Lesson 36: Constructive Accounting Part 2

Overview

• Focus: Statement of Comprehensive Income
• Goals:
  • Review income statement elements
  • Prepare single-step service income statement
  • Prepare multi-step merchandising income statement
  • Review function of expense income statement
  • Review nature of expense income statement
  • Solve accounting problems related to income statements

Recap from Previous Lesson

• Balance Sheet Elements:
  • Assets, Liabilities, and Capital
  • Distinction between current and non-current assets and liabilities
  • Preparation of balance sheet in account form (assets on left, liabilities/capital on right) and report form (assets on top, liabilities/capital below)
  • Solving balance sheet accounting problems

Financial Statements

• Definition: Structured representation of financial position and performance
• Objective: Provide information for economic decision-making
• Elements: Assets, Liabilities, Equity, Income, Expenses, Gains, Losses

Income Statement

• Nature: Reports financial performance by presenting revenues, gains, expenses, and losses
• Basic Equation: Revenue - Expenses = Net Income
• Key Components:
  • Income: Increase in economic benefits
    • Services rendered (service revenue)
    • Product sales (sales revenue)
  • Expenses: Decrease in economic benefits
    • Operating costs (salaries, rent, utilities)
• Net Income Impact: Added to capital

Types of Income and Expenses

• Revenue vs. Gains:
  • Revenue from regular activities (e.g., selling products/services)
  • Gains from non-regular activities (e.g., selling assets)
• Expenses vs. Losses:
  • Expenses from regular business operations
  • Losses from non-regular activities (e.g., disasters, asset sales below value)

Preparing Income Statements

Single-Step Service Income Statement

• Example: Dr. Laika de la Cruz, Dentist
  • Revenue: Service revenue + other services
  • Expenses: Dental supplies, salaries, rent, utilities, depreciation, repairs
  • Net Income Calculation: Total Revenue - Total Expenses

Multi-Step Merchandising Income Statement

• Example: Teddy Bear Trading
  • Steps:
    • Compute net sales (gross sales - returns/allowances - discounts)
    • Calculate cost of goods sold (COGS)
    • Determine gross profit (Net Sales - COGS)
    • List operating expenses and compute net income

Function vs. Nature of Expense Method

• Function of Expense: Costs classified by function (COGS, operating expenses)
• Nature of Expense: Costs classified by nature (salaries, rent)

Comprehensive Income

• Income Statement vs. Comprehensive Income Statement:
  • Income Statement: Reports revenues, expenses, gains, and losses
  • Comprehensive Income: Includes net income plus other comprehensive income (e.g., currency translation adjustments)
• Formats: Single Statement vs. Two-Statement

Practice Problems

• Solving for net income and gross profit using given financial data.

Next Lesson

• Topic: Statement of Changes in Equity

Acknowledgements

• Shoutouts to various schools and students supporting the lessons.

Contact

• For questions or feedback, use the comment section or email.

Closing

• Encouragement for continued study and engagement in accounting principles.

These notes provide a structured overview of the concepts taught in the lesson on comprehensive income statements, including preparation methods and practical exercises.