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Income Statement
Part 1- Calculation of Gross Profit
Worked Examples
Part A: Adjustment for Opening Inventory and Closing Inventory
Example:
From the information given below, prepare Income Statement for the year ended 31 December 2010
to calculate Gross Profit for the business of Moy.
$
Sales Revenue 22 000
Purchases 12 000
Inventory – 1Jan 10 6 500
Inventory – 31Dec10 7 500
Answer:
Moy’s Income Statement for the year ended 31 December 2010
$ $ $
Revenue (Sales) 22 000
Less: Cost of Sales:
Opening inventory 6 500
Add Purchases 12 000
Cost of goods available for sale 18 500
Less Closing Inventory (7 500) 11 000
Gross Profit 11 000
Note: When Sales > Cost of sales, there is a gross profit.
When Sales < Cost of sales, there is a gross loss.
Questions:
1. From the information given below, prepare Income Statement for the year ended 31
December 2010 to calculate Gross Profit for the business of Joy.
$
Sales Revenue 32 500
Purchases 45 000
Inventory – 1Jan 10 22 000
Inventory – 31Dec10 23 600
2. From the information given below, prepare Income Statement for the year ended 31
December 2010 to calculate Gross Profit for the business of Toy.
$
Sales Revenue 39 400
Purchases 36 500
Inventory – 1Jan 10 2 600
Inventory – 31Dec10 16 200
Prepared by Nayaz
http://principlesofaccounts.weebly.com
Part B: Adjustment for Returns Inwards and Returns Outwards
Returns Inwards (also known as sales returns) is deducted from Sales.
Returns Outwards (also known as purchases returns) is deducted from Purchases.
Example:
From the information given below, prepare Income Statement for the year ended 31 January 2011 to
calculate Gross Profit for the business of Dora.
$
Sales Revenue 22 000
Purchases 12 000
Inventory – 1 Feb 10 6 500
Inventory – 31Jan 11 7 500
Returns Inwards 750
Returns Outwards 550
Answer:
Dora’s Income Statement for the year ended 31 January 2011
$ $ $
Revenue (Sales) 22 000
Less: Returns Inwards (750)
21 250
Less: Cost of Sales:
Opening inventory 6 500
Add Purchases 12 000
Less: Returns Outwards (550) 11 450
Cost of goods available for sale 17 950
Less Closing Inventory (7 500) 10 450
Gross Profit 10 800
Questions:
1. From the information given below, prepare Income Statement for the year ended 31 January
2011 to calculate Gross Profit for the business of Diego.
$
Sales Revenue 42 650
Purchases 22 870
Inventory – 1 Feb 10 5 690
Inventory – 31Jan 11 4990
Returns Inwards 450
Returns Outwards 230
Prepared by Nayaz
http://principlesofaccounts.weebly.com
2. From the information given below, prepare Income Statement for the year ended 31 January
2011 to calculate Gross Profit for the business of Sara.
$
Sales Revenue 36 987
Purchases 35 874
Inventory – 1 Feb 10 6 534
Inventory – 31Jan 11 4 190
Returns Inwards 379
Returns Outwards 287
Part C: Adjustment for Carriage Inwards
Carriage inwards (also known as carriage on purchases) is added to Purchases.
This is because the cost of an item does not only include its purchase price but also any incidental cost
to bring the item in its saleable condition and location. Such incidental costs may include items like
freight charges, insurance on import and customs duty.
Example:
From the information given below, prepare Income Statement for the year ended 28 February 2011 to
calculate Gross Profit for the business of Barbie.
$
Sales Revenue 22 000
Purchases 12 000
Inventory – 1Mar 10 6 500
Inventory – 28Feb11 7 500
Returns Inwards 750
Returns Outwards 550
Carriage Inwards 1 690
Answer:
Barbie’s Income Statement for the year ended 31 February 2011
$ $ $
Revenue (Sales) 22 000
Less: Returns Inwards (750)
21 250
Less: Cost of Sales:
Opening inventory 6 500
Add Purchases 12 000
Add Carriage Inwards 1 690
Less: Returns Outwards (550) 13 140
Cost of goods available for sale 19 640
Less Closing Inventory (7 500) 12 140
Gross Profit 9 110
Prepared by Nayaz
http://principlesofaccounts.weebly.com
Questions:
1. From the information given below, prepare Income Statement for the year ended 28 February
2011 to calculate Gross Profit for the business of Kane.
$
Sales Revenue 42 650
Purchases 22 870
Inventory – 1Mar 10 5 690
Inventory – 28Feb11 4990
Returns Inwards 450
Returns Outwards 230
Carriage Inwards 2 000
2. From the information given below, prepare Income Statement for the year ended 28 February
2011 to calculate Gross Profit for the business of Dolly.
$
Sales Revenue 39 400
Purchases 36 500
Inventory – 1Mar 10 2 600
Inventory – 28Feb11 16 200
Returns Inwards 500
Returns Outwards 350
Carriage Inwards 2 250
Part D: Adjustment for Goods Taken by the Proprietor
Goods taken by the proprietor for his own use reduces the amount he/ she bought for sale by the
business. Therefore, goods taken by the proprietor (which can also be termed as Drawing of Goods) is
deducted from purchases in the income statement.
Example:
From the information given below, prepare Income Statement for the year ended 28 February 2011 to
calculate Gross Profit for the business of Jeff.
$
Sales Revenue 22 000
Purchases 12 000
Inventory – 1Mar 10 6 500
Inventory – 28Feb11 7 500
Returns Inwards 750
Returns Outwards 550
Carriage Inwards 1 690
Goods taken 300
Prepared by Nayaz
http://principlesofaccounts.weebly.com
Answer:
Jeff’s Income Statement for the year ended 31 February 2011
$ $ $
Revenue (Sales) 22 000
Less: Returns Inwards (750)
21 250
Less: Cost of Sales:
Opening inventory 6 500
Add Purchases 12 000
Add Carriage Inwards 1 690
Less Drawing of goods (300)
Less: Returns Outwards (550) 12 840
Cost of goods available for sale 19 340
Less Closing Inventory (7 500) 11 840
Gross Profit 9 410
Questions:
1. From the information given below, prepare Income Statement for the year ended 28 February
2011 to calculate Gross Profit for the business of Jack.
$
Sales Revenue 32 500
Purchases 45 000
Inventory – 1Mar 10 22 000
Inventory – 28Feb11 23 600
Returns Inwards 700
Returns Outwards 900
Carriage Inwards 1 500
Goods taken 450
2. From the information given below, prepare Income Statement for the year ended 28 February
2011 to calculate Gross Profit for the business of Jill.
$
Sales Revenue 38 946
Purchases 29 456
Inventory – 1Mar 10 3 524
Inventory – 28Feb11 3 899
Returns Inwards 187
Returns Outwards 132
Carriage Inwards 400
Goods taken 256