ACC 250 Lecture Notes - Lecture 3: Income Statement, Financial Statement
10 Jun 2018
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Cost of Goods Sold on the Income Statement
You have seen that the inventory that was not sold belongs on the balance sheet. Similarly,
the cost of the inventory that was sold, known as the cost of goods sold, belongs on the
income statement.
An item that is sold for $100 may have cost around $75. This leaves a profit of $25 before
deducing other expenses. Clearly, the cost of an item sold is a very significant expense. The
total cost of all of the items sold is usually the biggest expense figure for a merchandising
business.
When the periodic inventory method is used, no attempt is made to have the cost of goods
sold figure available during the period. It has to be obtained by a calculation when the income
statement is prepared.
To calculate the cost of goods sold, three figures are needed to substitute.
1. The beginning inventory figure, which is last year’s ending inventory figure;
2. The merchandise purchased figure, which is cumulated during the period in an account
called Purchases;
3. The ending inventory figure, which is obtained by taking a physical inventory by counting
an valuing the entire inventory.
1. The cost of goods sold figure is considered to be so significant that the statement is
prepared in two stages.
2. The first stage determines the gross profit. The gross profit is the difference between the
selling price and the cost price of the goods sold. It can also be seen as the profit figure
before deducing other expenses. The gross profit is a figure that the merchant will watch
carefully. It is important to have enough gross profit to cover expenses and lave a sufficient
net profit or, as we usually call it, net income. Most companies try to reach a specific target
gross profit percentage.
3. The cost of goods sold calculation is shown on the statement.
4. The expenses section is now headed operating expenses
Limitation of the Periodic Inventory System
When the periodic inventory system is used, accurate financial statements cannot be obtained
unless a physical inventory is taken. This is a time-consuming procedure that often makes it
necessary to interrupt business operations for a day or two. At the same time, the periodic
system is relatively easy to manage throughout the year. This is important for small
businesses, such as drugstores and hardware stores, that have to keep track of inventories
made up of a large number of different items. However, improvements in the quality and cost
of computerized accounting systems are influencing more and more businesses away from
the periodic system.
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Document Summary
Cost of goods sold on the income statement. You have seen that the inventory that was not sold belongs on the balance sheet. Similarly, the cost of the inventory that was sold, known as the cost of goods sold, belongs on the income statement. An item that is sold for may have cost around . This leaves a profit of before deducing other expenses. Clearly, the cost of an item sold is a very significant expense. The total cost of all of the items sold is usually the biggest expense figure for a merchandising business. When the periodic inventory method is used, no attempt is made to have the cost of goods sold figure available during the period. It has to be obtained by a calculation when the income statement is prepared. The gross profit is the difference between the selling price and the cost price of the goods sold.
