CHAPTER TWENTY TWO
COST OF GOODS
SOLD AND
STATEMENTS
22-3
COST OF GOODS SOLD AND
STATEMENTS
Objectives:
1. Complete a ten-column worksheet.
2. Prepare the income statement, statement
of owner’s equity, and balance sheet from
the worksheet.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-4
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-5
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-6
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-7
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-8
Completing the Ten-Column
Worksheet (continued)
The columns of the Income
Statement section and the Balance
Sheet section are totaled.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-9
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-10
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-11
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-12
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
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-13
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-14
Preparing the Financial Statements
(continued)
The balance sheet shows current
assets, plant and equipment, current
liabilities, long-term liabilities, and
owner’s equity.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-15
Accounting Terminology
•Classified balance sheet
•Current assets
•Current liabilities
•Long-term liabilities
•Solvency
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-16
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-17
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-18
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-19
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-20
Chapter Summary (continued)
• The gross profit on sales is
computed by subtracting the cost of
goods sold from the net sales.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-21
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-22
Investigating on the Internet
As a research assignment, access the
Pepsi web site and report sources of
information that might concern
financial statements.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-23
Topic Quiz
Answer the following true/false questions:
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.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
FALSE
TRUE
FALSE
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-24
1. Gross profit on sales is computed by
subtracting net sales from the cost of goods
sold.
FALSE
Gross profit is computed by subtracting the cost
of goods sold from net sales.
(Return to Topic Quiz)
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
22-25
3. The classified balance sheet shows only
current assets, current liabilities, and
owner’s equity.
FALSE
All assets, liabilities, and owner’s equity
accounts are grouped in the classified balance
sheet.
McGraw-Hill/Irwin
Accounting Fundamentals, 7/e
(Return to Topic Quiz)
© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.