ay LESSON! 1-1 IN * be familiar with the two forms of income statement + differentiate the two forms of income statement Income Statement ‘The Income Statement shows the result of operations for a given period. It consists of the _ revenues, costs, and expenses. Forms of Income Statement 1, Single-step Income Statement - also known as the natural form (or the nature of expense method), it presents expenses according to nature. This type of income statement is commonly used in a service business. It is called the single-step income statement since there is only one process of deducting expenses from revenues is performed to arrive at the net income or net loss. 2. Multiple-step Income Statement - also known as the functional form (or the cost of sales method), it presents expenses according to function (e.g., cost of sales, marketing and selling expenses, general and administrative expenses). This form of income statement is commonly used in merchandising and manufacturing businesses. It is called the multiple-step income statement since there are series of processes performed to arrive at the net income or net loss. @H The Two Forms of the Income StatementComparison of the Single-step and the Multiple-step Income Statements (simplified) Single-step Income Statement Multiple-step Income Statement Income From Services Prox Net Sales Prox Less: Cost of Sales 00 Gross Profit Prox Less: Operating Expenses x Less: Operating Expenses x01 Net Income/Loss Net Income/Loss Prox *Notice that in the single-step income statement, a single step of deducting total expenses from total revenues was done to get the net income or the net loss from operations. However, in the multiple-step income statement, a series of steps was done showing several activities of the business before finally arriving at the net income or net loss from operations. Test Your Understanding 1. Whatis a single-step income statement? 2. What isa multiple-step income statement? 3. What is the difference between a single-step income statement and a multiple-step income statement?+ review the accounts that comprise single-step income statement + prepare a single-step income statement ‘The following are the accounts that compose the single-step income statement: nerated by the business in performing services Service Income includes revenues earned or ge! ind the accounting term for a customer or client. The following are different examples of income al used to describe the income. Examples: Laundry Services by a laundry shop (Laundry Income) Medical Services by a doctor (Medical Fees) Dental Services by a dentist (Dental Fees) ‘Advisory Services by a consultant (Consultancy Fees) Accounting or Auditing Services by a certified public accountant (Audit Fees) Other Income includes revenues earned or generated from sources other than the companys main business. Examples: Interest Income - earned from money deposited in the bank or money lent to earn interest. Rent Income - income from the lease of company property Dividend Income - income received by a shareholder of a corporation. A shareholder is one who owns stocks of a corporation. Commissions Income - a percentage from the sale of goods given by the owner of the goods to the one who sold them. Salaries or Wages Expense includes all payments made to employees or workers for rendering services to the company. Examples are salaries or wages, 13th month pay, cost of living allowances. and other related benefits given to employees. G@H The Two Forms of the Income StatementUtilities Expense is an expense related oe to the use of electricity, fuel, water, and telecommunications facilities, Supplies Expense covers office Supplies used by the business in the conduct of its daily operations. Insurance Expense is the expired portion of premiums paid on insurance coverage, such as Premiums paid for health or life insurance, motor vehicles or other properties. Depreciation Expense is the annual Portion of the cost of a tangible assets, such as buildings, machineries, and equipment charged as expense for the year. Uncollectible Accounts Expense / Doubtful Accounts Expense / Bad Debts Expense means the amount of receivables charged as expense for the period because they are estimated to be doubtful of collection. Interest Expense is the amount of money charged to the borrower for the use of borrowed funds. Other expenses are expenses that are not related to the company's main line of business such as losses in the sale of company assets. Single-step Income Statement Alex Bern operates a spa in Quezon City. Presented below is his income statement in a single- step format. Alex Bern Spa Income Statement For Year Ended December 31, 201x Note Service Revenue 454,000 Other Income 1 61,000 Total Income 515,000 Expenses Salaries 155,000 Rent 85,000 Depreciation 2 20,000 Supplies 5,000 Insurance 2,000 Other Expense 3 4,000 Finance Costs 4 — 4,000 275,000 Net Income £240,000 ‘A Review of the Single-step Income Statement Ke)Notes to Financial Statements Note 1 - Other Income i Rent Income 30,000 Dividends Income 15,000 Gain on Sale of Equipment 10,000 6,000 Interest Income —_2kX Total 61,000 Note 2 - Depreciation Expense Depreciation Expense ~ Building 15,000 Depreciation Expense - Equipment 5,000, | Total 20,000 Note 3 - Other Expense Loss on Sale of Furniture 4,000 Note 4 - Finance Costs Interest Expense - Mortgage Interest Expense - Loan Total Test Your Understanding 1. What accounts comprise the single-step income statement? CH The Two Forms of the Income StatementBelow is a list of accounts of T. Alunan Law Firm, Prepare a single-step income statement for year ended December 31, 2019. Legal Fees 828,000 Salaries & Wages 158,400 Rent Expense 128,000 Utilities Expense 89,960 Supplies Expense 3,984 Interest Expense 18,800 Depreciation Expense - Office Equipment 12,000 Depreciation Expense - Furniture and Fixture 5,000 Dividends Income 16,000 Gain on Sale of Equipment 4,000 ‘A Review of the Single-step Income Statement HQ)LESSON 1-3 Jal ULIPLE TEP INCOME STATEMENT + know the components of the mulliple:step Income statement + prepare the multiple step income statement Components of the Multiple-Step Income Statement Ren Merchandising Income Statement For year ended December 31, 2019 Re’ Note 1 Prox 2 x Prox Income 3 Xxx Total Income Prox Operating Expense: Distribution Expenses 4 Px Administrative Expenses 5 20K Other Expenses 6 xxx Finance Cost xxx — Net Income Pax @H The Two Forms of the Income StatementNet Sales The first line after the heading of the income statement is the net sales. This is the company’s main source of income. To show the details of its computation, itis supported by a note to financial statement. Net sales is computed as follows: Gross Sales Px Less: Sales Returns & Allowances Prox Sales Discount 1006 sox Net Sales oa Cost of Sales The cost of sales or cost of goods sold represents the cost of merchandise inventory sold by the business to its customers. This comprises the company’s biggest expense and is deducted from net sales to arrive at the gross profit. Computation of cost of sales is as follows: Merchandise Inventory, Beginning Poo Add: Net Cost of Purchases Purchases Less: Purchase Returns & Allowances Pax Purchase Discount 0% Net Purchases Add: Freight-in Goods Available for Sale Less: Merchandise Inventory, End Cost of Sales eee 2 Other Income As discussed in the previous lesson, other income is income derived from sources other than the company’s main line of business. To show the details of this income account, it is supported by a note to financial statement. The Multiple-step income Statement K@)Distribution / Selling Expen Distribution expenses are those incurred in directly selling the merchandise. This Includes aries of sales personnel, expenses Incurred in promoting or advertising the produc, ions on sales, store supplies used, utilities used In the store, depreciation expense of assets used in the store, and the cost of transporting the merchandise to the customer's place of business under the account title freight-out or delivery expe General / Administrative Expenses \lministrative expenses are expe! ary in the management of the office salaries of office personnel, office supplies used, utilities used in the office, nd the provision for bad debts or uncollectible accounts. General or This includes the depreciation of office ass Note: If the business has a small office, does not maintain a store, and sales are also made in the office, operating expenses need not be categorized under selling and administrative expenses, Other Expenses As discussed in the previous lesson, Other Expenses are expenses not connected to the operating activities of the business. An example of this is loss on sale of assets and discount lost. Discount lost is a discount not availed by the company in the acquisition of assets. Finance Cost Finance Cost are the interest expense paid for the use of borrowed funds. The Two Forms of the Income StatementIllustrative Problem The following account balances are taken from the books of Ren Ren Merchandising on December 31, 2019. Sales 782,000 Sales Returns & Allowances 32,000 Sales Discount 48,000 Purchases 220,000 Purchase Returns & Allowances 34,000 Purchase Discount 26,000 Freight-in 10,000 Merchandise Inventory, Beginning 180,000 Merchandise Inventory, End 120,000 Sales Salaries Expense 52,000 Depreciation Expense ~ Store Equipment 7,800 Utilities Expense - Store 6,000 Office Salaries Expense 34,000 Utilities Expense - Office 4,400 Office Supplies Expense 3,000 Bad Debts Expense 2,000 Interest Expense 2,400 Loss on Sale of Equipment 1,600 Discount Lost 1,000 Interest Income 30,000 Rent Income 20,000 Note: A discount lost is the cash discount offered by the seller to the buyer in the purchase of goods but was not taken by the buyer. The Multiple step Income §Ren Ren Merchandising, Income Statement For year ended December 31, 2019 Note Net Sales Cost of Sales Gross Profit Other Income Total Income Operating Expenses Distribution Expenses Administrative Expenses Other Expenses Finance Cost Net Income ane Note 1 - Net Sales Gross Sales Less: Sales Returns & Allowances Sales Discount Net Sales 32,000 48,000 Note 2 - Cost of Sales Merchandise Inventory, Beginning Add: Net Cost of Purchases Purchases Less: Purchase Returns & Allowances. 34,000 Purchase Discount 26,000 Net Purchases ‘Add: Freight-in Goods Available for Sale Less: Merchandise Inventory, End Cost of Sales @H The Two Forms of the Income Statement 702,000 230,000 472,000 50,000 522,000 114,200 7,800 782,000 80,000 —80,000 702,000 180,000 170,000 350,000 120, iNote 3 - Other Income Interest Income Rent Income Total Note 4 - Distribution Expenses Sales Salaries Expense Depreciation Expense - Store Equipment Utilities Expense - Store Total Note 5 - Administrative Expenses Office Salaries Expense Utilities Expense - Office Office Supplies Expense Bad Debts Expense Total Note 6 - Other Expenses Loss on Sale of Equipment Discount Lost Total Note 7 - Finance Cost Interest Expense Test Your Understanding P 30,000 20,000 50,000 52,000 7,800 6,000 65,800 34,000 4,400 3,000 2,000 P 43,400 P 1,600 1,000 P 2,600 P 2,400 1. Discuss the components of the multiple-step income statement Ihe mage ston income sateen HR)Feenisier acacia + Income Statement - shows the result of operations for a given period. It consists of the revenues, costs, and expenses. * Forms of Income Statement 1, Single-step Income Statement - also known as the natural form (or the nature of expense method), it presents expenses according to nature. This type of income statement is commonly used ina service business. It is called the single-step income statement since there is only one process of deducting expenses from revenues is performed to arrive at the net income or net loss. 2. Multiple-step Income Statement - also known as the functional form (or the cost of sales method), it presents expenses according to function (e.g., cost of sales, marketing and selling expenses, general and administrative expenses). This form of income statement is commonly used in merchandising and manufacturing businesses. It is called the multiple-step income statement since there are series of processes performed to arrive at the net income or net loss. ¢ Comparison of the Single-step and the Mutiple-step Income Statements Single-step Income Statement Multiple-step Income Statement Income From Services Pu Net Sales Pxxx Less: Cost of Sales XXX Gross Profit Pixxx Less: Operating Expenses XXX Less: Operating Expenses XxX Net Income/Loss Net Income/Loss Px