CHAPTER TWENTY TWO

COST OF GOODS SOLD AND

STATEMENTS

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1. Complete a ten-column worksheet.

2. Prepare the income statement, statement of owner’s equity, and balance sheet from the worksheet.

COST OF GOODS SOLD AND STATEMENTS

Objectives:

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Completing the Ten-Column Worksheet

The following procedures are used to prepare the last two sections of the worksheet -- the Income Statement section and the Balance Sheet section.

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Completing the Ten-Column Worksheet (continued)

The balances of the asset, liability, and owner’s equity accounts shown in the Adjusted Trial Balance section are recorded in the proper columns of the Balance Sheet section.

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Completing the Ten-Column Worksheet (continued)

Both the debit and credit amounts shown on the Income Summary line are extended to the Debit and Credit columns in the Income Statement section.

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Completing the Ten-Column Worksheet (continued)

The balances of the revenue, cost, and expense accounts shown in the Adjusted Trial Balance section are recorded in the proper columns of the Income Statement section.

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Completing the Ten-Column Worksheet (continued)

The columns of the Income Statement section and the Balance Sheet section are totaled.

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Completing the Ten-Column Worksheet (continued)

The total of the Debit column in the Income Statement section is subtracted from the total of the Credit column. The difference is the net income for the period.

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Completing the Ten-Column Worksheet (continued)

The total of the Credit column in the Balance Sheet section is subtracted from the total of the Debit column. The difference is the same as the net income. This amount is entered below the total of the Credit column.

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Completing the Ten-Column Worksheet (continued)

The columns of the Income Statement section and the Balance Sheet section are totaled again. In each section, the debits and credits should be equal.

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Preparing the Financial Statements

The income statement for Maddalon Office Supply consists of five sections:

Operating Revenue

Cost of Goods Sold

The Gross Profit on Sales

The Operating Expenses

The Net Income

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Preparing the Financial Statements (continued)

The statement of owner’s equity includes the beginning capital plus any investments. To that figure, net income is added, withdrawals are subtracted, and the new total is computed.

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Preparing the Financial Statements (continued)

The balance sheet shows current assets, plant and equipment, current liabilities, long-term liabilities, and owner’s equity.

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Accounting Terminology

•Classified balance sheet

•Current assets

•Current liabilities

•Long-term liabilities

•Solvency

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Chapter Summary

•After the Adjusted Trial Balance section of the worksheet is completed, the balances for all accounts, except the Income Summary account, are transferred from the Adjusted Trial Balance section to the Income Statement and Balance Sheet sections of the worksheet.

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Chapter Summary (continued)

•The Income Summary debit and credit amounts are recorded in the Income Statement section of the worksheet. The net income is entered below the totals of the Debit column in the Income Statement section and the Credit column in the Balance Sheet section. Then, these sections are totaled again.

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Chapter Summary (continued)

•The completed worksheet provides the information needed to prepare the financial statements.

•The income statement for a merchandising business shows cost of goods sold and gross profit on sales as well as revenue, expenses, and net income or net loss.

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Chapter Summary (continued)

•Cost of goods sold:

Beginning inventory and net delivered cost of purchases are added to find the total merchandise available for sale.

The ending inventory is subtracted from the total merchandise available for sale to equal cost of goods sold.

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Chapter Summary (continued)

•The gross profit on sales is computed by subtracting the cost of goods sold from the net sales.

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Chapter Summary (continued)

•Assets are current or Plant and Equipment.

•Liabilities are current or long-term.

•The classified balance sheet shows assets and liabilities in groups.

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Investigating on the Internet

As a research assignment, access the Pepsi web site and report sources of information that might concern financial statements.

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1. Gross profit on sales is computed by subtracting net sales from the cost of goods sold.

2. The completed worksheet provides the information needed to prepare the

financial statements. 3. The classified balance sheet shows only

current assets, current liabilities, and owner’s equity.

Topic QuizAnswer the following true/false questions:

TRUE

FALSE

FALSE

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(Return to Topic Quiz)

1. Gross profit on sales is computed by subtracting net sales from the cost of goods sold.

FALSEGross profit is computed by subtracting the cost of goods sold from net sales.

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(Return to Topic Quiz)

3. The classified balance sheet shows only current assets, current liabilities, and owner’s equity.

FALSEAll assets, liabilities, and owner’s equity accounts are grouped in the classified balance sheet.