Fundamentals of Accountancy,

Business & Management 2

Quarter 1 – SCI Part 2 Prepared by:

Mary Mildred de Jesus
LET US PRAY
 OBJECTIVES
• Identify the elements of the SCI and
describe each of these items for a
service business and a merchandising
business
• Prepare an SCI for a service business
using the single-step approach
• Prepare an SCI for a merchandising
business using the multistep approach

ABM_FABM12-Ic-d-5-7
 EXPECTATIONS
The information below will help you be
a successful participant in this course.
How is the course designed?
• Lectures
• Video Lectures
• Case Studies (if necessary)
• Activity Game
• Exercises
• Quizzes
 MULTI-STEP
APPROACH OF
STATEMENT OF
COMPREHENSIVE
INCOME
 MULTI – STEP INCOME STATEMENT
 Is an income statement that segregates total revenue
and expenses into operating and non-operating heads.
 It offers an in-depth analysis of the business’s
financial performance in a specific reporting period.
 It lists items in different categories to make it
convenient for users of the income statement to better
understand the core operations of the business.
 COMPONENTS OF A MULTI-
STEP INCOME STATEMENT

A. OPERATING REVENUES
 are the revenues that an
entity generates from its
normal business
activities.
 COMPONENTS OF A MULTI-
STEP INCOME STATEMENT
B. NON-OPERATING REVENUES
Other income, non-operating
income, or other income might
imply the same kind of income
that the entity is generating from
its main operation.
Ex. Gain from selling of fixed
assets or others one-off income-
generating activities.
 C. COST OF GOODS SOLD
Cost of goods sold is the total of all costs used to
create a product or service, which has been sold.
These costs fall into the general sub-categories of
direct labor, direct materials, and overhead.
Direct labor and direct materials are variable
costs, while overhead is comprised of fixed costs
(such as utilities, rent, and supervisory salaries).
 COST OF GOODS SOLD
Beginning inventory + Net Purchases - Ending inventory =
COST OF GOODS SOLD (Cost of Merchandise sold)
 Beginning Inventory (Merchandise inventory) is the value of
the raw materials and finished goods in stock at the beginning
of the reporting period.
 Purchases made during the reporting period include all raw
materials, components, and merchandise acquired from other
parties during the period.
 Ending inventory is the amount counted as being on hand at
the end of the reporting period.
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.

BEGINNING INVENTORY
Add: NET PURCHASES
TOTAL GOODS AVAILABLE FOR SALE
Less: ENDING INVENTORY
COST OF SALES (COGS)
 COST OF GOODS SOLD
Ex. A company has P10,000 of inventory on hand
at the beginning of the month, expends P25,000
on various inventory items during the month, and
has P8,000 of inventory on hand at the end of the
month. What was its cost of goods sold during the
month?
 COST OF GOODS SOLD
Beginning Inventory P10,000
+ Purchases 25,000
- Ending Inventory 8,000
Cost of Goods sold P27,000
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.

PURCHASES
Less: PURCHASE DISCOUNTS
Less: PURCHASE RETURN
Less: PURCHASE ALLOWANCES
Add: FREIGHT IN
NET PURCHASES
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
 PURCHASES - It means to take  PURCHASE ALLOWANCE -
possession of a given asset,
property, item or right by paying
is a reduction in the buyer's cost
a predetermined amount of of merchandise that it had
money for the transaction to be purchased.
completed successfully.
 PURCHASE RETURN - is
 PURCHASE DISCOUNTS - is
a deduction that a company may when the buyer of merchandise,
receive if the supplier offers it inventory, fixed assets, or other
and the company pays the items sends these goods back to
supplier's invoice within a
specified period of time
the seller
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
 TRANSPORTATION-IN -  TRANSPORTATION-OUT -
also called “FREIGHT- also called “FREIGHT-OUT”,
IN”, is the freight cost is the freight cost incurred by a
incurred by the buyer to seller to ship goods to its
have purchased goods customers.
delivered. It may include
shipping and insurance  These are costs of selling the
costs. products and will appear as a
selling expense (perhaps as
 These are part of the cost of
goods purchased. Delivery Expense) in the period
in which they occur.
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
Example: Exhibit 1:
 Merchandise Inventory Jan. 1, 2019 P70,700
 Merchandise Inventory Jan. 31, 2019 73,150
 Purchases 433,200
 Purchase Return & allowances 10,600
 Purchase Discounts 3,855
 Freight In 14,980
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
 SALES - account provides  NET SALES - is
the total amount charged to determined by subtracting
customers for merchandise
sold, including cash sales sales returns and allowances
and sales on account. and sales discounts from
sales.
 SALES RETURNS AND
ALLOWANCES - are  SALES DISCOUNT - are
granted by the seller to granted by the seller to
customers for damaged or customers for early payment
defective merchandise. or amounts owed
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.

Gross Sales – sales returns and allowances - sales

discounts = NET SALES
GROSS SALES - are the total of all sale
transactions reported in a period, without any
deductions included within the figure.
NET SALES - are the grand total of all sale
transactions, after deducting the cost of sales returns
& allowances, and discounts
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
Example: Exhibit 2: Compute for the Net Sales:
 Gross Sales P1,000,000
 Sales return 10,000
 Sales allowances 5,000
 Sales discount 15,000
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
 D. GROSS PROFIT
 Gross profit - The cost of merchandise sold is
subtracted from sales to arrive at gross profit. Because
it is the profit before deducting the operating expenses.
 It shows how profitable a company is in manufacturing
or selling its products. Gross profit is used by creditors
to show the company’s ability to meet arising debt
obligations and to pay back outstanding credit.
Net Sales – Cost of Goods Sold = GROSS PROFIT
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
Example: Exhibit 3:
 During the current year, Sales is P550,000
on cash and P375,000 on account. The cost
of the merchandise sold is P535,000. What
is the amount of the gross profit?
 MULTI-STEP INCOME STATEMENT
It contains several sections, subsections, and subtotals.
Example: Exhibit 3: Solution

Sales (Cash) P 550,000

(on account) 375,000
Cost of Merchandise Sold - 535,000
Gross Profit P 390,000
E. OPERATING EXPENSES (OPERATING HEAD)

It comprises of the expenses that a company

incurs while performing its day to day operations.
As per accounting frameworks operating expenses
refer to the expenses that arise in the course of
ordinary activities of the entity.
Gross Profit – Operating Expenses =
OPERATING INCOME
 F. NON-OPERATING EXPENSES
(NON-OPERATING HEAD)
 It refers to the various business expenses that are not
related to the company’s core operations.
 Conversely, non-operating expenses are those expenses
that are not included in the calculation of EBIT
(EARNINGS BEFORE INTEREST AND TAX), which
is also known as the operating profit of a company. Some
of the most commonly used non-operating expenses are
interest expense and losses incurred on disposal or sales
of assets.
FUNCTIONS OF
EXPENSE
METHOD
 FUNCTIONS OF EXPENSE
METHOD
Under This method, expenses are classified and presented
according to their functions as part of cost of sales or.
Example: The cost of distribution or administrative
activities. At a minimum, cost of sales is presented
separately from other expenses.
The 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 - COGS) - are
also known as “cost of sales” or its acronym “COGS.” COGS refers to
the cost of goods that are either manufactured or purchased and then
sold. Is the cost of a product to a distributor, manufacturer or retailer.
Items included in Cost of Goods Sold:
 Cost of items intended for resale
 Cost of raw materials
 Direct Labor costs
 Cost of parts used to make a product
 FUNCTIONS OF EXPENSE
METHOD
Items included in Cost of Goods Sold:
 Supplies used in either making or selling the product
 Overhead costs, like utilities for the manufacturing site
 Shipping or freight in costs
 Indirect costs, like distribution or sales force costs
 Container costs
(Beginning Inventory + Net Purchases) – Ending Inventory
= Cost of Goods Sold
DISTRIBUTION COST
AND
SELLING EXPENSES
 FUNCTIONS OF EXPENSE
METHOD
2. DISTRIBUTION COST (OR SELLING EXPENSES)
Distribution cost - are those which are incurred for
warehousing and storage, packing for goods sent
and making the goods available for delivery to
customers.
Selling Expenses - a list of expenses relating
directly to the making of sales.
 FUNCTIONS OF EXPENSE
METHOD
Items included in Selling Expenses:
Salaries of Sales Personnel
Sales commissions
Travel and entertainment expense
Advertising or Marketing expense
Communication expense
Depreciation of sales equipment
Office rent by the sales personnel
 FUNCTIONS OF EXPENSE
METHOD
Items included in Delivery Expenses:
Salary expense of distribution manager
Production place
Storehouse Sales point
Packing cost
Items included in Selling Expenses:
Logistics expenses, shipping expense
Insurance expenses
 GENERAL
AND
ADMINISTRATIVE
EXPENSE
 FUNCTIONS OF EXPENSE
METHOD
3. GENERAL AND ADMINISTRATIVE EXPENSE
General expenses - pertain to operational
overhead expenses that impact the entire business.
Administrative Expenses - these expenses are
related to the organization as a whole, as opposed
to individual departments or business units.
 FUNCTIONS OF EXPENSE
METHOD
Items included in General & Administrative Expenses:
 Rent expense
 Utilities
 Postage
 Supplies and Computer equipment
 Insurance
 Taxes & licenses (except income tax expense)
 Salaries of Non-sales personnel (executive & other staff)
 Legal counsel and accounting staff salaries
 Depreciation of fixed assets
 FUNCTIONS OF EXPENSE
METHOD
4. FINANCE COSTS or INTEREST COSTS - are
usually understood to be referred to interest costs.
Usually they are thought to refer to interest expense on
short-term borrowings
Items included in Finance or Interest Costs:
 Short-term borrowings or interest on bank overdrafts
 Long-term borrowings loans and real estate mortgages
 FUNCTIONS OF EXPENSE
METHOD
5. INCOME TAX EXPENSE
 is the amount of expense that a business recognizes
in an accounting period for the government tax
related to its taxable profit.
 include taxes on income. Other taxes are presented in
the administrative expense’s category under the
“taxes and licenses” account.
 FUNCTIONS OF EXPENSE
METHOD
6. OTHER or NON-OPERATING EXPENSES
includes losses, like casualty losses and
losses on sale of properties. These are
expenses that do not relate to a company's
main business and either infrequent or
unusual activities of the business.
 FUNCTIONS OF EXPENSE
METHOD
KEY TAKEAWAY:
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.
 Multi-step Comprehensive Income Statement
Net Sales
Less: Cost of Goods sold
Gross Profit
Less: Operating Expenses
Operating Income
Less: Non-Operating revenue (+)
Non-Operating expenses (-)
Net Gain/loss from other activities
Income before taxes
less: Income Tax expense
Net Income (double rule)
 REFERENCES
 https://www.wikiaccounting.com/statement-comprehensive-income-definition-types-explanation/
 Irfanullah Jan, ACCA - modified on Apr 1, 2020
 https://xplaind.com/588771/income-statement-by
nature#:~:text=An%20income%20statement%20by%20nature,expense%2C%20wages%20and%20salari
es%20etc.&text=However%20there%20is%20drawback%20in,profit%20within%20the%20income%20
statement.
 https://www.investopedia.com/ask/answers/102714/what-are-differences-between-income-
statements-merchandising-companies-vs-service-companies.asp
 https://www.accountingtools.com/articles/2017/5/17/the-multi-step-income-statement
 Harold Averkamp CPA- MBA- https://www.accountingcoach.com/income-statement
 https://www.freshbooks.com/hub/accounting/single-step-vs-multi-step-
incomestatement#:~:text=A%20single%2Dstep%20income%20statement%20offers%20a%20simple%2
0report%20of,process%20to%20calculate%20net%20income.
 Arnold Quinto Malaluan- Assistant Professor II at Batangas State University-Lipa City Campus
(College of Accountancy, Business and Economics).” Instructional Materials for FABM 2”.
“There are no secrets to
success. It is the result of
preparation, hard work
and learning from
failure”.
-Colin Powell, statesman
& 4-star general-