Word has gotten around that you know accounting and can explain it well. Jim, an
ID: 2459649 • Letter: W
Question
Word has gotten around that you know accounting and can explain it well. Jim, another of your friends has a unique business. During the summer he buys hats that cost $5.00 each and sells them at the beach for $12.00 each. Other than the cost of the hat, his only other expense last summer was $120 for parking. He sold 78 hats last summer. His accountant prepared a financial statement for him and he has several questions about the income statement. He asks: What does the cost of goods sold and gross profit mean? How much gross profit do I make on each hat? Why show both gross profit and net income? If I have hats returned or a give a discount, how will that be shown on the income statement?
Explanation / Answer
What does the cost of goods sold and gross profit mean?
Cost of goods sold means direct costs that are attributable to the production of the goods sold by a company.
in the given case cost of goods sold is $5.00 cost of each hats which he is selling
Gross Profit means sales minus the cost of goods sold.
Gross Profit is the gross Income that a business earns from the sale of goods or services
How much gross profit do I make on each hat?
In the given Gross profit is (12 selling Price*78hats Minus 5 cost of goods sold *78hats) =546
Why show both gross profit and net income?
gross profit gives the profit from bussiness operation which is directly attributable to the production of the goods sold by a company before other operating expense like selling and administrative expense.hence it disclosed separately to access the efficiency of business operation.
If I have hats returned or a give a discount, how will that be shown on the income statement?
both sales return and sales discount is shown as deduction from sales figures and disclosed as Net sales.
Sales 936 cost of Goods sold 390 Gross profit 546Related Questions
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