CHAPTER 7

INCOME STATEMENT: an introduction

Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:

Balance Sheet

Income Statemen

t

Statement of Cash

Flows

Owners’ Equity

Statement

Financial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

PURPOSE OF INCOME STATEMENT

o Planning aheado Obtaining loans from banks, from other business, or from private individuals.oTelling prospective business partners how successful the business is.oTelling someone who may interested in buying the business.o calculating the tax.

INCOME STATEMENT

B Swift

Income Statement for the year ended 31 Dec 2008

Sales 38,500

Less Cost of goods sold

Purchases 29,000

Less: closing inventory (3,000)

(26,000)

Gross Profit 12,500

Less Expenses

Rent 2,400

Lighting expenses 1,500

General expenses 600 (4,500)

Net Profit 8,000

GROSS PROFIT

Is the excess of sales revenue over the cost of goods sold in the period

Sales Revenue – COGS =Gross Profit

Cost of goods purchased

Sales Gross Profit

9,820

7,530

10,500

9,580

8,760

10,676

14,307

19,370

9,350

17,200

Calculate the gross profit of each of the following business:Calculate the gross profit of each of the following business:

NET PROFIT

is what is left of the gross profit after all other expenses have been deducted

Gross Profit – Expenses =Net Profit

OTHER REVENUE EXPENSES NET PROFIT

-

4,280

500

-

3,260

2,622

2,800

2,500

1,780

2,440

Calculate the net profit of each of the following business:Calculate the net profit of each of the following business:

Information needed…

o Before drawing up an income statement you should prepare a trial balance.

INCOME STATEMENTB Swift

Trial Balance as at 31 Dec 2008

Dr Cr

Sales 38,500

Purchases 29,000

Rent 2,400

Lighting expenses 1,500

General expenses 600

Fixtures and fittings 5,000

Account Receivable 6,800

Account Payable 9,100

Bank 15,100

Cash 200

Drawings 7,000

Gross profit is calculated:

Sales – Cost of good sold = Gross Profit

Cost of good sold:

What we bought in the period: Purchases(-)Goods bought but not sold in the period: Closing inventory = Cost of good sold

Cost of good sold is calculated:

Cost of good sold:Purchases 29,000Less: Closing inventory (3,000)Cost of good sold 26,000

Therefore:Sales – Cost of good sold = Gross Profit38,500 – 26,000 = 12,500

INCOME STATEMENT

B Swift

Income Statement for the year ended 31 Dec 2008

Sales 38,500

Less Cost of goods sold

Purchases 29,000

Less: closing inventory (3,000)

(26,000)

Gross Profit 12,500

Less Expenses

Rent 2,400

Lighting expenses 1,500

General expenses 600 (4,500)

Net Profit 8,000

End – Chapter 7