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Preparing an Expanded Income Statement

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Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

Hey everyone, and welcome to our video today, Preparing an Expanded Income Statement. So what are today's topics? Well, today is going to be all about the expanded income statement. We're going to do a review of the expanded income statement. And then we're going to look at some of the expanded income statement calculations.

So let's start with our review of the expanded income statement. So starting with sales, we would subtract out cost of goods sold to give us our gross profit. Then we would subtract out any operating expenses to get income from operations. Now from there, we would either subtract other expenses or add other revenues to get us to net income. So that's what our expanded income statement looks like.

But then we can break down the expanded income statement even further. So we can take that sales piece and we can look at gross sales and net sales. So we can separately calculate net sales.

And then we can also break down that cost of goods sold piece. So cost of goods sold is really going to be a component of cost of goods purchased, which is going to give us goods available for sale. And then we can get down to our cost of goods sold figure. So it's really made up of a couple different calculations.

But let's start with talking about that first piece. So we're going to break down our sales. We're going to look at gross sales and then calculating our net sales.

So let's look at that expanded sales calculation. So if we start with our gross sales and then we subtract out sales returns and allowances, subtract out discounts, that's going to give us our net sales. So what are gross sales? Gross sales are our total sales earned. That's our total cash, our total credit sales.

And then we have our sales returns and allowances. That's a contra-revenue account. That means that it's a reduction of our revenue, so a reduction of our sales. And that's tracked separately from sales in order to preserve our analysis capabilities so we can see what are our total returns and allowances relative to our gross sales.

Now, discounts are similar in that they're also a contra-revenue account. So they also reduce our sales. And it's an incentive that's offered to improve prompt payment or to promote total sales.

And we also track our discounts separately from our sales. So if we take gross sales, subtract our sales return and allowances, subtract discounts, that gets us to our net sales. So that's our expanded sales calculation.

So now let's look at that cost of goods sold calculation, expanding on that. So if we start with our beginning inventory, add cost of goods purchased, that gives us our goods available for sale. From there, we would subtract out ending inventory. And that's how we get to our cost of goods sold.

But we're not done there. We can actually break down that cost of goods purchased piece of the cost of goods sold calculation into purchases minus discounts minus purchase returns and allowances to give us our net purchases. Then once we have our net purchases, we would add our freight in, so the shipping costs to bring those goods, to bring that inventory to us. And that will give us our cost of goods purchased, which we can then plug into that cost of goods sold calculation.

So there's a lot of calculations here, a lot of formulas. Let's look at an example of calculating cost of goods sold as well as cost of goods purchased right now. So let's look at an example.

OK, everyone. So what we have here is an example of a cost of goods sold calculation. And within that, we're also going to have to calculate our cost of goods purchased. But let's start at the top there with beginning inventory.

So beginning inventory, which we would pull from our accounting information, and which we were given for this example, is $500,000. And to our beginning inventory, we add cost of goods purchased. Well, how do we figure out cost of goods purchased? We have to go down to the calculation, cost of goods purchased calculation.

And then starting with our purchases, we then subtract out our purchase returns and allowances, subtract out our purchase discounts. And that provides us with our net purchases. And then once we have our net purchases, we then add freight in, or those shipping costs that we incurred to get that merchandise to us, to give us our total cost of goods purchased.

So now we can take that cost of goods purchased, that $181,000, and bring it up to our cost of goods sold calculation. So we can dump it into our cost of goods sold purchased. And then we add our beginning inventory and our cost of goods purchased. And that's our goods available for sale. So beginning inventory plus cost of goods purchased gives us goods available for sale.

We then subtract out our ending inventory, so what we have left on hand. And that gives us our cost of goods sold. So cost of goods sold again, beginning inventory plus cost of goods purchased equals goods available for sale. Subtract out ending inventory to give us our cost of goods sold.

Great. So now that we've seen a calculation of cost of goods purchased within the cost of goods sold calculation, let's summarize what we talked about today. In a nutshell, we did a review of the expanded income statement. And within the expanded income statement, we looked at the expanded income statement calculations. So we looked at expanding our sales calculation, our cost of goods sold calculation, and then our cost of goods purchased calculation within that cost of goods sold.

I hope everybody enjoyed this video. And I hope to see you next time.