Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 546

Financial Statements

Chapter 18

Cost of Goods Sold

If you work for a company that buys and sells products, you can expect to work with the cost of sales or

the cost of goods sold. Calculating the cost of goods sold, you’ll recall, involves accounting for the prod-

ucts your company paid for during the accounting period. The beginning inventory, purchases, goods avail-

able for sale, and ending inventory all have a direct impact on the cost of goods sold. The cost of goods

sold is usually included on the income statement. Here’s an example of an income statement for a company

that sells goods:

LMN Company

Income Statement

December 31, 20XX

Revenues

Gross Sales $125,000

Less: Sales Returns and Allowances (2,000)

Net Revenues 123,000

Cost of Goods Sold

Product Inventory

Beginning Inventory January 1, 20XX 32,000

Add: Purchases 130,000

Freight-In 20,000

150,000

Less: Purchases Returns and Allowances (2,000)

Net Purchases 148,000

Goods Available for Sale 180,000

Less: Ending Inventory December 31, 20XX (125,000)

Cost of Goods Sold 55,000

Operating Expenses

Sales Salaries 22,000

Advertising Expenses 2,500

Bad Debt Expense 1,250

Supplies Expenses 1,500

Total Selling Expenses 27,250

Office Salaries 15,000

Insurance Expenses 995

Office Supplies 1,500

Depreciation Expense, Office Equipment 2,200

Total General and Administrative Expenses 19,695

Total Operating Expenses 46,945

Income Before Taxes 21,055

Income Tax (2,100)

Net Income $18,955

The Income Statement Lesson 18.1 (cont’d)

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