Mr. M.
Waithe@fatimacollege F4 POA The Income Statement
The Income Statement
The Income Statement was previously known as and called the Trading & Profit + Loss Account. Looking
at the name ‘Trading & Profit + Loss Account’ it can be interpreted to contain two aspects being 1.
Trading Account, 2. Profit + Loss Account (P&L a/c).
The Trading Account is simply put a ‘format’ which attempts to show as clearly as possible the business’
Gross profit or Gross Loss for a specific Accounting Period. A typical period is 12 months. The Trading
Account shows the Gross Profit/Loss through a formula: Net Sales - Cost of Sales = Gross Profit/Loss.
The following are formulae used to calculate balances in the Income Statement which is illustrated in full
format as a template provided.
1. Gross Profit = Net Sales – COS
2. Net Sales = Sales – Returns Inwards (Sales Returns)
3. Net Purchases = Purchases + Carriage Inwards – Returns Outwards (Purchases Returns)
4. Cost of Sales = Opening Stock + Net Purchases – Closing Stock
5. Cost of Goods Available for Sale = Opening Stock + Net Purchases
6. Adjusted Gross Profit = Gross Profit + Other Income/Revenues
The Cost of Sales representing the direct cost incurred to generate a sale e.g. cost of sales to Francis
Fashions are the clothes it buys for resale.
The P&L a/c is simply put a ‘format’ which attempts to show as clearly as possible the business’ Net
Profit or Net Loss for a specific Accounting Period. The P&L a/c shows the Net Profit/Loss through a
formula: Net Profit/Loss = Adjusted Gross Profit/Loss – Total Expenses .
In this case, ‘total expenses’ comprises of all other expenses which are not directly incurred to generate
a sale e.g. Francis Fashions rents a shopping space in West Mall to retail its merchandise, the cost of
Rent is an indirect cost. Rent has nothing to do with the actual clothing and accessories sold by the
business, but is needed as part of running the business so that customers can come to the convenient
location to buy their merchandise. This type of indirect expense is also called ‘OVERHEADS’.
In questions 1-5 circle the letter of the correct answer.
1. Which of the following accounts are needed to determine gross profit?
a) Wages
b) Discount received
c) Closing Stock
d) Carriage outwards
2. Cost of Goods Sold is:
a) All costs associated with buying the goods
b) Net purchases plus the closing stock
c) Opening stock plus net purchases
d) Net purchases plus opening stock less closing stock
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Mr. M. Waithe@fatimacollege F4 POA The Income Statement
3. Given the following account balances from the ledger: Purchases $500, Sales $600, Closing Stock
$300, what is the gross profit?
a) $200
b) $400
c) $0
d) $800
4. Which of these accounts would have no effect on profit in the Income Statement?
a) Wages
b) Closing stock
c) Furniture
d) Insurance
5. Using the following information, determine the cost of sales.
$
Sales 3,000
Purchases 1,200
Returns Inwards 300
Carriage inwards 150
Closing Stock 200
a) $1,150
b) $2,700
c) $1,550
d) $1,350
6. Using the following information, calculate the cost of goods sold and gross profit.
Opening inventory $40, purchases $200, closing inventory $30 and sales $400.
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7. Use the following account balances to calculate the cost of goods sold and gross profit.
Beginning inventory $100, purchases $600, returns outwards $50, ending inventory $80 and
sales $1,000.
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8. For the year 2016, a business’ total sales are $5,200 and its returns inwards (sales returns) are
$1,200. What is its net sales figure?
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9. Prepare the Trading Account for the period ended 30 September, 2015 using the information
below.
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Mr. M. Waithe@fatimacollege F4 POA The Income Statement
10.
Sales $7,000
Sales Returns $500
Purchases $4,600
Purchases Returns $240
Carriage inwards $130
Inventory [Link].1 Oct, 2014 $590
Inventory [Link]. 30 Sep, 2015 $300
11. Use the following information to calculate the net profit.
Gross Profit $1,000, Rent Revenue $300, Commission Received $200, Electricity Expense $300
and Wages $430
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12. The following list of balances was extracted from the books of R. Jailal on 31 May 2017. Prepare
his Income Statement for the period ended 31 May, 2017.
13. Sales $12,600
Purchases $6,300
Returns inwards $400
Returns Outwards $850
Inventory (01.06.2016) $730
Insurance $200
Carriage inwards $110
Carriage outwards $80
Motor expenses $140
Pay $770
Lighting expense $300
Commission revenue $1,000
Inventory (31.05.2017) $260
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