Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 552

Financial Statements

Chapter 18

Student Guide

Student Handout: Income Statement

Key Terms

Total sales: Earnings from the sale of goods or the performance of service

Sales returns or allowances: Refunds or adjustments for unsatisfactory merchandise or service

Net revenues or net sales: The difference between the total sales and the sales returns or allowances

Cost of goods sold: Cost to the business for merchandise or goods sold

Gross profit or gross margin: The difference between the net sales and the cost of goods sold

Operating expense: The overhead or cost incurred in operating the business

Net income or net profit: The difference between gross profit (margin) and operating expenses

18.1.1

How to Prepare an Income Statement

1. Use the adjusted trial balance to record net sales
   (a) Record gross sales
   (b) Record sales returns and allowances
   (c) Subtract sales return and allowances from gross sales
   Net Sales = Gross Sales – Sales Returns and Allowances


2. Use the adjusted trial balance to record cost of goods sold
   (a) Record cost of beginning inventory
   (b) Record cost of purchases
   (c) Record cost of ending inventory
   (d) Add cost of beginning inventory and cost of purchases and subtract cost of
   ending inventory
   Cost of Goods Sold = Cost of Beginning Inventory + Cost of Purchases – Cost of Ending Inventory


3. Record gross profit from sales: subtract cost of goods sold from net sales
   Gross Profit from Sales = Net Sales – Cost of Goods Sold


4. Use the adjusted trial balance to record total operating expenses: list the operating
   expenses and add the entries.


5. Record net income: subtract the operating expenses from the gross profit.
   Net Income = Gross Profit from Sales – Operating Expenses