Chapter 5 Lecture 2 (new) - Lecture 2 More about the Income...

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Lecture 2 More about the Income Statement In chapter 4 we reviewed the multi-step income statement format , and then expanded the cost of goods sold section to include net cost of purchases, goods available for sale, and then the calculations for cost of goods sold . The key relationships for that income statement are as follow: Gross Sales - Sales Returns and Allowances = Net Sales . Net Sales - Cost of Goods Sold = Gross Margin. Cost of Goods Sold = Beginning Inventory + Net Cost of Purchases - Ending Inventory. Beginning Inventory + Net Cost of Purchases = Goods Available for Sale. Net Cost of Purchases = Purchases - Purchase Returns and Allowances + Freight In. Gross Margin - Operating Expenses = Net Operating Income (or Income Before Income Taxes). Let’s talk about recording purchases of inventor ! When we purchase inventory to resell, under a periodic system, we'll debit an account called Purchases . Technically, the Purchases account is an asset account , because we haven't used (sold) that resource yet. When we return
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