a) Describe the general purpose of the statement of comprehensive income.

In addition, explain the terms income and expenses as defined by the

Conceptual Framework for Financial Reporting.
Purpose of the statement of comprehensive income
The purpose of the statement of comprehensive income is to provide
information to users on the financial performance of business over the
reporting period. (IAS, 2010) Comprehensive income is also known as the
change in equity of business during the reporting period.
It is a statement of all income and expenses recognized during the reporting
period, which interpret the financial performance of the company.
(Readyratios, n.d.) This is use to illustrate the financial performance of the
business and the results of operations. (Investopedia, 2009)
Financial performance is depended on the profitability and performance of the
entity. The statement of comprehensive income also provides users with
information on the entitys financial performance to assess if it is a profit or
loss.
This statement uses the term comprehensive income to describe the total of
all components of comprehensive income, including net income.
(Investopedia, 2014) The components of the statement of comprehensive
income include revenue, cost of goods sold, gross profit, expenses, income
and profits (Kenberry, n.d.)
The statement of comprehensive income is one of the major financial
statements used by accountants and business owners. (Investopedia, 2009)

Income
Income is defined as the increases in economic benefits during the reporting
period in the form of increase of assets or decreases of liabilities that result in
increases in equity. (IAS, 2010)
Income must result in an increase in the net assets of the entity such as by
the inflow of cash or other assets. However, net assets of an entity may
increase simply by further capital investment by its owners even though such
increase in net assets cannot be regarded as income. (Sales, n.d.)
The definition of income in general encompasses both revenue and gains.
Revenue refers to incomes that are realized as revenue under specific
conditions and if the amount of revenue is measureable. Its activities includes
sales, fees, interest, dividends and rent. (Investopedia, 2016)
Gains represent other items that meet the definition of income, which may not
arise in the course of the ordinary activities of an entity. Gains represent
increases in economic benefits and they are similar. Hence, they are not
regarded as constituting a separate element in the IFRS Framework. (IAS,
2010)

Expenses
Expenses is defined as the decreases in economic benefits for an entity
during the accounting period in the form of outflows, depletion of assets or the
increase in liabilities. (Deloitte, 2010)
The definition of expenses encompasses losses and expenses that arise in
the course of the ordinary activities of the entity, which include cost of sales,
wages and depreciation. (IAS, 2010) They usually take the form of an outflow
or depletion of assets such as cash and cash equivalents, inventory, property,
plant and equipment.
Losses represent decreases in economic benefits and as such they are no
different in nature from other expenses. Hence, they are not regarded as a
separate element in this Framework. (IAS, 2010)

b) Describe the general purpose of the statement of financial position. In

addition, explain the terms asset, liability and equity as defined by the
Conceptual Framework for Financial Reporting.
The purpose of statement of financial position
The financial statements are structured representation of the financial position
and financial performance of an entity. The objective of financial statements is
to provide information about the financial position, financial performance and
cash flows of an entity that is useful to a wide range of users in making
economic decisions. (IAS, 2010)
The statement of financial position is another name for the balance sheet. It is
one of the main financial statements, which is used by the users to make
decisions regarding the allocation of resources. (Inc, 2016)
The elements of financial statements are directly related to the measurement
of financial position. It provides information about an entitys assets, liabilities,
equity, income and expenses, contributions by and distributions to owners in
their capacity as owners and cash flows. (IAS, 2010)
The structure of the statement of financial position is similar to the basic
accounting equation.
Assets = Liabilities + Stockholders' Equity (Owners Equity)
This equation was developed to determine the position of the entity based on
the business point of view instead of the stakeholders. The statement of
financial position must reflect the basic accounting principles and guidelines
such as the cost, matching, and full disclosure principle.

Assets
An asset is a resource that an entity owns or controls in order to have future
economic benefits from its use. Assets must be classified in the financial
position statement or balance sheet as current or non-current depending on
the duration over which the reporting entity expects to derive economic benefit
from its use.
An entity must normally present a classified statement of financial position,
separating current and non-current assets. Current assets are assets that are
assets that will be received within 12 months. Some examples of current
assets include cash in hand, cash at bank, debtors, stocks, receivables,
prepaid expenses and any other short term investments, all of which are used
for daily operations within a short period of time. (Bowen, 2010)
All other assets are will be received after 12 months are non-current assets.
Some examples of non-current assets include fixed assets, long-term
investments and intangible assets. Fixed assets include property and plant,
building and land, machinery and office equipment as well as fixtures and
furniture. Long-term investments include bonds and intangible assets include
patents and copyrights (Bowen, 2010).
Therefore assets are also classified in the statement of financial position on
the basis of their nature.
Liability
A liability is an obligation that a business owes to someone and its settlement
involves the transfer of cash or other resources. Liabilities must be classified
in the statement of financial position as current or non-current depending on
the duration over which the entity intends to settle the liability.

A liability that will be settled over the long term is classified as non-current
whereas those liabilities that are expected to be settled within 12 months from
the reporting date are classified as current liabilities. (ACCA, n.d.) Some
current liabilities include trade payables, accrued expenses, short-term bills
and creditors.
Liabilities that are expected to settle more than 12 months from the reporting
date are classified as non-current. (ACCA, n.d.) Some non-current liabilities
include loans, mortgage and equipment lease.
Current Tax Payable is usually presented in the statement of financial position
as well due to the materiality of the amount. () A liability should be recognized
if it would provide users of the financial statements with information relevant
and accurate to the entity and if the liability can be measured (IFRS, 2013).
Equity
Equity is the residual interest in the assets of the entity after deducting all its
total liabilities from the total assets. Therefore equity is what the business
owes to its owners. (IFRS,2010)
Equity includes the original capital introduced by the owners and they are
called share capital. Retained earnings refer to a portion of income retained
by the business instead of paying it out as dividends to the shareholders.
Reserves refer to an amount of funds set aside by the company for a
particular purpose, usually to purchase fix assets or to repay debts.
This is to acknowledge the supreme conceptual importance of identifying,
recognizing and measuring assets and liabilities, as equity is conceptually
regarded as a function of assets and liabilities. (ACCA, n.d.)

c) Explain the accrual basis of accounting by defining the principles involved.

Illustrate your answer by taking the example of the cost of sales adjustment in
the statement of comprehensive income.
Accrual basis
The accrual concept in accounting is defined as revenues, incomes and
expenses that are recorded in the accounting period at the time it is being
incurred whether or not any cash amount was involved.
Under the accrual basis of accounting, revenues are reported on the income
statement when they are earned and expenses are matched with the related
revenues and/or are reported when the expense occurs, not when the cash is
paid.
The result of accrual accounting is an income statement that better measures
the profitability of a company during a specific time period. The accrual
principle is the concept that you should record accounting transactions in the
period in which they actually occur, rather than the period in which the cash
flows related to them occur.
The accrual principle allows you to aggregate all revenue and expense
information for an accounting period, without the distortions and delays
caused by the cash flows arising from that accounting period.
The accrual principle is a fundamental requirement of all accounting
frameworks, such as Generally Accepted Accounting Principles and
International Financial Reporting Standards. (Basu, n.d.)

Matching concept
The matching concept is an accounting practices whereby expenses are
recognized in the same reporting period as the related revenues are
recognized.
The purpose of the matching concept is to avoid miss-stating earnings for the
period. Reporting revenues for a period without reporting all the expenses that
brought them could result in overstated or understated profits or loss.
Matching principle therefore results in the presentation of a more balanced
and clear view of the financial performance of the company. (BCWS, 2015)
Comparison between cash basis and accrual basis
The difference between cash and accrual basis accounting has to do with the
time frame in which revenues and expenses are recorded and reported.
Under the cash basis of accounting, revenues are reported on the income
statement in the period in which the cash is received from customers and
expenses are reported on the income statement when cash is paid out.
However under the accrual basis of accounting, revenues are reported on the
income statement when they are earned, which often occurs before the cash
is received from the customers and expenses are reported on the income
statement in the period when they occur or when they expire, which is often in
a period different from when the payment is made. (Bayt, 2014)
Cash basis accounting is a very simple form of accounting. As when a
payment is received for the sale of goods, the revenue is recorded as of the
date of the payment no matter when the sale was made.

The accrual basis of accounting provides a better picture of a company's

profits during reporting period. The reason is that the income statement
prepared under the accrual basis will report all of the revenues
actually earned during the period and all of the expenses incurred in order to
earn the revenues.
An example of cost sales adjustments
A fruit company name Appuits, bought 500 boxes of fruits at $2 each during
the current year and sold half the boxes, 250 of them at $5 each at year-end.
Therefore, sales = 250 x $5 = $1250
Cost of goods sold = 250 x $2 = $500
Gross profit = sales cost of goods sold (boxes of fruits sold)
= $1250 - $500 = $750
The 250 boxes left of unsold fruits would then go into the closing inventory
This is an example that shows that unsold inventory or goods have to be
removed from the cost of goods sold if not the financial statement of the
business would not be correct.

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