Instructions for Gross Profit Section of Income Statement-Periodic System

Love Thy Pets Inc., Income Statement (Partial) For the Year Ended, December 31, 2011 Revenues: Sales Less: Sales Returns and Allowances Sales Discounts Net Sales Cost of goods sold: Inventory, January 1 Purchases Less: Purchases returns and Allowances Purchases Discounts Net Purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale Inventory, December 31 Cost of goods sold Gross Profit $500,000 $20,000 6,000 26,000 $474,000 50,000 265,000 $10,000 5,000 15,000 250,000 10,000 260,000 310,000 45,000 274,000 $200,000

MJC Revised 10-2011

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Instructions for Gross Profit Section of Income Statement-Periodic System

Always start with the three-line header, which includes first the name of the corporation; second, the title of the statement; and third, the fiscal period for which the statement is prepared. If the statement is not a complete financial statement, place the word Partial after the title of the statement in brackets.

Net sales Section:

1. Place the title Revenues: in the far left column. Since this is a section header, there will

be no dollar amount in the right hand columns.

2. Next place the title Sales in the far left column. This amount will be all of the

corporations sales for the fiscal period found in the general ledger account. Place the dollar amount in the second column from the right.
3. The next two lines will be labeled: Less: Sales Returns and Allowances and Sales Discounts. Take these amounts from their ending balances from the ledger accounts (T-Accounts). Place the dollar amounts for these two accounts in the third column from the right. 4. Add the sales returns and allowances to the sales discounts. On the same line as the sales discounts, place the resulting dollar amount in the second column from the right. 5. Now subtract the total from step 4 from the sales to get net sales. Title this line Net sales in the far left hand column. Place the resulting dollar amount in the far right hand column.

Cost of Goods Sold Section:

1. On the first line of this section, place the title Cost of goods sold in the far left hand column. No dollar amount will be shown since this is a section header. 2. Now place the title Inventory, January 1 in the far left hand column. Place the dollar amount in the second column from the right. 3. Next, place the title Purchases. Place the dollar amount in the third column from the right. 4. On the next two-line place the titles Less: Purchases returns and allowances and Purchases discounts. Place the dollar amounts for these two accounts in the fourth column from the right. 5. Now add the purchases returns and allowances to the purchases discounts. Place the results in the third column from the right on the same lines as the title as purchase discounts.

MJC Revised 10-2011

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Instructions for Gross Profit Section of Income Statement-Periodic System Cost of Goods Sold Section Continued:
6. Next, place the title Net purchases. Subtract the total for purchases returns and allowances and purchase discounts from purchases to get the dollar amount. Place the dollar amount in the third column from the right. 7. Now, place the title Add: Freight-in. Place the dollar amount in the third column from the right. 8. Next, place the title Cost of goods purchased. Add net purchases and freight-in to get the dollar amount for this line. Place the dollar amount in the second column from the right. 9. Now, place the title Cost of goods available for sale. To get this dollar amount you will need to add beginning inventory as of January 1 to the cost of goods purchased. Place the dollar amount in the column second from the right. 10. Next place the title Inventory, December 31. Place the dollar amount in second from the right column. 11. Finally, for this section subtract the ending inventory as of December 31 from the cost of goods available for sale. Label this line cost of goods sold. Place the dollar amount in the far right hand column.

Gross Profit:
The final step is to subtract cost of goods sold from the net sales, which will result in the gross profit dollar amount. Place the title Gross Profit on the line just under cost of goods sold. Place the dollar amount in the far right hand column. Double underline this total since it is only a partial statement.

MJC Revised 10-2011

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