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Preparing an Expanded Income Statement

Author: Sophia
PDF Version

what's covered
This lesson will cover how to prepare an expanded income statement. Specifically, this lesson will cover:

Table of Contents

1. Expanded Income Statement: A Review

In review, the expanded income statement starts with sales minus cost of goods sold equals gross profit. We then subtract out operating expenses to arrive at income from operations. Finally, we add other revenues or subtract other expenses to equal net income.

formula to know
Expanded Income Statement
table attributes columnalign right end attributes row Sales row cell stack negative space Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell row cell stack negative space Operating space Expenses with bar below end cell row cell Income space from space Operations end cell row cell stack negative space Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

We can further break down the expanded income statement by taking the sales piece and looking at gross sales and net sales, separately calculating net sales.

We can also break down the cost of goods sold piece. Cost of goods sold is a component of cost of goods purchased, which is going to give us goods available for sale. Then, we can calculate the cost of goods sold figure. Therefore, the whole process is made up of a few different calculations.

1a. Expanded Sales Calculation

Now we're going to break down our sales, looking at gross sales and calculating our net sales, through the expanded sales calculation.

Starting with gross sales, we subtract out sales returns and allowances, and subtract out discounts, to equal net sales.

  • Gross sales are the total sales earned--total cash and total credit sales.
  • Sales returns and allowances is a contra-revenue account, meaning it reduces sales. It is tracked separately from sales to preserve our analysis capabilities, so we can compare our sales returns and allowances to our total sales to see what percentage they are, and perform additional analysis.
  • Discounts is also a contra-revenue account, meaning it reduces our sales. It's an incentive which can be offered to improve prompt payment or improve total sales. It is also tracked separately.
Again, the expanded sales calculation is gross sales minus sales return and allowances, minus discounts, equals net sales.

formula to know
Expanded Sales Calculation
Gross space Sales minus Sales space Returns space and space Allowances minus Discounts equals Net space Sales

1b. Expanded Cost of Goods Sold Calculation

We can also expand the cost of goods sold calculation. Starting with our beginning inventory, we add cost of goods purchased to give us the goods available for sale. From there, we subtract out ending inventory to provide the cost of goods sold.

formula to know
Cost of Goods Sold
table attributes columnalign right end attributes row cell Beginning space Inventory end cell row cell stack plus space Cost space of space Goods space Purchased with bar below end cell row cell Goods space Available space for space Sale end cell row cell stack negative space Ending space Inventory with bar below end cell row cell Cost space of space Goods space Sold end cell end table

However, we can go even further by breaking down the cost of goods purchased piece of the calculation, starting with purchases, minus discounts, minus purchase returns and allowances to equal net purchases. Next, we would add freight-in, which is the shipping cost to bring the inventory to us, to give us the total cost of goods purchased. This is how we calculate cost of goods purchased, which we can now plug into the cost of goods sold calculation.

formula to know
Cost of Goods Purchased
table attributes columnalign right end attributes row Purchases row cell negative space Discounts end cell row cell stack negative space Purchase space Returns space and space Allowances with bar below end cell row cell Net space Purchases end cell row cell stack plus space Freight minus in with bar below end cell row cell Cost space of space Goods space Purchased end cell end table

2. Calculating Cost of Goods Sold: Example

Now that we have discussed the formulas and calculations involved, let's look at an example of calculating cost of goods sold, as well as cost of goods purchased.

A table titled

As you can see, we start at the top with beginning inventory, $500,000, which we would pull from our accounting information.

To this 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 cost of goods purchased calculation.

table titled

Starting with our purchases, we subtract out purchase returns and allowances, and subtract out purchase discounts, which provides us with net purchases. Then, once we have our net purchases, we add freight-in, or those shipping costs that we incurred getting the merchandise to us, to give us the total cost of goods purchased, $181,000.

Now we can take the cost of goods purchased, that $181,000, and bring it up to the cost of goods sold calculation. We input it into the cost of goods sold purchased, then we can add our beginning inventory.

A table titled

This sum equals our goods available for sale: beginning inventory plus cost of goods purchased equals goods available for sale.

Finally, we subtract out our ending inventory--what we have left on hand--to equal the cost of goods sold.

A table titled

big idea
Again, beginning inventory plus cost of goods purchased equals goods available for sale; subtract ending inventory to provide cost of goods sold.

summary
Today we reviewed the expanded income statement. Within the expanded income statement, we examined the expanded income statement calculations, including the expanded sales calculation, the expanded cost of goods sold calculation, and the cost of goods purchased calculation within that cost of goods sold. Lastly, we walked through an example of an expanded cost of goods sold calculation.

Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR TERMS OF USE.

Formulas to Know
Cost of Goods Purchased

table attributes columnalign right end attributes row Purchases row cell negative space Discounts end cell row cell stack negative space Purchase space Returns space and space Allowances with bar below end cell row cell Net space Purchases end cell row cell stack plus space Freight minus in with bar below end cell row cell Cost space of space Goods space Purchased end cell end table

Cost of Goods Sold

table attributes columnalign right end attributes row cell Beginning space Inventory end cell row cell stack plus space Cost space of space Goods space Purchased with bar below end cell row cell Goods space Available space for space Sale end cell row cell stack negative space Ending space Inventory with bar below end cell row cell Cost space of space Goods space Sold end cell end table

Expanded Income Statement

table attributes columnalign right end attributes row Sales row cell stack negative space Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell row cell stack negative space Operating space Expenses with bar below end cell row cell Income space from space Operations end cell row cell stack negative space Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

Expanded Sales Calculation

Gross space Sales minus Sales space Returns space and space Allowances minus Discounts equals Net space Sales

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