Week 4- FABM2

Guide Question
How these stores earn an income?
What are the factors to consider before you make profit?
COST OF GOODS SOLD
Cost of goods sold is the accounting term used to describe the
expenses incurred to produce the goods or services sold by a
company.

Examples of what can be listed as COGS include the cost of

materials, labor, the wholesale price of goods that are resold,
such as in grocery stores, overhead, and storage.
OBJECTIVES
• Define Cost of Goods Sold
• Differentiate COGS from Expenses
• Illustrate the formula of COGS
Cost of Goods Sold in Merchandising company

Cost of goods sold needs to be deducted from sales in order to arrive at

gross profit. It depicts the cost incurred for goods sold during the period.
Cost of goods sold is the sum of the cost of all the products of the
merchandising company that were sold during the accounting period.

If the merchandising company use a perpetual system of inventory, cost

of goods sold would be calculated at every point of sales being made.

Under the periodic inventory system used by company, cost of goods sold
needs to be computed. Under this method, all the goods purchased are
entered in the purchases account and not inventory account.
The COGS is an important metric on the financial
statements as it is subtracted from a company's
revenues to determine its gross profit. The gross
profit is a profitability measure that evaluates how
efficient a company is in managing its labor and
supplies in the production process.
Difference of COST OF Goods Sold from Expenses

Cost of goods sold is the major expense in merchandising

companies and represents what the seller paid for the
inventory it has sold.

Operating expenses for a merchandising company are those

expenses, other than cost of goods sold, incurred in the normal
business functions of a company. Usually, operating expenses
are either selling expenses or administrative expenses.
Selling expenses -are expenses a company incurs in selling and
marketing efforts. Examples include salaries and commissions
of salespersons, expenses for salespersons’ travel, delivery,
advertising, rent (or depreciation, if owned) and utilities on a
sales building, sales supplies used, and depreciation on delivery
trucks used in sales.
Administrative expenses -are expenses a company incurs in
the overall management of a business. Examples include
administrative salaries, rent (or depreciation, if owned) and
utilities on an administrative building, insurance expense,
administrative supplies used, and depreciation on office
equipment.
Objectives
• Identify the elements of the SCI
• describe each of these items for a service business and a
merchandising business
Financial statements are written records that convey the business
activities and the financial performance of a company. Financial
statements are often audited by government agencies, accountants,
firms, etc. to ensure accuracy and for tax, financing, or investing
purposes.

The objective of financial statements is to provide information about

the financial position, performance and changes in financial position of
an enterprise that is useful to a wide range of users in making economic
decisions." Financial statements should be understandable, relevant,
reliable and comparable.
The financial statements are considered the end product
of the information accumulated and processed during the
accounting period. The basic financial statements are
generally prepared at the end of the accounting year.
For timely information, however, financial statement are
also prepared at the end of every month. The basic
financial statements are:

1.Income Statement (Statement of Performance)

2.Balance Sheet (Statement of Financial Position)
The Income Statement is one of a
company’s core financial statements that
shows their profit and loss over a period of
time.
The profit or loss is determined by taking
all revenues and subtracting all expenses
from both operating and non-operating
activities.
Components of an Income Statement

The most common income statement items include:

1.Revenue/Sales
Sales Revenue is the company’s revenue from sales or services, displayed at the
very top of the statement. This value will be the gross of the costs associated
with creating the goods sold or in providing services. Some companies have
multiple revenue streams that add to a total revenue line.

2.Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is a line-item that aggregates the direct costs
associated with selling products to generate revenue. This line item can also be
called Cost of Sales if the company is a service business. Direct costs can include
labor, parts, materials, and an allocation of other expenses such as depreciation
(see an explanation of depreciation below).
3.Gross Profit
Gross Profit Gross profit is calculated by subtracting Cost
of Goods Sold (or Cost of Sales) from Sales Revenue.

4.Marketing, Advertising, and Promotion Expenses

Most businesses have some expenses related to selling
goods and/or services. Marketing, advertising, and
promotion expenses are often grouped together as they
are similar expenses, all related to selling.
5.General and Administrative (G&A) Expenses
SG&A Expenses include the selling, general, and the administrative section
that contains all other indirect costs associated with running the business. This
includes salaries and wages, rent and office expenses, insurance, travel
expenses, and sometimes depreciation and amortization, along with other
operational expenses. Entities may, however, elect to separate out
depreciation and amortization in its own section.

6.Interest
Interest Expense. It is common for companies to split out interest expense and
interest income as a separate line item in the income statement. This is done
in order to reconcile the difference between EBIT and EBT. Interest expense is
determined by the debt schedule.
7.Other Expenses
Businesses often have other expenses that are unique to their
industry. Other expenses may include things such as fulfillment,
technology, research and development (R&D), stock-based
compensation (SBC), impairment charges, gains/losses on the
sale of investments, foreign exchange impacts, and many other
expenses that are industry or company-specific.
Parts of Income Statement/ Statement of Performance

1.Heading- First line: Name of the Company

- Second Line: Statement of Performance
- Third Line: the date- which is the end of the period:
month, day, year covered by the statement

2. Body- it contains the simple listing of all the income (Sales) and
expense items and a comparison of their totals, to determine net
income or net loss.
PREPARATION OF INCOME STATEMENT

Income, costs and expenses are commonly termed

nominal account s because these accounts pertain
only to the period when they were earned or
incurred.
These accounts are accumulated from the start to
the end of the accounting period.
ACTIVITY

Make COST OF GOODS SOLD AND STATEMENT OF

COMPREHENSIVE INCOME (3 TRANSACTIONS)
STATEMENT OF CHANGES IN OWNERS EQUITY