Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 544

Financial Statements

Chapter 18

Student Guide

Within the expense category is cost of goods sold. This expense is directly related to buying or producing

the goods sold.

Each income statement has a beginning inventory which represents the value of goods is at the beginning

of the period. Companies then add any purchases made during the period, which totals the goods available

for sale. When inventory is counted at the end of the period (ending inventory), that inventory is subtracted

from the goods available for sale. The difference is the cost of goods sold for the period.

Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory

For a retailer, the costs of goods sold are the costs of purchasing merchandise. For a manufacturer, these

costs are the total sum costs of direct labor and raw material.

Net income, also called the bottom line, is the excess of total revenues over total expenses. If total expens-

es exceed total revenues, a net loss is reported. When revenues and expenses are equal for the period, the

business has operated at break even.

The Income Statement Lesson 18.1 (cont’d)