Chapter Two

Part 2
Financial Statements
Lecture One
 Traditional Income Statement
Traditional income statement
Sales ×××
Less: Cost of Goods Sold (COGS) (×××)

Gross Margin (GM) ×××

Less: Operating Expenses
1- Selling Expenses (×××)
2-Administrative Expenses (×××)
Net Operating Income ×××
 Traditional Income statement
Sales ××××
Less: Cost of Goods Sold:
Beg. Finished Goods (Beg.FG) ××××
+ Cost of Goods Mfd (COGM) ××××
= COG Available for sale (COGAS) ××××
- End. Finished Goods (End.FG) (××××)
= Cost of Goods Sold (COGS) ×××× (××××)
Gross Margin ××××
Less: Operating Expenses:
Selling Expenses ××××
Administrative Expenses ××××
= Total Operating Expenses ×××× (××××)
Net Income ××××
Data Given
sales 1,000,000
Beginning Finished Goods (Beg.FG) 200,000
Ending Finished Goods (End.FG) 150,000
Cost of Goods Mfd (COGM) 400,000
Selling Expenses 50,000
Administrative Expenses 100,000
 Income statement
Sales 1,000,000
Less: Cost of Goods Sold:
Beg. Finished Goods (Beg.FG) 200,000
+ Cost of Goods Mfd. (COGM) 400,000
= COG Available for sale 600,000
- End. Finished Goods (End.FG) (150,000)
= Cost of Goods Sold (COGS) 450,000 (450,000)
Gross Margin 550,000
Less: Operating Expenses:
Selling Expenses 50,000
Administrative Expenses 100,000
= Total Operating Expenses 150,000 (150,000)
Net Income 400,000
Beginning Finished Goods (Beg.FG) 250,000
Ending Finished Goods (End.FG) 100,000
Cost of Goods Mfd (COGM) A
Cost of Goods Available for sale (COGAS) 3,250,000
Cost of Goods Sold (COGS) B
Gross Margin (GM) C
Selling Expenses 600,000
Administrative Expenses D
Total Operating Expenses (OE) 1,000,000
Net Income (NI) E
Sales 5,000,000
 Income statement
Sales 5,000,000
Less: Cost of Goods Sold:
Beg. Finished Goods (Beg.FG) 250,000
+ Cost of Goods Mfd (COGM) 3,000,000
= COG Available for sale 3,250,000
- End. Finished Goods (End.FG) (100,000)
= Cost of Goods Sold (COGS) 3,150,000 (3,150,000)
Gross Margin 1,850,000
Less: Operating Expenses:
Selling Expenses 600,000
Administrative Expenses 400,000
= Total Operating Expenses 1,000,000 (1,000,000)
Net Income 850,000
Beginning Finished Goods (Beg.FG) 200,000
Ending Finished Goods (End.FG) 100,000
Cost of Goods Mfd (COGM) 5,000,000
Cost of Goods Available for sale (COGAS) A
Cost of Goods Sold (COGS) B
Gross Margin (GM) C
Selling Expenses 650,000
Administrative Expenses 150,000
Total Operating Expenses (OE) D
Net Income (NI) E
Sales 8,000,000
 Income statement
Sales 8,000,000
Less: Cost of Goods Sold:
Beg. Finished Goods (Beg.FG) 200,000
+ Cost of Goods Mfd (COGM) 5,000,000
= COG Available for sale 5,200,000
- End. Finished Goods (End.FG) (100,000)
= Cost of Goods Sold (COGS) 5,100,000 (5,100,000)
Gross Margin 2,900,000
Less: Operating Expenses:
Selling Expenses 650,000
Administrative Expenses 150,000
= Total Operating Expenses 800,000 (800,000)
Net Income 2,100,000
 Traditional VS Contribution Income Statement
COGS is the first item
under Variable Costs

Traditional income statement Contribution income statement

Sales ××× Sales ×××
Less: Cost of Goods Sold (COGS) ××× Less: Variable Cost
1- Cost of Goods Sold (COGS) ×××
2- Variable Selling Expenses ×××
3- Variable Administrative Expenses ×××
Gross Margin (GM) ××× Contribution Margin (CM) ×××
Less: Operating Expenses Less: Fixed Cost:
1- Selling Expenses ××× 1- Fixed Selling Expenses ×××
2-Administrative Expenses ××× 2- Fixed Administrative Expenses ×××
Net Operating Income ××× Net Operating Income ×××
Data Given:
Sales 12,000
Cost of Goods Sold 6,000
Variable Selling 600
Variable Administrative 400
Fixed Selling 2,500
Fixed Administrative 1,500
 Traditional income statement Contribution income statement
Sales 12000 Sales 12000
Less: Cost of Goods Sold (COGS) (6000) Less: Variable Cost
1- Cost of Goods Sold (COGS) (6000)
2- Variable Selling Expenses (600)
3- Variable Administrative Expenses (400)
Gross Margin (GM) 6000 Contribution Margin (CM) 5000
Less: Operating Expenses Less: Fixed Cost:
1- Selling Expenses (3100) 1- Fixed Selling Expenses (2500)
2-Administrative Expenses (1900) 2- Fixed Administrative Expenses (1500)
Net Operating Income (NI) 1000 Net Operating Income (NI) 1000
Lecture Two
 Traditional VS Contribution Income Statement
COGS is the first item
under Variable Costs

Traditional income statement Contribution income statement

Sales ××× Sales ×××
Less: Cost of Goods Sold (COGS) ××× Less: Variable Cost
1- Cost of Goods Sold (COGS) ×××
2- Variable Selling Expenses ×××
3- Variable Administrative Expenses ×××
Gross Margin (GM) ××× Contribution Margin (CM) ×××
Less: Operating Expenses Less: Fixed Cost:
1- Selling Expenses ××× 1- Fixed Selling Expenses ×××
2-Administrative Expenses ××× 2- Fixed Administrative Expenses ×××
Net Operating Income ××× Net Operating Income ×××
Per Month ……..…… Fixed Cost
Per Unit ………... Variable Cost
% of Sales ……….. Variable Cost
Given Below are Costs related to Albaz company:
Sales (10,000 Units) 2,000,000 End. FG 50,000
Beg. FG 100,000 COGM 900,000
Selling & Administrative Costs Cost formula
Selling Cost:
1. Advertising cost €50,000 per month
2. Delivery cost €5 per unit
3. Commissions €20,000 per month, plus 1% of sales
Administrative Cost:
1. Insurance of the HQ’s building €8,000 per month
2. Depreciation of the HQ’s equipment €12,000 per month
3. Salaries of the HQ’S security €10,000 per month, plus €3 per unit sold
During the month of April, 2017 the company sold 20,000 units.
Required: Prepare an income statement for the month of April using:
(1) Traditional Format, (2) Contribution Format
Sales 2,000,000
Less: Variable Cost:
1- COGS 950,000
2- Delivery (5 ×10,000) 50,000
3- Commissions (1% × 2,000,000) 20,000
4- Salaries (3 × 10,000) 30,000
Total Variable Cost = 1,050,000
Contribution Margin (CM) 950,000
Less: Fixed Cost:
1- Advertising 50,000
2- Commission 20,000
3- Insurance 8,000
4- Depreciation 12,000
5- Salaries 10,000
Total Fixed Cost = 100,000
Net Income (NI) 850,000
 Traditional Income statement
Sales 2,000,000
Less: Cost of Goods Sold:
Beg. Finished Goods (Beg.FG) 100,000
+ Cost of Goods Mfd (COGM) 900,000
= COG Available for sale 1,000,000
- End. Finished Goods (End.FG) (50,000)
= Cost of Goods Sold (COGS) 950,000 (950,000)
Gross Margin 1,050,000
Less: Operating Expenses:
Selling Expenses (50,000 + 50,000 + 20,000 + 20,000) 140,000
Administrative Expenses (8,000 + 12,000 + 10,000 + 30,000) 60,000
= Total Operating Expenses 200,000 (200,000)
Net Income 850,000
Maged company purchases a single product from a large manufacturer and sells it at a retail
level, the company purchases each unit of the product at a cost of €140, and sells it at a price
of €200 per unit. The selling and administrative costs that the company incurs in a typical
month are presented below:
Costs Cost formula
Selling Cost:
1. Advertising cost €7,000 per month
2. Delivery cost €10 per unit
3. Salaries and commissions €24,000 per month, plus 2% of sales
Administrative Cost:
1. Insurance €3,000 per month
2. Depreciation of office equipment €4,000 per month
3. Accountants’ Salaries €1,500 per month, plus €3 per unit sold
During the month of march, 2017 the company sold 15,000 units.
Required: Prepare an income statement for the month of march using a contribution format
Sales (15,000 × 200) 3,000,000
Less: Variable Cost:
1- COGS (15,000 × 140) 2,100,000
2- Delivery (10 ×15,000) 150,000
3- Salaries and commissions (2% × 3,000,000) 60,000
4- Accountants’ Salaries (3 × 15,000) 45,000
Total Variable Cost = 2,355,000
Contribution Margin (CM) 645,000
Less: Fixed Cost:
1- Advertising 7,000
2- salaries and commission 24,000
3- Insurance 3,000
4- Depreciation 4,000
5- Accountants’ Salaries 1,500
Total Fixed Cost = 39,500
Net Income (NI) 605,500
Albaz company purchases a single product from a large manufacturer and sells it at a retail
level, the company purchases each unit of the product at a cost of €150, and sells it at a price
of €250 per unit. The selling and administrative costs that the company incurs in a typical
month are presented below:
Costs Cost formula
Selling Cost:
1. Advertising cost €35,000 per month
2. Delivery cost €12 per unit
3. Commissions €30,000 per month, plus 3% of sales
Administrative Cost:
1. Insurance of the HQ’s building €5,000 per month
2. Depreciation of the HQ’s equipment €10,000 per month
3. Salaries of the HQ’S security €5,000 per month, plus €2 per unit sold
During the month of April, 2017 the company sold 10,000 units.
Required: Prepare an income statement for the month of April using a contribution format
Sales (10,000 × 250) 2,500,000
Less: Variable Cost:
1- COGS (10,000 × 150) 1,500,000
2- Delivery (12 ×10,000) 120,000
3- Commissions (3% × 2,500,000) 75,000
4- Salaries (2 × 10,000) 20,000
Total Variable Cost = 1,715,000
Contribution Margin (CM) 785,000
Less: Fixed Cost:
1- Advertising 35,000
2- Commission 30,000
3- Insurance 5,000
4- Depreciation 10,000
5- Salaries 5,000
Total Fixed Cost = 85,000
Net Income (NI) 700,000
Given Below are Costs related to Albaz company:
Units Sold = 20,000 Selling Price = 175 Per Unit
Beg. FG = 120,000 End. FG = 20,000 COGM = 3,000,000
Selling & Administrative Costs Cost formula
Selling Cost:
1. Delivery cost €4 per unit
2. Advertising cost €50,000 per month, Plus €2 per unit
3. Salaries of Salesmen €40,000 per month, plus 1% of sales
Administrative Cost:
1. Rent of the HQ’s building €35,000 per month
2. insurance of the HQ’s equipment €25,000 per month, Plus €3 per unit
3. Salaries of the HQ’S receptionist €30,000 per month, plus €1 per unit

Required: Prepare an income statement for the month of April using:

(1) Traditional Format, (2) Contribution Format ….. It’s your Assignment
Lecture Three
Schedule of Cost of Goods Manufactured
(COGM)
 General Classification
Manufacturing Costs Non-Manufacturing Costs

Dir. Mat Dir. Lab Mfg. OH Selling Administrative

Indir. Mat Indir. Lab Other OH

 Schedule of Cost of Goods Manufactured (COGM)

(1) Direct Materials:

Beg. Raw Materials (Beg.DM)
+ Purchases of Raw Materials
- Ending Raw Materials (End.DM)
= Raw Materials used in production
(2) Direct Labour :
(3) Manufacturing Overhead:
1 & 2 & 3 = Total Manufacturing Cost ( DM + DL + MOH )
+ Beg. WIP
- End. WIP
= Cost of Goods Manufactured (COGM)
 Beg. Direct Materials 100,000
Purchases of Materials 1,200,000
End. Direct Materials 150,000
Direct Labour 500,000
Manufacturing Overhead 350,000
Beg. Work in Process 250,000
End. Work in Process 50,000

Required: Compute COGM

 Schedule of Cost of Goods Manufactured (COGM)

(1) Direct Materials:

Beg. Raw Materials (Beg.DM) 100,000
+ Purchases of Raw Materials 1,200,000
- Ending Raw Materials (End.DM) (150,000)
= Raw Materials used in production 1,150,000
(2) Direct Labour : 500,000
(3) Manufacturing Overhead: 350,000
1 & 2 & 3 = Total Manufacturing Cost ( DM + DL + MOH ) 2,000,000
+ Beg. WIP 250,000
- End. WIP (50,000)
= Cost of Goods Manufactured (COGM) 2,200,000
Beg. Direct Materials 100,000
Purchases of Materials 1,200,000
End. Direct Materials 150,000
Direct Materials Used In Production ?
Direct Labour 500,000
Manufacturing Overhead 350,000
Beg. Work in Process 250,000
End. Work in Process 50,000
COGM ?
PC (Prime Cost) ?
CC (Conversion Cost) ?
1 PC = DM + DL
2 CC = DL + MOH
3 TMC = DM Used + DL + MOH
4 DM Used = Beg. DM + Pur. - End. DM
5 COGM = Beg. WIP + TMC – End. WIP
6 COGAS = Beg. FG + COGM
7 COGS = Beg. FG + COGM – End. FG
8 GM = Sales – COGS
9 NI = GM - OE
 Inventory July 1 July 31
Direct Materials (DM) 21000 24500
Work in Process (WIP) E (41,000) 38500
Finished Goods (FG) 48000 F (36,000)
Costs:
Direct materials used (MD used) 66500
Purchases of direct materials (PUR) A (70,000)
Direct labor (DL) B (52,000)
Manufacturing overhead (MOH) C (47,000)
Prime cost (PC) 118500
Total manufacturing costs (TMC) 165500
Cost of goods manufactured (COGM) D (168,000)
Cost of goods available for sale (COGAS) 216000
Cost of goods sold (COGS) 180000
Lecture Four
Revision
 Beg. DM 2,000 Beg. Inv. (FG) 1,000
Purchases (DM) ? COGM 18,000
End. DM 500 COGAS ?
DM Used in production 4,500 End. Inv. (FG) ?
DL ? COGS 17,000
MOH 5,000 GM 13,000
TMC 18,500 OE ?
Beg. WIP 2,500 NI 4,000
End. WIP ? PC ?
Sales 30,000 CC ?
PC 13,500 = DM 4,500 + DL 9,000 CC 14,000 = DL 9,000 + MOH 5,000
Traditional income statement Schedule of COGM
Sales 30,000 1- DM
Beg. Mat 2,000
Less: Cost of Goods Sold (COGS)
+ Pur. 3,000
Beg. Inv. 1,000
- End. Mat. (500)
+ COGM 18,000
DM Used 4,500 4,500
COGAS 19,000
- End. Inv. (2,000)
COGS 17,000 17,000 2- DL 9,000
Gross Margin (GM) 13,000 3- MOH 5,000
Less: Operating Expenses 1 + 2 + 3 = TMC 18,500
1- Selling Expenses Beg. WIP 2,500
2-Administrative Expenses - End. WIP (3,000)
Total OE = 9,000
Net Operating Income 4,000 COGM 18,000
 Beg. DM 2,000 Beg. Inv. (FG) 1,000
Purchases (DM) ? COGM 18,000
End. DM 500 COGAS ?
DM Used in production 4,500 End. Inv. (FG) ?
DL ? COGS 17,000
Rent 1,000 GM 13,000
TMC 18,500 OE ?
Beg. WIP 2,500 NI 4,000
End. WIP ? PC ?
Sales 30,000 CC ?
Indirect Materials 1,500 Insurance 700
Indirect Labour 1,500 Power & Heat 300
PC 13,500 = DM 4,500 + DL 9,000 CC 14,000 = DL 9,000 + MOH 5,000
Traditional income statement Schedule of COGM
Sales 30,000 1- DM
Beg. Mat 2,000
Less: Cost of Goods Sold (COGS)
+ Pur. 3,000
Beg. Inv. 1,000
- End. Mat. (500)
+ COGM 18,000
DM Used 4,500 4,500
COGAS 19,000
- End. Inv. (2,000)
COGS 17,000 17,000 2- DL 9,000
Gross Margin (GM) 13,000 3- MOH (1,000 + 1,500 + 1,500 + 700 + 300) 5,000
Less: Operating Expenses 1 + 2 + 3 = TMC 18,500
1- Selling Expenses Beg. WIP 2,500
2-Administrative Expenses - End. WIP (3,000)
Total OE = 9,000
Net Operating Income 4,000 COGM 18,000
 Beg. Mat 1,500 Beg. Inv. (FG) 2,000
Purchases (DM) 2,500 COGM 17,500
End. Mat 1,000 COGAS ?
DM Used in production ? End. Inv. (FG) 3,500
DL 4,000 COGS ?
MOH 9,000 GM ?
TMC ? OE ?
Beg. WIP ? NI 9,000
End. WIP 3,000 PC ?
Sales 40,000 CC ?
PC 7,000 = DM 3,000 + DL 4,000 CC 13,000 = DL 4,000 + MOH 9,000
Traditional income statement Schedule of COGM
Sales 40,000 1- DM
Beg. Mat 1,500
Less: Cost of Goods Sold (COGS)
+ Pur. 2,500
Beg. Inv. 2,000
- End. Mat. (1,000)
+ COGM 17,500
DM Used 3,000 3,000
COGAS 19,500
- End. Inv. (3,500)
COGS 16,000 16,000 2- DL 4,000
Gross Margin (GM) 24,000 3- MOH 9,000
Less: Operating Expenses 1 + 2 + 3 = TMC 16,000
1- Selling Expenses Beg. WIP 4,500
2-Administrative Expenses - End. WIP (3,000)
Total OE = 15,000
Net Operating Income 9,000 COGM 17,500
MA Company provided the following data:

Sales 600,000 Beg. Inventory 20,000

Selling price per unit 30 End. inventory 40,000
Var. selling per unit 4 COGM 180,000
Var. administrative per unit 2 Fixed administrative cost 30,000
Fixed selling cost 40,000

Required:
1. Compute No. Of Units Sold. = 600,000 / 30 = 20,000 Units
2. Prepare a traditional income statement
3. Prepare a conurbation income statement
4. Calculate the gross margin (GM) per unit = 440,000 / 20,000 = 22 per unit
5. Calculate the contribution margin (CM) per unit = 320,000 / 20,000 = 16 per unit
 Traditional income statement Contribution income statement

Sales 600,000 Sales 600,000

Less: Cost of Goods Sold (COGS) Less: Variable Cost

Beg. Inv. 20,000 1- Cost of Goods Sold (COGS) 160,000
+ COGM 180,000 2- Var. Selling 80,000
COGAS 200,000 3- Var. Administrative 40,000
- End. Inv. (40,000)
COGS 160,000 160,000
Gross Margin (GM) 440,000 Contribution Margin (CM) 320,000
Less: Operating Expenses Less: Fixed Cost:
1- Selling Expenses 1- Fixed Selling 40,000
= 40,000 + (20,000 × 4) 120,000 2- Fixed Administrative 30,000
2-Administrative Expenses Expenses
= 30,000 + (20,000 × 2) 70,000
Net Operating Income 250,000 Net Operating Income 250,000
Albaz company purchases a single product from a large manufacturer and sells it at a retail
level, the company purchases each unit of the product at a cost of €140, and sells it at a price
of €230 per unit. The selling and administrative costs that the company incurs in a typical
month are presented below:
Costs Cost formula
Selling Cost:
1. Advertising cost €30,000 per month
2. Delivery cost €10 per unit
3. Commissions €25,000 per month, plus 2% of sales
Administrative Cost:
1. Insurance of the HQ’s building €6,000 per month
2. Depreciation of the HQ’s equipment €12,000 per month
3. Salaries of the HQ’S security €7,000 per month, plus €3 per unit sold
During the month of April, 2017 the company sold 10,000 units.
Required: Prepare an income statement for the month of April using:
Contribution Format & Traditional Format
Sales (10,000 × 230) 2,300,000
Less: Variable Cost:
1- COGS (10,000 × 140) 1,400,000
2- Delivery (10 ×10,000) 100,000
3- commissions (2% × 2,200,000) 46,000
4- Security (3 × 10,000) 30,000
Total Variable Cost = 1,576,000
Contribution Margin (CM) 724,000
Less: Fixed Cost:
1- Advertising 30,000
2- commission 25,000
3- Insurance 6,000
4- Depreciation 12,000
5- Security 7,000
Total Fixed Cost = 80,000
Net Income (NI) 644,000
The utility cost of MA Company are listed as following:
month Units Utility cost month Units Utility cost
produced produced
January 905 16,212 June 902 16,180
February 949 16,600 July 919 16,332
March 911 16,265 August 859 15,760
April 895 16,110 September 898 16,138
May 917 16,294
Required:
1. Using the high-low method, estimate the variable component of utility cost
per unit produced.
2. Using the high-low method, estimate the fixed component of utility cost
3. What amount of utility cost would you expect to be incurred at a level of
1,100 units?
Given below the total factory overhead costs of a manufacturing company, at high and low
levels of activity over recent years:
Overhead costs Level of activity
low High
Machine-Hours 5,000 6,000
Factory overhead costs:
Indirect Materials (Variable) 50,000 ?
Indirect Labour (Variable) 30,000 ?
Insurance (Fixed) 20,000 ?
Rent (Fixed 60,000 ?
Power and Heat (Mixed) 40,000 ?
Required: Total factory overhead costs 200,000 221,000
1. Estimate indirect material, rent and maintenance costs at the high level of activity
2. Estimate factory overhead costs for 8,000 machine hours, using the linear equation from
M = F + VL