Introduction to Financial Accounting Unit 6 1 Introduction to Financial Accounting Unit 6 Income Statement – Structure, Categories and Formats

Introduction to Financial Accounting Unit 6 2 Unit 6 – Income Statement – Structure, Categories and Formats Learning Outcome:  understand the make-up and prepare a simple income statement  understand the treatment for return inwards and return outwards in the income statement  understand the treatment for carriage inwards and carriage outwards  prepare a whole set of financial statements (excluding cash flows statement)

Introduction to Financial Accounting Unit 6 3 Income Statement (1)  SALES – COST OF SALES = GROSS PROFIT  GROSS PROFIT – ALL OTHER EXPENSES = NET PROFIT  NET PROFIT is the figure transferred to the BALANCE SHEET.

Introduction to Financial Accounting Unit 6 4 Income Statement (2)  INCOME is a cash INFLOW that a Company receives for SELLING a product or a service onto a customer.  INCOME is listed at the top of the income statement.  The top part of the statement is called the TRADING ACCOUNT, and deals with cost of sales and Gross Profit.

Introduction to Financial Accounting Unit 6 5 Income Statement (3)  The bottom part of the statement is called the profit and loss account, and deals with the TRADING OUTFLOWS - deductions of expenses - from Gross profit to arrive at Net profit.  The income statement is not a “substitute” for the Balance sheet.

Introduction to Financial Accounting Unit 6 6 Income Statement (4)  The income statement is complimentary to the Balance Sheet, in that it is an appendix to the capital section of the Balance Sheet.  The layout of an income statement will vary according to the type of business.

Introduction to Financial Accounting Unit 6 7 Cost of Sales (1)  It is also called cost of goods sold (COGS) which describes it better.  Components: Raw materials Direct labour + Applicable production overheads (Indirect costs)

Introduction to Financial Accounting Unit 6 8 Cost of Sales (2)  This is cost of producing goods add the cost of opening inventory, less the cost of closing inventory, and you have the production cost of goods sold or COST OF SALES

Introduction to Financial Accounting Unit 6 9 Steps in calculating Cost of Sales (1) 1. Take the OPENING STOCK for the beginning of the period (which will be found in the previously calculated balance sheet). 2. And then ADD the total of the goods bought in the period OPENING STOCK + GOODS BOUGHT = GOODS AVAILABLE FOR RESALE

Introduction to Financial Accounting Unit 6 10 Steps in calculating Cost of Sales (2) 3. The CLOSING STOCK figure for the period represents the amount of stock available to sell, that was not sold in the period, so GOODS AVAILABLE FOR SALE – CLOSING STOCK = COST OF SALES

Introduction to Financial Accounting Unit 6 11 Returns inwards and Returns outwards (1)  Companies return goods to their suppliers (returns outwards) and will have goods returned to them by their customers (returns inwards).  When gross profit is calculated, these returns will have to come into the calculations.

Introduction to Financial Accounting Unit 6 12 Returns inwards and Returns outwards (2)

Introduction to Financial Accounting Unit 6 13 Carriage inwards and Carriage outwards (1)  Carriage inwards are charged when goods purchased are delivered.  Carriage outwards are charged when the goods are sent out to the customers.

Introduction to Financial Accounting Unit 6 14 Carriage inwards and Carriage outwards (2)

Introduction to Financial Accounting Unit 6 15 Format of Income Statement

Introduction to Financial Accounting Unit 6 16 Practice and Exercises Income Statement – Structure, Categories and Formats

Introduction to Financial Accounting Unit 6 17 Next Lecture Reading Unit 7 – Cash flows Statement 1 – Overview and Indirect Method