from operating activities” is computed by adjusting the accrual basis
profit or loss as follows:
1. Non-cash expenses – added
2. Non-cash income – deducted
3. Increases in operating current assets – deducted (inverse relationship)
4. Increases in operating current liabilities – added (direct relationship)

Reporting cash flows from Investing and Financing activities

Cash inflows and outflows from Investing activities and Financing activities are reported on the basis of major classes of
gross cash receipts and gross cash payments (similar to the direct method of presenting cash flows from operating
activities).

Illustration 1: Statement of Cash Flows

ABC Co.’s cash balance on January 1, 20x1 was ₱20,000. The following were the transactions that affected cash during
the period:

a. Collections from customers for the sale of the goods, ₱580,000.

b. Cash receipt from loan obtained from a bank, ₱180,000.
c. Cash receipt from additional investment by owner, ₱20,000.
d. Payments to suppliers for the purchase of inventory, ₱120,000.
e. Payments for employee salaries, ₱140,000.
f. Payments for rent expense, ₱70,000.
g. Payments for utilities expense, ₱20,000.
h. Payment for the acquisition of equipment, ₱200,000.
i. Cash disbursements for drawings by owner, ₱60,000.

Requirement:
Prepare the statement of cash flows. Use the direct method of presenting cash flows from operating activities.
Solution:
ABC Co.
Statement of Cash Flows
For the period ended December 31, 20x1

Cash flows from operating activities:

Cash receipts from sale of goods ₱58,000
Cash paid for purchase of inventory (120,000)
Cash paid for salaries expense (140,000)
Cash paid for rent expense (70,000)
Cash paid for utilities expense (20,000)
 Net cash from operating activities 230,000

Cash flows from investing activities:

Cash paid for the acquisition of equipment (200,000)
Net cash used in investing activities (200,000)

Cash flows from financing activities:

Cash proceeds from loan borrowed 180,000
Cash proceeds from investment by owner 20,000
Cash payments to owner (60,000)
Net cash used in financing activities 140,000

Net increase in cash 170,000

Cash, beginning balance 20,000
Cash, ending balance ₱190,000

Illustration 2: Statement of Cash Flows

The comparative balance sheet and statement of comprehensive income of ABC Co. on December 31, 20x1 are shown
below:
ABC Co.
Statement of Financial Position
As of December 31, 20x1

ASSETS 20x1 20x0

Cash and cash equivalents ₱220,000 ₱100,000
Trade and other receivables 65,000 60,000
Inventory 60,000 240,000
Prepaid assets 20,000 80,000
Total current assets 365,000 480,000

Property, plant & equipment 380,000 220,000

Total noncurrent assets 380,000 220,000

TOTAL ASSETS ₱745,000 ₱700,000

LIABILITIES
Trade and other payables ₱310,000 ₱280,000

EQUITY
Owner’s Capital 435,000 420,000

TOTAL LIABILITIES & EQUITY ₱745,000 ₱700,000

ABC Company
Statement of Comprehensive Income
For the year ended December 31, 20x1

Sales ₱500,000
Cost of sales (300,000)
 GROSS PROFIT 200,000
Rent income 75,000
Depreciation expense (120,000)
Insurance expense (60,000)
Bad debts expense (15,000)
Loss on sale of equipment 20,000
PROFIT FOR THE YEAR 60,000
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YR. ₱60,000

Additional information:

 Equipment with carrying amount of ₱120,000 was sold for ₱100,000 resulting to a loss on sale of ₱20,000.
 Equipment was acquired on cash basis for ₱400,000.
 The owner made total drawings of ₱45,000.

Requirement:
Prepare the statement of cash flows. Use the indirect method of presenting cash flows from operating activities.
So6666lution:
ABC Co.
Statement of Cash Flows
For the period ended December 31, 20x1

Cash flows from operating activities:

PROFIT FOR THE YEAR ₱60,000
Non-cash items:
Depreciation 120,000
Loss on sale of equipment 20,000
Total 200,000
Changes in operating assets & liabilities:
Increase in Trade and other receivables (5,000)
Decrease in inventory 180,000
Decrease in prepaid assets 60,000
Increase in Trade and other payables 30,000
Net cash from operating activities 465,000

Cash flows from investing activities:

Cash proceeds from sale of equipment 100,000
Cash paid for the acquisition of equipment (400,000)
Net cash used in investing activities (300,000)

Cash flows from financing activities:

Cash payments to owner (45,000)
Net cash used in financing activities (45,000)

Net increase in cash and cash equivalents 120,000

Cash and cash equivalents, beginning 100,000
Cash and cash equivalents, ending ₱220,000

Notes:

 The “Changes in operating assets and liabilities” in the statement of cash flows are computed as follows:
 INCREASE
ASSETS 20x1 20x0 (DECREASE)
Trade and other receivables 65,000 60,000 5,000
Inventory 60,000 240,000 (180,000)
Prepaid assets 20,000 80,000 (60,000)

LIABILITIES
Trade and other payables 310,000 280,000 30,000

Recall that, in the statement of cash flows:

 Increases in operating current assets are deducted, while decreases are added (inverse relationship).
 Increases in operating current liabilities are added, while decreases are deducted (direct relationship).

 Although, “bad debts” is also a non-cash expense, it is not considered separately in the statement of cash flows. This
is because the effect of “bad debts” is automatically accounted for in the statement of cash flows by considering only
the net increase or decrease in “Trade and other receivables.”
 The balance of “Cash and cash equivalents, ending” in the statement of cash flows (i.e., ₱220,000) tallies with the
amount shown in the statement of financial position above. If these amounts do not tally, there is an error.

ABC Co.
Statement of Cash Flows
For the period ended December 31, 20x1

Cash and cash equivalents, beginning 100,000

Cash and cash equivalents, ending ₱220,000

ABC Co.
Statement of Financial Position
As of December 31, 20x1

ASSETS 20x1 20x0

Cash and cash equivalents ₱220,000 ₱100,000
 The “Net increase in cash and cash equivalents” in the statement of cash flows of ₱120,000 is the difference
between the beginning and ending balances of “Cash and cash equivalents.”

ABC Co.
Statement of Financial Position
As of December 31, 20x1

ASSETS 20x1 20x0

Cash and cash equivalents ₱220,000 ₱100,000

220,000 – 100,000 = 120,000 net increase

in cash and cash equivalents.
ABC Co.
Statement of Cash Flows
For the period ended December 31, 20x1

Net increase in cash and cash equivalents 120,000

Cash and cash equivalents, beginning 100,000
Cash and cash equivalents, ending ₱220,000

Chapter 4 Summary:

 The “Statement of Cash Flows” provides information on cash inflows and cash outflows during the period.
 Cash flows are classified into the following activities:
1. Operating activities
2. Investing activities
3. Financing activities
 Cash flows from operating activities result primarily from transactions that affect income and expenses.
 Cash flows from investing activities result primarily from the acquisition and disposal of long-term assets and
other investments, like property, plant and equipment.
 Cash flows from financing activities result primarily from borrowing transactions and transactions with the owner.
 Cash flows from operating activities may be presented using either the (a) Direct method or (b) Indirect method.
 The direct method shows each major class of gross cash receipts and gross cash payments.
 The indirect method adjusts accrual basis profit or loss for the effects of changes in operating assets and liabilities
and effects of non-cash items.
 The following are the adjustments to the accrual basis profit or loss under the indirect method:
1. Non-cash expenses – added
2. Non-cash income – deducted
3. Increases in operating current assets – deducted (inverse relationship)
4. Increases in operating current liabilities – added (direct relationship)