Instructions for Gross Profit Section of Income Statement-Periodic System

MJC Revised 10-2011 Page 1

Love Thy Pets Inc., Income Statement (Partial)

For the Year Ended, December 31, 2011

Revenues:

Sales $500,000

Less: Sales Returns and Allowances $20,000

Sales Discounts 6,000 26,000

Net Sales $474,000

Cost of goods sold:

Inventory, January 1 50,000

Purchases 265,000

Less: Purchases returns and Allowances $10,000

Purchases Discounts 5,000 15,000

Net Purchases 250,000

Add: Freight-in 10,000

Cost of goods purchased 260,000

Cost of goods available for sale 310,000

Inventory, December 31 45,000

Cost of goods sold 274,000

Gross Profit $200,000

Instructions for Gross Profit Section of Income Statement-Periodic System

MJC Revised 10-2011 Page 2

Always start with the three-line header, which includes first the name of the corporation; second,

the title of the statement; and third, the fiscal period for which the statement is prepared. If the

statement is not a complete financial statement, place the word “Partial” after the title of the

statement in brackets.

Net sales Section:

1. Place the title “Revenues:” in the far left column. Since this is a section header, there will

be no dollar amount in the right hand columns.

2. Next place the title “Sales” in the far left column. This amount will be all of the

corporation’s sales for the fiscal period found in the general ledger account. Place the

dollar amount in the second column from the right.

3. The next two lines will be labeled: “Less: Sales Returns and Allowances and Sales Discounts.”

Take these amounts from their ending balances from the ledger accounts (T-Accounts). Place

the dollar amounts for these two accounts in the third column from the right.

4. Add the sales returns and allowances to the sales discounts. On the same line as the sales

discounts, place the resulting dollar amount in the second column from the right.

5. Now subtract the total from step 4 from the sales to get net sales. Title this line “Net sales” in

the far left hand column. Place the resulting dollar amount in the far right hand column.

Cost of Goods Sold Section:

1. On the first line of this section, place the title “Cost of goods sold” in the far left hand column.

No dollar amount will be shown since this is a section header.

2. Now place the title “Inventory, January 1” in the far left hand column. Place the dollar amount in

the second column from the right.

3. Next, place the title “Purchases.” Place the dollar amount in the third column from the right.

4. On the next two-line place the titles “Less: Purchases returns and allowances and Purchases

discounts.” Place the dollar amounts for these two accounts in the fourth column from the right.

5. Now add the purchases returns and allowances to the purchases discounts. Place the results in

the third column from the right on the same lines as the title as purchase discounts.

Instructions for Gross Profit Section of Income Statement-Periodic System

MJC Revised 10-2011 Page 3

Cost of Goods Sold Section Continued:

6. Next, place the title “Net purchases.” Subtract the total for purchases returns and allowances

and purchase discounts from purchases to get the dollar amount. Place the dollar amount in the

third column from the right.

7. Now, place the title “Add: Freight-in.” Place the dollar amount in the third column from the

right.

8. Next, place the title “Cost of goods purchased.” Add net purchases and freight-in to get the

dollar amount for this line. Place the dollar amount in the second column from the right.

9. Now, place the title “Cost of goods available for sale.” To get this dollar amount you will need to

add beginning inventory as of January 1 to the cost of goods purchased. Place the dollar amount

in the column second from the right.

10. Next place the title “Inventory, December 31.” Place the dollar amount in second from the right

column.

11. Finally, for this section subtract the ending inventory as of December 31 from the cost of goods

available for sale. Label this line “cost of goods sold.” Place the dollar amount in the far right

hand column.

Gross Profit:

The final step is to subtract cost of goods sold from the net sales, which will result in the gross profit

dollar amount. Place the title “Gross Profit” on the line just under cost of goods sold. Place the dollar

amount in the far right hand column. Double underline this total since it is only a partial statement.