LESSON 15 1 Preparing an Income Statement CENTURY

LESSON 15 -1 Preparing an Income Statement CENTURY 21 ACCOUNTING © Thomson/South-Western

2 USES OF FINANCIAL STATEMENTS n Financial statements provide the primary source of information needed by owners & managers to make decisions on the future activity of a business n They provide information about a business’s financial condition, changes in the financial condition, & the progress of operations CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15 -1

3 INCOME STATEMENT n An income statement is used to report a business’s financial progress n Merchandising businesses report revenue, cost of merchandise sold, gross profit on sales, expenses, & net income or loss n The income statement of a merchandising business has 3 main sections: n Revenue section n Cost of merchandise sold section n Expenses section CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15 -1

4 INCOME STATEMENT INFORMATION ON A WORK SHEET page 448 • Information from a completed work sheet is used to prepare an income statement • Amounts in all revenue & expense accounts & Merchandise Inventory are reported on an income statement CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15 -1

5 REVENUE SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS § A merchandising business will have more accounts to report on the income statement § Sales Discounts § Sales Returns & Allowances § Total sales less sales discount & sales returns & allowances is called net sales CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15 -1

6 REVENUE SECTION OF AN INCOME STATEMENT page 449 FOR A MERCHANDISING BUSINESS 1 2 3 4 5 8 1. 2. 3. 4. 5. Heading Revenue section Title of revenue account Sales amount Less contra accounts CENTURY 21 ACCOUNTING © Thomson/South-Western 6 6. 7. 8. 9. 7 9 Contra account amounts Contra account total Net Sales Net sales amount LESSON 15 -1

COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS § The original price of all merchandise sold during a fiscal period is called the cost of merchandise sold § Also known as Cost of goods sold or Cost of sales § The totals of the sales contra accounts & the purchases contra accounts are not described on a separate line 7 § Each amount is immediately to the right of an amount column ruled with a single line § The single ruled line indicates that the column is being totaled. § The amount adjacent to the column is the sum of that column CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15 -1

8 COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING page 450 BUSINESS 1. Cost of Merchandise Sold section 2. Beginning inventory 1 3. Purchases section 2 3 4. Total cost of merchandise available for sale 5. Ending inventory 5 6 4 CENTURY 21 ACCOUNTING © Thomson/South-Western 6. Cost of merchandise sold LESSON 15 -1

9 COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS § The revenue remaining after cost of merchandise sold has been deducted is called Gross profit on Sales § Measures how effectively the business is performing in its primary functions of buying & selling merchandise § Calculating a ratio between gross profit on sales & net sales (component percentage) enables management to compare its performance to prior fiscal periods. § Reported in the fourth column of the income statement CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15 -1

10 COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS 7 1 2 3 4 5 CENTURY 21 ACCOUNTING © Thomson/South-Western 6 page 452 1. Gross Profit on Sales 2. Expenses section 3. Net Income before Federal Income Tax 4. Less Federal Income Tax Expense 5. Net Income after Federal Income Tax 6. Double lines 7. Component percentage LESSON 15 -1

11 TERMS REVIEW page 454 n net sales n cost of merchandise sold n gross profit on sales CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15 -1