INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS (COM 5024) 1st Term, AY 2022 – 2023

LESSON 3d. PREPARATION OF THE STATEMENT OF COMPREHENSIVE INCOME

(Income Statement for Manufacturing Business)
The income statement of a manufacturing company is not different with that of the merchandising
company except the presentation of the cost of good sold. The manufacturing business is the one
manufacturing the goods that they are selling hence the cost of goods sold will include the cost of the raw
materials used in the production and the cost of converting the raw materials into finished goods such as
wages of the production workers and other expenses incurred in the production plant or factory. There are
three components of the manufacturing cost: direct materials cost, direct labor cost and the manufacturing
overhead cost.
Direct materials – these are the raw materials that form the significant part of the finished product.
They are directly identifiable in the finished product, meaning without them, there would be no product at all.
For example, in a furniture manufacturing company that manufactures wooden table, the direct materials are
the wood and paint or varnish. When direct materials are purchased, same entry to record the purchases in
merchandising company:
Purchases xxx
Input tax xxx Periodic inventory system
Cash (or Accounts Payable) xxx

Raw materials inventory xxx

Input tax xxx Perpetual inventory system
Cash (or Accounts Payable) xxx

Direct labor – these are the wages or salaries of factory workers directly involved in the production
process. They normally are the ones who directly touched (do not take this literally) the product during the
manufacturing process. They are normally the workers in the assembly line and finishing line in the
manufacturing plant. For example, in a furniture manufacturing company that manufactures wooden table,
the salaries of the wood cutter, assembler and painter are considered direct labor.
Manufacturing Overhead (Factory Overhead) – This includes all other expenses in the factory other
than the direct materials and direct labor. These include the following:

Indirect materials – these are the other raw materials used in production but are not directly
identifiable in the finished product. For example, in a furniture manufacturing company that
manufactures wooden table, indirect materials include the nails, wood glue, sandpapers, tacks,
screws.
Indirect labor – these are the wages or salaries of other workers in the factory who are not
involved in the production process. Examples are the salaries of the maintenance staff
(repairmen and cleaners), security staff, supervisors, forklift operators.
 Other manufacturing cost – includes utilities in the factory, insurance of factory workers and
factory equipment, oils and lubricants, depreciation of factory equipment and other assets,
taxes for factory property.

FORMAT OF THE INCOME STATEMENT OF THE MANUFACTURING COMPANY (SIMILAR TO

MERCHANDISING EXCEPT THE COMPUTATION OF THE COST OF GOODS SOLD.

Format of the multiple-step form: (DETAILED)

Name of the Company
Statement of Income
For the period (year) ended December 31, 2022

Sales xxx
Less: Sales returns and allowances xxx
Sales discounts xxx xxx
Net sales xxx
Less cost of goods sold:
Finished goods – beginning xxx
Add cost of goods manufactured (see separate computation) xxx
Total goods available for sale xxx
Less Finished goods – ending xxx xxx
Gross profit xxx
Add other income: Non-operating income / gains
Interest income xxx
Dividend income xxx xxx
Total gross income xxx
Less operating expenses:
Marketing and selling expenses:
Sales salaries (or Salaries Expense – Sales Department) xxx
Advertising and promotion expense xxx
Freight out xxx
All expenses of the store, sales
Commissions xxx
and marketing department
Store supplies expense xxx
etc. xxx xxx
General and administrative expenses:
Office salaries All expenses of the general and xxx
Office supplies expenses executive offices xxx
Depreciation expense-office equipment xxx
Bad debts expense xxx
etc. Non-operating expenses / losses xxx xxx
Other expenses (including interest expense xxx
Total expenses xxx
Net income / (loss) xxx
Format of the multiple-step form: (SIMPLIFIED)
Name of the Company
Statement of Income
For the period (year) ended December 31, 2022

Net sales (1) xxx

Less cost of goods sold (2) xxx
Gross profit xxx
Add other income (3) xxx
Total gross income xxx
Less operating expenses:
Marketing and selling expenses (4) xxx
General and administrative expenses: (5) xxx
Other expenses (including interest expense) (6) xxx
Total expenses xxx
Net income / (loss) xxx

Computation of the Cost of Goods Manufactured (sometimes this is required as a

formal report to accompany the income statement, in which case, just put a heading in this
computation)
Name of the Company
Statement of Cost of Goods Manufactured and Sold
For the period ended (Month/Day/Year)

Raw materials – beginning xxx

Add net Purchases xxx same computation of net purchases in merchandising
Raw materials available for use xxx
Less raw materials – ending xxx
Raw materials used xxx Work in process – are the raw materials that
Less Indirect materials used xxx were already started in process but are not yet
Direct materials used xxx 100% finished (1% - 99% only) as at the end of
Add: Direct labor xxx the period.
Manufacturing overhead xxx
Total manufacturing cost xxx
Add work in process - beginning xxx Finished goods – are those that are 100%
Total goods placed in process xxx complete and are ready for sale.
Less work in process – ending xxx
Cost of goods manufactured xxx

Add finished goods beginning xxx

Total goods available for sale xxx to continue with the cost of goods sold
Less finished goods ending xxx
 Cost of goods manufactured and sold xxx

Other computation in the income statement of a manufacturing company

Prime cost = Direct materials + Direct labor
Conversion Cost = Direct labor + Manufacturing overhead
Manufacturing cost = Direct materials + Direct labor + Manufacturing Overhead
Cost of goods manufactured = Manufacturing cost + Work in process, beg – Work in process, end
Cost of goods sold = Cost of goods manufactured + Finished goods, beg – Finished goods, end
Product cost = manufacturing cost = inventoriable cost
Period cost = Marketing and selling expenses + General and administrative expenses + other expenses
Period cost = Operating expenses = Non-manufacturing cost = Non-inventoriable cost

There are three inventory accounts in the manufacturing company, these inventories are to be shown in the
statement of financial position in this same order (in order of liquidity)
Finished goods inventory – goods that are 100% complete and ready for sale
Work in process inventory – goods that have started in process but not yet finished (1% - 99%
complete as to production)
Raw materials inventory – goods that are not yet started in process which are still in its original
form (0%)
Total inventory = Finished goods + Work in process + Raw materials + Factory Supplies

ILLUSTRATIVE EXAMPLE
Drew Manufacturing Company had the following data for the year 2022:
January 1, 2022 December 31, 2022
Finished goods inventory P 80,000 P 70,000
Work in process inventory 100,000 130,000
Raw materials inventory 100,000 180,000
Raw materials purchases 110,000
Freight In 7,500
Purchase discount 2,500
Indirect materials 7,000
Direct labor 50,000
Indirect labor 15,000
Factory rent 5,000
Factory utilities 3,000
Factory supplies used 12,000
Depreciation expense – factory equipment 6,000
Store supplies used 2,000
Telephone and communications expense 3,000
Required:
A. Prepare the statement of cost of goods manufactured and sold in good form.
B. Determine the following:
1. Prime cost
 2. Conversion Cost
3. Product cost

ANSWER: (A) Purchases 110,000

DREW MANUFACTURING COMPANY Add freight in 7,500
STATEMENT OF COST OF GOODS MANUFCTURE AND SOLD Total 117,500
Purchase disc. 2,500
FOR THE YEAR ENDED DECEMBER 31, 2022
Net purchases 115,000

Raw materials – beginning P 100,000

Add net Purchases 115,000 Indirect mats 7,000
Raw materials available for use 215,000 Indirect lab 15,000
Less raw materials – ending 180,000 Fac rent 5,000
Raw materials used 35,000 Fac util 3,000
Fac depr 6,000
Less indirect materials 7,000 Fac sup 12,000
Direct materials used 28,000 Total M/OH 48,000
Add: Direct labor 50,000 117,500
Manufacturing overhead 48,000
Total manufacturing cost 126,000
Add work in process - beginning 100,000
Total goods placed in process 226,000
Less work in process – ending 130,000
Cost of goods manufactured 96,000
Add finished goods beginning 80,000
Total goods available for sale 176,000
Less finished goods ending 70,000
Cost of goods manufactured and sold P106,000

(B) 1. Prime cost = Direct materials used + Direct labor

= 28,000 + 50,000
= 78,000
2. Conversion Cost = Direct labor + Manufacturing overhead
= 50,000 + 48,000
= 98,000
3. Product cost = Direct materials + Direct labor + Manufacturing Overhead
= 28,000 + 50,000 + 48,000
= 126,000 (total manufacturing cost)
PRACTICE EXERCISE
(NOTE: TRY TO ANSWER FIRST ON YOUR OWN BEFORE YOU LOOK AT THE ANSWER ON THE NEXT PAGE)

The beginning and ending balance of selected accounts of Drea Paper Products Inc. for the year 2021 are given
below:
Beginning Balance Ending Balance
Finished goods P450,000 P580,000
Work on process 500,000 465,000
Raw materials 730,000 720,000

Transactions that transpired during the year were:

Raw materials costing P280,000 were purchased for cash.
Raw materials costing P210,000 were purchased on account.
Incurred factory overhead cost, P125,000.- other manufacturing overhead
Other materials requisitioned for production, P50,000 – indirect materials
Factory wages consisted of: Direct labor, P290,000; Indirect labor, P80,000.
Finished goods costing 370,000 were sold for P750,000.
Required:
1. Prepare the statement of cost of goods manufactured and sold in good form.
2. Determine the following a. Prime cost; b. Conversion cost, c. Product cost.
1.
DREA PAPER PRODUCTS INC.
STATEMENT OF COST OF GOODS MANUFACTUREd AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 2022
Raw materials – beginning P 730,000
Add net Purchases 490,000
Raw materials available for use 1,220,000
Less raw materials – ending 720,000
Raw materials used ` 500,000
Less Indirect materials 50,000
Direct materials used 450,000
Add: Direct labor 290,000
Manufacturing overhead (see Note 1) 255,000
Total manufacturing cost 995,000
Add work in process - beginning 500,000
Total goods placed in process 1,495,000
Less work in process – ending 465,000
Cost of goods manufactured 1,030,000
Add finished goods beginning 450,000
Total goods available for sale 1,480,000
Less finished goods ending 580,000
Cost of goods manufactured and sold P 900,000

2. a. Prime cost = Direct materials used + Direct labor

= 450,000 + 290,000
= 740,000
b. Conversion Cost = Direct labor + Manufacturing overhead
= 290,000 + 255,000
= 545,000
c. Product cost = Direct materials + Direct labor + Manufacturing Overhead
= 450,000 + 290,000 + 255,000
= 995,000

Note 1. Other manufacturing cost 125,000

Indirect materials 50,000
Indirect labor 80,000
Total manufacturing overhead 255,000