1. LESSON 15-1 Preparing an Income Statement
4/25/2017
LESSON 15-1
Preparing an Income Statement

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

3. INCOME STATEMENT
An income statement is used to report a business’s financial progress
Merchandising businesses report revenue, cost of merchandise sold, gross profit on sales, expenses, & net income or loss
The income statement of a merchandising business has 3 main sections:
Revenue section
Cost of merchandise sold section
Expenses section
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
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
Sales Discounts
Sales Returns & Allowances
Total sales less sales discount & sales returns & allowances is called net sales
LESSON 15-1

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

7. Also known as Cost of goods sold or Cost of sales
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
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
LESSON 15-1

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

10. COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS
page 452
1. Gross Profit on Sales
2. Expenses section 7 1
3. Net Income before Federal Income Tax
4. Less Federal Income Tax Expense 2
5. Net Income after Federal Income Tax
6. Double lines 3
7. Component percentage 4 6 5
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11. TERMS REVIEW net sales cost of merchandise sold gross profit on sales
page 454
net sales
cost of merchandise sold
gross profit on sales
LESSON 15-1