Reviewer in CF & AS

Semi-Finals

Income statement is a formal statement showing the financial performance of an entity

for a given period of time.
Financial performance of an entity is primarily measured in terms of the level of
income earned by the entity through the effective and efficient utilization of its
resources.
Financial performance is also known as the results of operations of the entity.
Transaction approach is the traditional preparation of the income statement in
conformity with accounting standards.
Income statement presents:
1. Income,
2. Expenses,
3. Gains,
4. Losses, and
5. Net income or loss recognized during the period.
Information about financial performance is useful in predicting future cash flows.
Sources of income:
a. Sales of merchandise to customers.
b. Rendering of services.
c. Use of entity resources.
d. Disposal of resources other than products.
Components of expense:
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expenses
c. Administrative expenses
d. Other expenses
e. Income tax expense

1. Trading – trade items

2. Merchandising – buy and sell
3. Manufacturing – raw materials turn into a product
Formulas:
Cost of goods sold of merchandising concern
Beginning inventory + Net purchases = Goods available for sale
Goods available for sale – Ending inventory = Cost of Goods Sold
Gross Purchases + Freight in (shipping fees) = Total
Total – Purchase returns, allowances and discounts = Net Purchases
Gross Sales
Gross Sales – Sales returns, allowances and discounts = Net Sales

Cost of goods sold of manufacturing concern

Beginning raw materials + Net purchases = Raw materials available for use
Raw materials available for use – Ending raw materials = Raw materials used
Raw materials used + Direct Labor + Factory Overhead = Total manufacturing cost
Total manufacturing cost + Beginning goods in process = Total cost of goods in process
Total cost of goods in process – Ending goods in process = Cost of goods manufactured
Cost of goods manufactured + Beginning finished goods = Goods available for sale
Goods available for sale – Ending finished goods = Cost of goods sold