Cost of Goods Sold Statement Prepared by – Mohammad Azam B. Com, MBA (Finance), MS (Management Sciences) Lecturer of Accounting – Kardan Institute of Higher Education Kabul, Afghanistan.

What is Cost? Cost is a sacrifice of resource to achieve some future benefits. Expense is known as expired cost. Benefits of which have been derived is known as expense. Expense always results in negative cash flow.

The Income Statement

Income Statement The first statement prepared is the Income Statement.

Income Statement The first statement prepared is the Income Statement. The Income Statement reports a business’ performance for the period.

Income Statement A simple format for an income statement is:

Income Statement A simple format for an income statement is: Revenues – Expenses = Net Income

Income Statement Revenues are earned for the sale of goods or services. Note that revenues occur when the sale is made. The payment may or may not have been received.

Income Statement Revenues are earned for the sale of goods or services. Note that revenues occur when the sale is made. The payment may or may not have been received. Examples of revenues include sales, service revenue and interest revenue.

Income Statement Expenses are incurred when a business receives goods and services. Like revenues, payment may or may not have been made.

Income Statement Expenses are incurred when a business receives goods and services. Like revenues, payment may or may not have been made. Examples of expenses include salaries expense, utility expense and interest expense.

Income Statement Most businesses require more information from their businesses than a simple income statement can provide. Therefore, they use a multi-step income statement format. A format for a multi-step income statement is:

Income Statement Sales revenue - Cost of goods sold Gross profit - Operating expenses Income from operations +/- Non-operating items Income before taxes - Income taxes Net income

Income Statement Cost of goods sold represents the expense a business incurred to buy or make a product for resale. or CGS is the costs that go into making the products that a company sells.

Income Statement Cost of goods sold represents the expense a business incurred to buy or make a product for resale. Example - a book store buys a book for $25 and then sells it for $32. The cost of goods sold is $25.

Income Statement Operating expenses are the usual expenses incurred in operating a business.

Income Statement Operating expenses are the usual expenses incurred in operating a business. Accounts such as salaries expense, utility expense, and depreciation expenses are all shown in this section.

Income Statement Non-operating items are revenue, expenses & gains that do not relate to the company’s primary operations.

Income Statement Non-operating items are revenue, expenses & gains that do not relate to the company’s primary operations. Accounts include interest expense, rent revenue and gains of the sale of equipment and investments.

Income Statement Income taxes are computed by multiplying Income before taxes by the income tax rate.

Income Statement Income taxes are computed by multiplying Income before taxes by the income tax rate. Example – Income before taxes is $50,000. The income tax rate is 30%. Income taxes = $50,000 * 30% = $15,000.

Income Statement Sales 100,000 - Cost of Goods Sold -58,000 Gross Margin 42,000 - Operating Expenses -27,000 Income from Operations 15,000 - Non-operating Items -5,000 Income before Taxes 10,000 - Income Taxes -3,000 Net Income 7,000

Income Statement Operating expenses include: Utility expense 8,000 Sales 100,000 - Cost of Goods Sold -58,000 Gross Margin 42,000 - Operating Expenses -27,000 Income from Operations 15,000 - Non-operating Items -5,000 Income before Taxes 10,000 - Income Taxes -3,000 Net Income 7,000 Operating expenses include: Utility expense 8,000 Salaries expense 16,000 Supplies expense 3,000

Income Statement Non-operating items include: Interest expense 5,000 Sales 100,000 - Cost of Goods Sold -58,000 Gross Margin 42,000 - Operating Expenses -27,000 Income from Operations 15,000 - Non-operating Items -5,000 Income before Taxes 10,000 - Income Taxes -3,000 Net Income 7,000 Non-operating items include: Interest expense 5,000

Income Statement Income taxes = Income before taxes * Income tax rate Sales 100,000 - Cost of Goods Sold -58,000 Gross Margin 42,000 - Operating Expenses -27,000 Income from Operations 15,000 - Non-operating Items -5,000 Income before Taxes 10,000 - Income Taxes -3,000 Net Income 7,000 Income taxes = Income before taxes * Income tax rate 10,000 * 30% = 3,000

Cost of Goods Sold Statement Step Two Cost of Goods Sold Statement

a)Direct Materials & Labour: Direct Materials-Opening (Jan 1, 2010) + Purchases Cost of D. Materials available for Use - D. Materials-Ending (Dec 31, 2010) D. Materials used D. Manufacturing Labour

b) Indirect Manufacturing Cost /Factory Overhead: Indirect Manufacturing Labour Supplies Heat, Light & Power Depreciation-Plant Building Depreciation-Plant Equipment Miscellaneous Manufacturing costs incurred during the period

c) Work in Process: Manufacturing costs incurred during the period… + Beginning Work-in-process Inventory (Jan 1, 2010) Cost of Goods available for manufacturing. - Ending Work-in-process Inventory (Dec 31, 2010) Cost of Goods manufactured.

d) Finished Goods: Cost of Goods manufactured. + Finished Goods Beginning (Jan 1, 2010) Cost of Goods available for sale.. - Finished Goods Ending (Dec 31, 2010) Cost of Goods Sold…

Luqman & Brothers Corporation Cost of Goods Sold Statement For the period of December 31, 2010 Direct Materials-Opening (Jan 1, 2010) US$ 123,000 Add: Purchases 100,000 Cost of D. Materials available for Use 223,000 Less: D. Materials-Ending (Dec 31, 2010) 23,000 D. Materials used US$ 200,000 D. Manufacturing Labour 20,000 Factory Overhead: Indirect Manufacturing Labour 15000 Supplies 10,000 Heat, Light & Power 12,000 Depreciation-Plant Building 5,000 Depreciation-Plant Equipment 3,500 Miscellaneous 1,000 US$ 46,500 Manufacturing costs incurred during the period… 266,500 Add: Beginning Work-in-process Inventory (Jan 1, 2010) 33,500 Cost of Goods available for manufacturing… 300,000 Less: Ending Work-in-process Inventory (Dec 31, 2010) 100,000 Cost of Goods manufactured… 200,000 Add: Finished Goods Beginning (Jan 1, 2010) 200,000 Cost of Goods available for sale.. 400,000 Less: Finished Goods Ending (Dec 31, 2010) 100,000 Cost of Goods Sold… US$ 300,000

Exercise Opening: (Jan 1, 2010): Direct Materials 12,000 Work in Process 11,000 Finished Goods 10,000 Purchases Returns 11,500 Purchases 22,500 Freight-In 400 Ending (Dec 31, 2010): Direct Materials 2,000 Work in Process 1,000 Finished Goods 900 Factory Overhead: Indirect Manufacturing Labour 1,500 Supplies 1,000 Electricity 2,000 Dep.-Plant Building 1,000 Dep.-Plant Equipment 350 Miscellaneous 100

The End