Preparing functional form income statement 03132013


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Preparing functional form income statement 03132013

  1. 1. Preparing Functional-form Income Statement 15 February 2013
  2. 2. Preparing Functional-form Income Statement • The income statement of a merchandising business uses the “function of expense or cost of sales” method which consists of the following format: Net Sales Pxxx Cost of Sales xxx Gross Profit Pxxx Other Income xxx Distribution Costs (xxx) Admin & Gen Expenses (xxx) Other Expenses (xxx) Finance Costs (xxx) Net Profit Pxxx
  3. 3. Net Sales • Sales is the principal source of revenue of a company. Net sales is obtained by deducting the contra-revenue accounts (Sales returns and allowances and Sales discount) from Gross sales. Sales Pxxx Less: Sales Returns & Allow xxx Sales Discount xxx xxx Net Sales Pxxx
  4. 4. Cost of Goods Sold • The cost of goods sold is the largest single expense of a merchandising business. It is the cost of merchandise that the company sold to its customers. • Under the perpetual inventory system, the cost of goods sold is determined every time a sale is made. • However, when cost of goods sold is determined only at the end of the accounting period when a physical count of unsold goods is conducted, the company is said to be using the periodic inventory system.
  5. 5. Cost of Goods Sold • Merchandise available for sale – the sum of the beginning inventory and net purchases. • Net purchases – Gross purchases plus Freight-in minus Purchase returns and allowances and Purchase discount. • Cost of goods sold – is computed by subtracting the ending inventory from the cost of merchandise available for sale.
  6. 6. Cost of Goods Sold Merchandise Inventory, Beg. Pxxx Add: Purchases xxx Freight-In xxx Gross Purchases xxx Less: Purchase Ret & Allow (xxx) Purchase discount (xxx) Net Purchases Pxxx Total goods available for sale xxx Less: Merchandise inventory, end xxx Cost of Goods Sold xxx
  7. 7. Gross Profit • Gross Profit is the merchandising profit of a company as it is obtained by deducting cost of goods sold from net sales. Net Sales Pxxx Less: Cost of Goods Sold xxx Gross Profit Pxxx
  8. 8. Other Income • Other Income are the ordinary income that are not directly related to the primary operations of the business. • Examples: o Interest income o Dividend income o Rent income o Income from royalties
  9. 9. Operating Expenses • Operating expenses are the ordinary and necessary expenses in the day-to-day running of the operations of the business. • General categories: o Distribution costs o General and administrative costs o Other operating expenses o Finance Costs
  10. 10. Operating Expenses • Distribution costs are those expenses directly related to the selling activity of the business like sales salaries, salesmen’s commission, advertising, store supplies used, delivery expense and depreciation of store property and equipment.
  11. 11. Operating Expenses • General and administrative expenses are those expenses relating to the general operations of the business like office salaries, office supplies used, depreciation of office property and equipment and taxes and licenses.
  12. 12. Operating Expenses • Expenses that cannot be traced directly as selling or administrative expenses are identified as Other operating expenses. • Finance costs are costs arising from borrowings made by the company. It normally includes: o Interest expense o Discounts lost
  13. 13. Net profit before tax • Net profit before tax is Gross Profit plus Other Income minus total operating expenses.