The Mathematics of Money

(Darren Dugan) #1

Copyright © 2008, The McGraw-Hill Companies, Inc.


Since the expenses were larger than the gross profi t, the pharmacy lost money in this quarter.
It is conventional in accounting to indicate that an amount is negative by writing it in paren-
theses. This may be confusing at fi rst since in mathematics ( )’s indicate multiplication, but
it is always clear from context what is meant.

The completed income statement then should look like this:

Latchman’s Pharmacy
Third Quarter 2008 Income Statement

Sales $248,535
Cost of goods sold
Prescription medications $94,350
OTC medicines $11,563
Health and beauty $23,505
Other/sundries $26,505
Total cost of goods sold $155,923
Gross profi t $92,612
Expenses
Wages $53,650
Rent $22,985
Other $18,754
Total expenses $95,389
Net income ($2,777)

More Detailed Income Statements


The income statements we have been looking at above have been fairly simple. Complex
businesses often require a greater breakdown of items into subcategories.
Sales: Reporting the sales of the business may require more detail than just the gross
amount of money taken in. Gross sales may need to be adjusted for items that were returned,
and for cash discounts that may have been given for early payments by customers who bought
on credit (these discounts are discussed in detail in Chapter 8). It is unlikely that Sammy had
to deal with customer returns or early payment discounts from lemonade sales (since pay-
ment would be made on the spot in any case). However, other businesses certainly do, and so
these adjustments to sales need to be reflected on the financial statements. Subtracting these
and any other appropriate reductions from the gross sales gives the net sales.

Example 12.1.3 Cattarauqua Ginseng Enterprises had gross sales of $185,926 last
year. It had one order of $5,300 of merchandise returned, and gave $4,096 in cash
discounts for prompt payment. Calculate the company’s net sales.

Gross sales  Returns  Cash discounts  Net sales
$185,926  $5,300  $4,096  $176,530

Depending on how specifi c the income statement needs to be, these items may or may not
be listed separately on the income statement.

Cost of Goods Sold: On the face of it, this seems quite simple: this category should simply
be the business’s cost for the items it sold, pure and simple. However, this is complicated
by the fact that the items a business buys in any given period are not exactly the items it
sells in that period. Items are kept in inventory from one period to the next.
The cost of goods sold, then, is found by looking at the cost of the items in inventory
at the start of the period. We then add the cost of new merchandise purchased within the
period, to get the total cost of all goods that the business had in inventory at any time during
the period. To find out how much was sold, we subtract the cost of the inventory in place
at the end of the period.
The total cost of merchandise acquired may also give details of any reductions due to
returned merchandise or savings due to cash discounts, just as we did in calculating the
net sales.

12.1 Income Statements 489
Free download pdf